The investment landscape in India has not been the most conducive to international investment, but is improving. The Securities and Exchange Board of India (SEBI) was established in 1988 and has continually expanded its powers to create a more organized and secure investment environment. In 2011, SEBI expanded its reach by requiring promoters (individuals who raise money for companies through alternative methods—investment vehicles or limited partnerships) to disclose their shares received for services rendered—just one example of oversight improvements.
Investors looking to invest in India can pursue one of two methods: either investing in investment products that mimic Indian offerings through American Depository Receipts (ADRs) or by investing in mutual funds listed on the exchange.
The first method is easier for investors living in the United States due to fewer disclosures and ease of use. The second method could be useful for more direct exposure to Indian markets and have the ability to be involved (not everyone can).
Investors interested in mutual funds will naturally gravitate to the Bombay Stock Exchange (BSE), India’s biggest stock exchange located in Mumbai. The BSE provides investors with the whole universe of investment products—stocks, bonds, options, commodities etc.
Currently the majority of investments made in India’s stock market are foreign institutional investors (FIIs) such as pension funds, sovereign wealth funds and asset management companies. Individuals are not allowed to invest directly into the Indian stock market unless they are high net-worth clients (more than $50M) and are registered as sub-accounts of an FII. To that end, most individual investors will pursue the first method for their investment activities because if they choose the second method they will only have access to mutual funds.
If we have the Dow Jones Industrial average and the S&P 500 as proxies for American stock market activity then India has the Sensex and S&P CNX Nifty. The Sensex (like the DJIA) contains 30 stocks listed in the Bombay Stock Exchange and represents 45% of the market. The S&P CNX Nifty contains 50 stocks listed on the National Stock Exchange (NSE) representing 62% of that exchange.
Trading occurs in a T+2 rolling settlement format where if a trade is placed on a Monday then settlement occurs on Wednesday. There are many attractive opportunities in India that can be pursued.
Having been a patron of business as the Chief Minister of Gujarat, investors expect Modi to continue his pro-business policies as the Prime Minister. One of his goals is to build 100 smart cities (modeled after Japan) all around the country. Smart cities are cities designed to enhance performance and wellbeing, to reduce consumption and to more effectively interact with its citizens. The main sectors of focus in a smart city are more efficient transportation, energy use, increased cleanliness, healthcare and effective waste management. The main winners of this initiative would be telecommunications and Information Technology companies—as all the cities will require robust IT/communications infrastructure.
Pursuit of Yield
Investment in a developing economy is not without its risks. For all the positives India celebrates such as its exponential growth, burgeoning middle class with it’s accompanying spending power and the world’s largest information technology presence, India still has some challenges. A basic tenet of investment strategy is the pursuit of yield—a reflection of the risk/reward principal. If an investor has the appetite to invest in something risky, she should be rewarded with a higher yield. India currently has a benchmark interest rate of 8%. If an investor were to compare that to the United States benchmark interest rate of 0.25%, he would make the decision to invest in India every time.
The aforementioned rates are something called nominal interest rates—they don’t account for inflation. Inflation is the increase in prices of goods and services in a country. Nominal interest rates adjusted for inflation are called real interest rates—the real value of money over a period of time. Investing in a market should be determined by real interest rates. Simply put if you invest $1 into India for one year at 8%, the following year you will have $1.08. However with the average inflation rate of 9.23%, your dollar will have lost 1.23% of its value in real terms—a much less attractive prospect. This exorbitant inflation rate in India is what curbs many investors’ desires to invest in India. To create a more conducive investment environment, India must address its inflation problem.
India has a bright future with a charismatic and intelligent leader. Investors are excited about the changes Narendra Modi is making, as it will have impacts on the investment landscape both in foreign direct investment (FDI) as well as private investment in the market. There are many structural changes to be made before investment becomes the efficient mechanism that it is in the United States or Western Europe.
This article is the opinion of the author and is not shared by India Currents or any of its staff. All investors should conduct their independent analysis before taking any actions and should not make any decisions on the information provided in this article alone.
Rahul Varshneya graduated from the Leavey School of Business at Santa Clara University with a degree in finance and works in the tech industry as a financial analyst. If you have feedback or have a topic you would like addressed please contact Rahul at firstname.lastname@example.org.