INTEGRATION OF INDIAN INTEGRATION OF INDIAN FINANCIAL MARKET WITH FINANCIAL MARKET WITH

GLOBAL FINANCIAL GLOBAL FINANCIAL MARKETMARKET

INDIAN FINANCIAL MARKETINDIAN FINANCIAL MARKET In recent years, the Indian economy has seen a great In recent years, the Indian economy has seen a great

transformation from a closed, controlled, slow growing economy transformation from a closed, controlled, slow growing economy to a more open, liberalized and one of the fastest growing to a more open, liberalized and one of the fastest growing economies of the world. economies of the world.

The rate of savings in India is constantly rising. The gross The rate of savings in India is constantly rising. The gross domestic savings in the year 2005-06 is estimated at Rs.1, domestic savings in the year 2005-06 is estimated at Rs.1, 156,809. The rise in the savings rate has with an increase in the 156,809. The rise in the savings rate has with an increase in the rate of growth of GDP over the last three years.rate of growth of GDP over the last three years.

Indian markets have established itself as a playground deemed to Indian markets have established itself as a playground deemed to provide good opportunities to investors.provide good opportunities to investors.

Investments in Indian market hence have been considered as a Investments in Indian market hence have been considered as a safe place to invest by the investors.safe place to invest by the investors.

In India money market is regulated by Reserve bank of In India money market is regulated by Reserve bank of India and Securities Exchange Board of India (SEBI) India and Securities Exchange Board of India (SEBI) regulates capital market. Capital market consists of primary regulates capital market. Capital market consists of primary market and secondary market. All Initial Public Offerings market and secondary market. All Initial Public Offerings comes under the primary market and all secondary market comes under the primary market and all secondary market transactions deals in secondary market.transactions deals in secondary market.

Secondary market refers to a market where securities are Secondary market refers to a market where securities are traded after being initially offered to the public in the traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. primary market and/or listed on the Stock Exchange. Secondary market comprises of equity markets and the Secondary market comprises of equity markets and the debt markets. In the secondary market transactions BSE debt markets. In the secondary market transactions BSE and NSE plays a great role in exchange of capital market and NSE plays a great role in exchange of capital market instruments. instruments.

INTEGRATION OF THE INTEGRATION OF THE MARKETS-ITS IMPACTMARKETS-ITS IMPACT

The main impact of the global financial turmoil in India has The main impact of the global financial turmoil in India has emanated emanated from the significant change experienced in the capital accountfrom the significant change experienced in the capital account in in 2008-09so far, relative to the previous year. Total net capital flows fell 2008-09so far, relative to the previous year. Total net capital flows fell from US$17.3 billion in April-June 2007 to US$13.2 billion in April-June from US$17.3 billion in April-June 2007 to US$13.2 billion in April-June 2008.2008.

While While Foreign Direct InvestmentForeign Direct Investment (FDI) inflows have continued to (FDI) inflows have continued to exhibit accelerated growth exhibit accelerated growth

Foreign institutional investors Foreign institutional investors (FIIs) witnessed a net outflow of about (FIIs) witnessed a net outflow of about US$ 6.4 billion in April-September 2008 as compared with a net inflow US$ 6.4 billion in April-September 2008 as compared with a net inflow of US$ 15.5 billion in the corresponding period last year. of US$ 15.5 billion in the corresponding period last year.

External commercial borrowingsExternal commercial borrowings of the corporate sector declined from of the corporate sector declined from US$ 7.0 billion in April-June 2007 to US$ 1.6 billion in April-June 2008 US$ 7.0 billion in April-June 2007 to US$ 1.6 billion in April-June 2008

The primary market has had a direct relation with the secondary The primary market has had a direct relation with the secondary market. The Bull Run in the secondary market has in the past enabled market. The Bull Run in the secondary market has in the past enabled and emboldened companies to enter the market with big issues and and emboldened companies to enter the market with big issues and attract investors and traders to invest in public issues to reap high attract investors and traders to invest in public issues to reap high profits following their listing.profits following their listing.

The BSE Sensex increased significantly from a level of The BSE Sensex increased significantly from a level of 13,072 13,072 as at end-March 2007 to its peak of 20,873 as at end-March 2007 to its peak of 20,873 on January 8, on January 8, 2008. However with portfolio flows reversing in 2008, partly 2008. However with portfolio flows reversing in 2008, partly because of the international market turmoil, the Sensex has because of the international market turmoil, the Sensex has now dropped to a level of 11,328 on October 8, 2008, in line now dropped to a level of 11,328 on October 8, 2008, in line with similar large declines in other major stock markets. with similar large declines in other major stock markets.

Foreign Investment also came down heavily due to a liquidity Foreign Investment also came down heavily due to a liquidity crunch in the major companies. crunch in the major companies.

