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India Country Commercial Guide, 2008

India Country Commercial Guide, 2008

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Publicado pormramkrsna

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Published by: mramkrsna on Sep 22, 2008
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The Indian capital market has grown rapidly in recent years, with
market capitalization on the Bombay Stock Exchange hitting $1.7
trillion at end-2007, the tenth largest in the world. Spot prices for
index stocks are usually market-driven and settlement
mechanisms are close to international standards. India's debt and
currency markets lag behind its equity markets. Although private
placements of corporate debt have been increasing, the daily

trading volume remains low. The Indian stock markets lack broad
liquidity, although high transaction costs and systemic risk have
come down with recent regulatory and administrative
improvements. Institutional improvements and better regulations
have helped to reduce episodes of market manipulation, which had
caused a lack of confidence by retail investors who invested
primarily in public sector debt instruments and debt-oriented
mutual funds. SEBI has initiated further policy changes such as
allowing all investors to short sell, introducing borrowing and
lending of shares, and introducing Real Estate Investment Trusts
that would be listed in the market. These measures add depth and
breadth to the market making it more liquid than before.

In 2004, the GOI announced its intentions to integrate the
commodities and securities markets and to revamp taxes on
securities transactions, although this is still being debated. The
GOI eliminated the tax on long-term capital gains on stocks and
reduced the tax on short-term capital gains to 10 percent. At the
same time, it put in place a securities transaction tax of 0.15
percent.

Foreign Institutional Investors (FIIs) have a relatively small
(compared to their global portfolios) but growing presence in India
with net inflows for India totaling around $16 billion for the calendar
year 2007. While FIIs are allowed to invest in all securities traded
on India's primary and secondary markets, in unlisted domestic
debt securities, and in commercial paper issued by Indian
companies, the GOI imposes several restrictions that vary by type
of investment. For example, the GOI caps the amount of FII
investment in government securities at $3.5 billion, except for
corporate debt where the limit is $1.5 billion in a single fiscal year.
FII equity holdings in a single company are also capped at a level
below the overall sector-specific foreign investment limits unless
specifically authorized by that company's board of directors.

FIIs investing in India's capital markets must register with the
Securities and Exchange Board of India (SEBI). They are divided
into two categories: (a) Regular FIIs – those which are required to
invest not less than 70 per cent of their Indian exposure in equity-
related instruments, and (b) 100 percent debt-fund FIIs -- those
which are permitted to invest only in debt instruments. The list of
eligible FIIs has been expanded to include endowment and
university funds, foundations, \charitable trusts, and hedge funds.
SEBI allows foreign brokers to work on behalf of registered FIIs.
The FIIs can also bypass brokers and deal directly with companies
in open offers. FII bank deposits are fully convertible and their
capital, capital gains, dividends, interest income, and any
compensation from the sale of rights offerings, net of all taxes,
may be repatriated without prior approval.

Non-resident Indians (NRIs) are subject to separate investment
limitations. They can repatriate dividends, rents and interest
earned in India and their specially designated bank deposits are
fully convertible.

The National Stock Exchange (NSE) and the Bombay Stock
Exchange (BSE), both based in Mumbai, use screen-based trading
systems. Computers and reliable telecommunications links permit
automated buy/sell transactions. Other regional exchanges and
the National Over-the-Counter Exchange in Delhi also have
computer- trading systems. The efficiency of the capital market
has improved because of the compulsory depository system for
most of the stocks, abolition of the traditional speculative "badla"
system of carry forward trades, and introduction of derivatives
trading by way of stock options and index trading. SEBI regulates
all market intermediaries. Securities can be transferred through
electronic book entry. The National Securities Depository Limited,
which is promoted by the NSE, commenced operation in 1996.
The BSE, the other market with national reach, has also set up a
depository system. Together, the NSE and BSE account for 96

Chapter 6: Investment Climate

page 50

percent of total turnover in the stock markets. India's turnover ratio
(annual value of stock traded over market capitalization), a
measure of liquidity, is higher than those of many developed (e.g.,
UK, Japan, and Germany) and emerging markets (e.g., China and
Singapore). The NSE and BSE are the world's fourth and fifth
largest stock exchanges in terms of number of transactions,
although they are smaller in terms of turnover value compared to
the world's largest markets.

Companies incorporated outside India can raise resources in
India's capital market through the issuance of Indian Depository
Receipts (IDRs), subject to certain conditions established and
monitored by SEBI. Companies are required to have pre-issue
paid-up capital and free reserves of least $100 million, as well as
an average turnover of $500 million during the three financial years
preceding the issuance.

India's banking industry (with total assets of about $877 billion in
March 2007) is split into three categories - - 28 public sector banks
(70 percent of total assets in the banking system), 28 regional
private banks (21 percent), and 29 foreign banks (about 8
percent). According to official figures, the ratio of non-performing
loans to total assets for public sector banks was 2.6 percent in
2006-07 compared to 3.7 percent the previous year. A Board for
Financial Supervision ensures compliance with guidelines on loan
management, capital adequacy, and asset classification. All banks
operating in India are regulated through the Reserve Bank of India
(RBI) whose authority the GOI has limited gradually as part of the
economic reform process.

Domestic banks are mandated to extend 40 percent of their loans
to "priority" borrowers (agriculturists, exporters, and small
businesses). A similar requirement for foreign banks is 32 percent
of loans to exporters and small businesses. In April 2003, the
lending commitment for regional rural banks in priority sectors was
raised to 60 (from 40) percent. In addition to imposing sector
lending requirements, the dominance of state-owned banks in the
market also allows the GOI to exert influence over individual
lending decisions.

The GOI allows external commercial borrowing (ECB) under the
automatic route up to $500 million with minimum average maturity
of 5 years, and up to $20 million for three-five years average
maturity, with a total sectoral cap of $22 billion annually. The
central bank also authorizes an additional $250 million in ECBs
with average maturity of at least 10 years, under the approval
route. ECB for financing equipment imports and infrastructure
projects can go as high as $500 million. In August 2007, the
government restricted rupee expenditures of ECBs to $20 million
and with prior RBI approval, in order to stem surging capital
inflows. All companies except banks, financial institutions and
non-banking financial companies are eligible to pursue ECB or
provide guarantees for such loans. ECB funds cannot be used for
investment in the stock market or real estate.

Takeover regulations require disclosure on acquisition of shares
exceeding five percent of total capitalization. Acquisition of 15
percent or more of the voting rights in a listed company triggers a
public offer for an additional 20 percent stake as per SEBI's
Substantial Acquisition of Shares & Takeovers Regulations.
Companies may buy back their shares in the market to make inter-
corporate investments. RBI and FIPB clearances are required to
acquire a controlling stake in Indian companies. Cross
shareholding and stable shareholding are not prevalent in the
Indian market. The Hostile Takeover Code and the SEBI
Takeover Committee regulate hostile takeovers. The Committee
makes ad hoc decisions on takeovers, and tends to protect the
target firm when takeover bids come from foreign entities.

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