Market depth on the bourses has been a matter of serious concern. Every MF seems to have this problem as domestic savers pour money in. One way is to get the foreign companies that do business, to list here- Surely, if the govt wants, it can be done


(This appeared first in Moneylife)

Keeping the (Market Wealth) in India

Our honourable prime minister Narendra Modi is passionate about ‘Make in India’. Government policies are getting fine-tuned to make this easy. Today, I want to touch on a topic that is dear to my heart. About encouraging Indians to create wealth from the massive spending and growth that is happening in India. While our gross domestic product (GDP) may be growing in real terms at 6%-7% (implying a nominal growth in double-digit terms, given that inflation is around 4%-5%), many businesses are making money hand over fist and shareholders are creating wealth at a much faster pace.
The Indian consumer is the most sought after one today. Whether it is Google or Microsoft or Unilever or Nestlé or Apple, everyone is wooing Indian consumers. Indian consumers are giving a lot of boost to the share prices of all these companies. Then you pause. All this money is spent by the Indians. Who gains? Who owns Google or Microsoft? It is clearly the Americans who own bulk of the shares. You and I cannot buy five shares in Google as easily as we can buy five shares in Bajaj Auto or Maruti. In fact, we won’t be able to buy any with our national currency!
Now think of the opposite. Who owns top Indian companies? The fact is that HDFC (Housing Development Finance Corporation), HDFC Bank and ICICI Bank are overwhelmingly owned by foreign investors. In some cases, they hold 74% shares. Uday Kotak is probably India’s finest banker and sharpest brain. Read what he has to say here: He rightly points out that companies that need capital can find it from Indians. When that is possible, why do companies like HDFC have to raise money from foreigners?
Indeed, we have a problem of plenty. Indian mutual funds are flush with money and not finding enough investment avenues. They need quality investments. Why give this up to foreigners? He notes that HDFC is today owned 80% by foreigners! And 100% of the money is made from Indians and made in India! However, the wealth from this gets created abroad. Google, today, counts on India for its next big growth opportunity. Probably, companies like Google also do a lot of their development work in India. India has the fastest growing Internet market in the world. But then, who owns the wealth that gets created from this? Indians? Think again.
My friend, Umesh Kudalkar, is an investor and an analyst par excellence. He has sharp insights on most companies and also sees things from the top. He has made a very passionate argument which calls for listing of foreign companies in India, if they wish to do business here. While India needs capital to grow, India also has capital that seeks investment opportunities. I urge you to read his arguments for “Listing in India” at  To know more about Umesh, check I fully endorse his views. Yes, there could be legal or technical issues which may need to be addressed before we can actually commence listing and trading of global securities on our bourses. If Hong Kong or Japan or European countries can invest in shares in global companies, we should also be doing that.
Coming back to fund-raising by Indian companies, the government needs to revisit the provisions that permit companies to raise equity through private placement with select investors. This provision was introduced in an era when we widely believed that domestic shareholders would not participate in offerings of new shares at prices prevailing in the secondary markets. Today, things are different. Domestic money is in plentiful supply and looking for new investment options. It would be perfect if the clause were scrapped. However, markets are fickle and investor sentiments change. In order to help both, the government can insist that all new offerings should be compulsorily through rights issues (the principle of not diluting existing shareholders). Anything unsubscribed could be given to domestic mutual funds first and then to the horde of registered foreign institutional investors (FIIs). This can be done easily without any delay, as technology is an enabler of instant decisions.
There was a time when we needed FIIs. India was short of capital and FIIs were important because they pumped in billions of dollars every year. Those days are over. Already, investments by Indian mutual funds have overtaken FII investments. Much as we need their money, they also need investment options. China allowed foreigners to buy only in a graduated manner, limiting the number of companies, imposing several restrictions and so on. Here, we have opened our capital markets too much, too soon.
Last week, Indian Railways Finance Corporation launched a bond listing on the India INX. It is an initiative by the BSE, to enable foreigners to trade round the clock. In the first phase, it proposes to commence trading in equity derivatives, currency derivatives, commodity derivatives including index and stocks. Subsequently, depository receipts and bonds would be offered, once the required infrastructure for these is in place. The technology offerings at India INX would facilitate co-location of members in its own data centre at GIFT City (Ahmedabad) as well as provide high-frequency trading. It is an attempt to compete with the likes of Singapore and Hong Kong. It is only fair that foreign securities are available for trading for Indians.
Domestic companies’ shares are creating wealth for foreigners. And foreign companies are creating wealth for their shareholders by selling to Indian consumers. And, we, Indians are getting excluded. As Umesh Kudalkar mentions in his article, every government does things to encourage domestic participation. What are we doing? We are permitting foreign banks to thrive here, without being incorporated or listed here. I am sure that if we ask them to incorporate locally and get listed here, they will comply; no one will leave the country. On the other hand, we are seeing a bank like HDFC Bank being owned predominantly by foreigners and creating wealth for them. We can insist on the foreign companies to either list and offer shares to Indian investors and/or insist on their shares being traded within India, enabling Indians to buy those shares.
Indian investors have totally been left out of the wealth created by companies like Google, Apple, Microsoft, etc, while being big contributors to their profits. Our digital payment rewards are going to Visa and MasterCard. Here, if we cannot compete with them, at least owning their shares should be enabled. India has been perennially short of capital. It is only now that wealth creation is possible as entrepreneurs get rewards from the capital markets. By opening more avenues for Indian investors, this process can be accelerated. More capital means more risk-taking can happen. Ultimately, this will all go to increase the ‘Make in India’ pie.
Our capital market regulations are among the best in the world. In many cases, we are ahead of Western regulators when it comes to disclosure regulations. However, we seem to have had a blind spot when it comes to thinking about our own interests. We have a colonial mind-set. We still want to ‘impress’ and ‘favour’ the foreigner. Indeed, at the time of writing, there is a speculative news report that Indian government may allow 100% FDI in banks. I would be happy to see the government and the regulators take steps to get us freedom from the second colonial conquest, that of our capital markets.