The stock market Of the United states of America or Wall The stock market Of the United states of America or Wall Street stock exchange crashed due to a crisis in the housing Street stock exchange crashed due to a crisis in the housing finance sector of its leading banks, caused due to finance sector of its leading banks, caused due to delinquency and non-repayment of housing loans, resulting delinquency and non-repayment of housing loans, resulting in panic in the world markets including India.in panic in the world markets including India.

BENEFITS BENEFITS The benefits of international risk sharing for The benefits of international risk sharing for

consumption smoothing, the positive impact of consumption smoothing, the positive impact of capital flows on domestic investment and growth, capital flows on domestic investment and growth, enhanced macroeconomic discipline and increased enhanced macroeconomic discipline and increased efficiency as well as greater stability of the domestic efficiency as well as greater stability of the domestic financial system associated with financial openness.financial system associated with financial openness.

International financial integration could positively International financial integration could positively affect total factor productivity. Financial openness affect total factor productivity. Financial openness may increase the depth and breadth of domestic may increase the depth and breadth of domestic financial markets and lead to an increase in the financial markets and lead to an increase in the degree of efficiency of the financial intermediation degree of efficiency of the financial intermediation process by lowering costs and excessive profitsprocess by lowering costs and excessive profits

The cumulative growth performance of emerging The cumulative growth performance of emerging markets, excluding China and India, appears less markets, excluding China and India, appears less spectacular than usually perceived under spectacular than usually perceived under globalization.globalization.

How could the Indian financial market get affected by a How could the Indian financial market get affected by a financial turmoil in United States?financial turmoil in United States?

The impact of FIIs is so high that whenever FIIs tend to withdraw the The impact of FIIs is so high that whenever FIIs tend to withdraw the money from market, the domestic investors become fearful and they also money from market, the domestic investors become fearful and they also withdraw from market.withdraw from market.

In case of January 18, 2008, the Sensex lost almost 687 points. Here, the In case of January 18, 2008, the Sensex lost almost 687 points. Here, the net sales by FIIs were Rs. 1348.40 Crores. This is a major contributor to the net sales by FIIs were Rs. 1348.40 Crores. This is a major contributor to the fall on that day.But contrary to that day, take the case on January 21, fall on that day.But contrary to that day, take the case on January 21, 2008, the Sensex lost 1408 points and the gross sales was Rs. 1060.30 2008, the Sensex lost 1408 points and the gross sales was Rs. 1060.30 Crores and the purchases were Rs. 3062.00 Crores. So this can be Crores and the purchases were Rs. 3062.00 Crores. So this can be concluded that after the fall of market, FIIs had invested again into the concluded that after the fall of market, FIIs had invested again into the market. market.

Depreciation in rupee value has added to the worries of FIIs. Depreciation Depreciation in rupee value has added to the worries of FIIs. Depreciation in currency leads to losses (in dollar terms) for the FIIs, as they have to in currency leads to losses (in dollar terms) for the FIIs, as they have to periodically represent to market value of their investments overseas. Many periodically represent to market value of their investments overseas. Many speculate the fear of depreciation of rupee even more against the dollar. If speculate the fear of depreciation of rupee even more against the dollar. If that happens, FIIs will have to report huge losses on the currency account, that happens, FIIs will have to report huge losses on the currency account, and hence are pulling out from the domestic markets.and hence are pulling out from the domestic markets.

From the above data, it can be noted:Increase in net investments till 2005.

Small decrease in investments in the year 2006, but there was a steep increase in the year 2007-08. This was the

best period in Indian stock market where stock prices got increased and the market was in good mood.

In early 2008, the government liberalized its policy In early 2008, the government liberalized its policy towards foreign investment in the following key economic towards foreign investment in the following key economic sectors by increasing the maximum permitted foreign sectors by increasing the maximum permitted foreign investment to:-investment to:-

49 per cent for commodity exchanges.49 per cent for commodity exchanges.

49 per cent for credit information companies.49 per cent for credit information companies.

74 per cent for non-scheduled airlines (however, foreign 74 per cent for non-scheduled airlines (however, foreign airlines are not allowed to invest in a scheduled airline airlines are not allowed to invest in a scheduled airline company in India)company in India)

100 per cent in titanium mining with prior Indian 100 per cent in titanium mining with prior Indian Government approval. Government approval.

October last year, markets regulator had put a 40 per cent October last year, markets regulator had put a 40 per cent cap on FIIs’ total asset holding via participatory notes or cap on FIIs’ total asset holding via participatory notes or overseas derivatives instruments and stopped them from overseas derivatives instruments and stopped them from issuing fresh P notes or renewal of old ones with an 18-issuing fresh P notes or renewal of old ones with an 18-month deadline ending in March 2009 to do the needful.month deadline ending in March 2009 to do the needful.

The move was aimed to keep track of foreign flows into the The move was aimed to keep track of foreign flows into the country. However SEBI has removed the existing limit on country. However SEBI has removed the existing limit on distribution of FII investment a day after the government distribution of FII investment a day after the government doubled the cap on their investment in corporate debt to $6 doubled the cap on their investment in corporate debt to $6 billion. This was a result of FII’s pulling out of the Indian billion. This was a result of FII’s pulling out of the Indian equity market (US$11.56 billion) and pumping money in the equity market (US$11.56 billion) and pumping money in the debt market (US$1.8 billion).debt market (US$1.8 billion).

So far as security receipts issued by the Asset So far as security receipts issued by the Asset Reconstruction Companies (ARCs) are concerned, the total Reconstruction Companies (ARCs) are concerned, the total holding of a single FII in each tranche of scheme must not holding of a single FII in each tranche of scheme must not exceed 10 per cent of the issue.exceed 10 per cent of the issue.

Besides, the total holding of all FIIs put together must not Besides, the total holding of all FIIs put together must not exceed 49 per cent of the paid up value of each tranche of exceed 49 per cent of the paid up value of each tranche of scheme of security receipts issued by ARCs.scheme of security receipts issued by ARCs.

The relaxation, according to Sebi, is aimed at “greater The relaxation, according to Sebi, is aimed at “greater flexibility to the FIIs to allocate investments across equity flexibility to the FIIs to allocate investments across equity and debt.”and debt.”

It will have a two-way positive impactIt will have a two-way positive impact:: This will enable FIIs to invest without any obligationThis will enable FIIs to invest without any obligation This will also enable Indian companies to get more funds for This will also enable Indian companies to get more funds for

their expansion planstheir expansion plans

A STEP TOWARDS A STEP TOWARDS INTEGRATION OF THE INTEGRATION OF THE

MARKETSMARKETS In recent years, a growing number of countries- both In recent years, a growing number of countries- both

developed and developing - are opening their stock developed and developing - are opening their stock markets to foreign investors and abolishing laws markets to foreign investors and abolishing laws restricting their citizens from investing abroad.restricting their citizens from investing abroad.

Companies that previously had to raise capital in the Companies that previously had to raise capital in the domestic market can now tap foreign sources of capital domestic market can now tap foreign sources of capital that demand lower rates of return. In order to do so, that demand lower rates of return. In order to do so, companies may list their stocks on foreign stock companies may list their stocks on foreign stock exchanges while investors may trade overseas exchanges while investors may trade overseas

One of the techniques : CROSS LISTINGOne of the techniques : CROSS LISTING

Cross-listing is a dynamic and destabilizing force that has Cross-listing is a dynamic and destabilizing force that has moved liquidity from local exchanges to international moved liquidity from local exchanges to international markets, thereby compelling a consolidation among market markets, thereby compelling a consolidation among market centers.centers.

Cross listing is effected with the issuer first establishing a Cross listing is effected with the issuer first establishing a depository receipts facility (typically, with a major bank).depository receipts facility (typically, with a major bank).

The bank will hold shares of the foreign issuer and issue The bank will hold shares of the foreign issuer and issue depository receipts to U.S. investors, who will thereby depository receipts to U.S. investors, who will thereby achieve the convenience of denominated trading. These achieve the convenience of denominated trading. These depository receipts then may (or may not) be listed on a depository receipts then may (or may not) be listed on a Stock exchange.Stock exchange.

Correspondingly, the number of foreign companies listed on Correspondingly, the number of foreign companies listed on the two principal U.S. stock markets (the NYSE and NASDAQ) the two principal U.S. stock markets (the NYSE and NASDAQ) grew from 170 in 1990 to over 750 in 2000 (or roughly a grew from 170 in 1990 to over 750 in 2000 (or roughly a 450% increase). As of April 2001, over 970 non-U.S. firms 450% increase). As of April 2001, over 970 non-U.S. firms were listed on the NYSE, NASDAQ. During the 1990s, trading were listed on the NYSE, NASDAQ. During the 1990s, trading of ADRs grew rapidly, reaching $1,185 billion in 2000.of ADRs grew rapidly, reaching $1,185 billion in 2000.

INDIAN DEPOSITORY INDIAN DEPOSITORY RECEIPTSRECEIPTS

A step towards integration of Indian security market with global markets.A step towards integration of Indian security market with global markets.

IDRIDR is an instrument in the form of depository receipt created by the is an instrument in the form of depository receipt created by the domestic depository in India against the underlying equity shares of the domestic depository in India against the underlying equity shares of the issuing company; they allow foreign companies to mobilize funds from issuing company; they allow foreign companies to mobilize funds from Indian markets by offering equity and getting listed on Indian stock Indian markets by offering equity and getting listed on Indian stock exchanges.exchanges.

Technique– CROSS LISTINGTechnique– CROSS LISTING

Cross-listing increases the shareholder base, the firm's risk is shared Cross-listing increases the shareholder base, the firm's risk is shared among more shareholders, and this increased diversification reduces the among more shareholders, and this increased diversification reduces the firm's cost of capital. For a time, the empirical evidence seemed to firm's cost of capital. For a time, the empirical evidence seemed to confirm this explanation because the stock prices of cross-listing firms confirm this explanation because the stock prices of cross-listing firms seemed to rise and then decline post-listing.seemed to rise and then decline post-listing.

  

IMPACT--IDRsIMPACT--IDRs By dual-listing their stock, firms are expected to experience By dual-listing their stock, firms are expected to experience

an increase in stock price since investors in the foreign an increase in stock price since investors in the foreign market are willing to pay a higher price for the stock. The market are willing to pay a higher price for the stock. The result is due to the stock having a lower expected return, result is due to the stock having a lower expected return, and therefore a lower cost of capital for the firm.and therefore a lower cost of capital for the firm.

From the existing shareholder's point of view, their wealth From the existing shareholder's point of view, their wealth increases as the value of their securities rises. Multiple increases as the value of their securities rises. Multiple listing can thus be a tool for increasing shareholder’s listing can thus be a tool for increasing shareholder’s value, simply by taking some procedural steps and bearing value, simply by taking some procedural steps and bearing the administrative costs involved.the administrative costs involved.

The regulatory concerns related to cross listings The regulatory concerns related to cross listings  Informed trading is general form in which hold private Informed trading is general form in which hold private

information with regard to stocks, issuing company.information with regard to stocks, issuing company. Insider trading which is not considered ethical, will be done Insider trading which is not considered ethical, will be done

in legal manner by denoting trading by persons who are in in legal manner by denoting trading by persons who are in special relationships with the firm, as defined by the law. special relationships with the firm, as defined by the law.

SUGGESTIONSSUGGESTIONS 1. Increase rupee liquidity1. Increase rupee liquidity 2. Increase dollar liquidity2. Increase dollar liquidity 3. Exchange rate policy3. Exchange rate policy

Other suggestions:Other suggestions: Focus more on growth by improving public and private Focus more on growth by improving public and private

investment continue to take measures for improving investment continue to take measures for improving liquidity enhance investor confidence to ensure growth of liquidity enhance investor confidence to ensure growth of industry.industry.

All banks should be asked to make a liquidity plan and a All banks should be asked to make a liquidity plan and a solvency plan. RBI should review these plans and insist solvency plan. RBI should review these plans and insist that each of these plans have quantitative monitorable that each of these plans have quantitative monitorable actions and targets.actions and targets.

CONCLUSIONSCONCLUSIONS Though we cannot unambiguously conclude the existence Though we cannot unambiguously conclude the existence

of perfect total integration of Indian market with the world of perfect total integration of Indian market with the world markets given the limitations of our analysis. However, we markets given the limitations of our analysis. However, we can unambiguously assert that over time, with the opening can unambiguously assert that over time, with the opening up of economies and integration and strengthening of up of economies and integration and strengthening of domestic financial markets, the benefits from asset domestic financial markets, the benefits from asset diversification are getting exhausted. diversification are getting exhausted.

A key feature of global financial integration during the A key feature of global financial integration during the past three decades has reflected in the shift in the past three decades has reflected in the shift in the composition of capital flows to developing and emerging composition of capital flows to developing and emerging

market economies, especially from official to private flows.market economies, especially from official to private flows.

East and South East Asian economies, in particular, have East and South East Asian economies, in particular, have achieved substantial integration. Apart from Asia’s growing achieved substantial integration. Apart from Asia’s growing integration with the rest of the world, increasing integration integration with the rest of the world, increasing integration within Asia also reflects the growing intra-regional trade within Asia also reflects the growing intra-regional trade and financial flows. Evidence from price-based measures and financial flows. Evidence from price-based measures suggests that financial market integration in Asia has been suggests that financial market integration in Asia has been increasing.increasing.

There is evidence of India’s growing international There is evidence of India’s growing international integration through trade and cross border capital flows. integration through trade and cross border capital flows. India’s trade and financial links with Asia are also growing India’s trade and financial links with Asia are also growing amidst recent initiatives taken to promote regional amidst recent initiatives taken to promote regional cooperation. cooperation.

Emerging Asia has become the ‘growth centre’ of the world Emerging Asia has become the ‘growth centre’ of the world due to shifting of production base to the region.due to shifting of production base to the region.