4 thoughts on “Make in India- The search for ‘large’ investments by Funds

  1. Bala, great piece as usual. The problem here is more structural, in that we are a net importer by a huge margin. Usually, when imports and exports are balanced, the FOREX earnings from exports cover the FOREX spending from imports in the country’s net account. But when imports are disproportionate, the importers buy FOREX indirectly in the international markets, and as domestic currency is accumulated in the international markets its value is diminished due to demand, supply dynamics.

    As this domestic currency changes hands in the international markets, it needs to find a way back to the country of its origin, as it is useless in every other country, only unless it is the reserve currency.

    Now to avoid, large-scale currency devaluation the domestic government has to either buy this domestic currency held by foreigners or provide avenues for that domestic money to come back to the country in the form of investments. Such investments create artificial demand for the domestic currency.

    In case of the US and China, we see America giving up its Real estate and shareholdings in companies to provide that investment avenue to the $ held by the Chinese. $ being the reserve currency helps the Chinese buy-up assets all over the world as well.

    In our case, I do not have the figures for foreign investment in the Indian Real estate but most of it goes into shareholdings of listed companies or set up of new businesses.

    While what you say is possible, that foreign companies earning their profits from India should provide avenues for Indian investment into them. It is not as easy as letting Indians open foreign investment accounts with Interactive Brokers and investing in these companies. Such investments would only escalate the currency demand-supply dynamics that I have discussed above.

    Forcing companies to list their shares in domestic currency terms is a way out but I find it highly divergent from a free market perspective.

    Instead of forcing laws on someone, which is the easy way out, we should be focused on balancing our imports and exports better. This will remove the need for foreigners to invest in our domestic assets.

    While increasing our exports to match our imports is a tall order given the foreign competition in foreign markets, I believe it is much easier to provide import substitution for our imports.

    As for foreign companies benefiting from our consumption story, an easier domestic to foreign investment policy to facilitate such avenues for every Indian will be the best solution and with no pressure on the currency from import, export imbalance such remittances from India to abroad will not add to the pressure already faced by our currency.

    The talk over the last few years has been to grow by following the example of our Asian neighbours, Japan, South Korea & China by exporting our way to prosperity. But better than growing through exports in a highly competitive market, we should first aim to be self-sufficient in a domestic market where we should have a better competitive edge.

    Our population provides us with the means to reach manufacturing economies of scale in all products. Once we are self-sufficient, we can think of competing against others in foreign markets. If we cannot compete with them on our home turf what chances do we have in a foreign place with global competition?

    But sadly, the situation is such that we need to protect our domestic industries with customs duties. Which is a stop-gap solution at best. In some cases, even after a labour-intensive product is manufactured in a high capita country, with added logistic costs and customs duties, the imported product is still cheaper than our domestic product.

    We have added inefficiencies after inefficiencies in our production value chain by subsidizing the citizens and penalizing the industry. A few examples are the differences in power costs, freight vs passenger costs in railways. The industry is always seen as a scapegoat to fund the political ambitions of those in power.

    Government after government tries to fund their subsidy programs by penalizing the industry through irrational pricing of inputs such as mines, ores, spectrum etc, inadequate infrastructure spending and thoughtless lawmaking to gain popularity. While our competition provides special concessions for the same to help grow the nation as a whole.

    In the end, it all comes down to the kind of people we are. We expect dole outs from our elected leaders for our personal short-term gains. We never ask what will the representative do for our country we only ask what will they do for me, my family, and my community.

    Someone has said it best, “the citizens get the politicians they deserve.”

    This is how I see it, all our problems are interconnected and no one measure will help solve the imbalances. It is like the traffic problem, if we solve the traffic snarl at one junction, we find that the problem has shifted downward to the next junction.

    There is no easy way to build a nation, a nation the size of ours requires planning and effort from all its citizens. But most of the measures that I have recommended have intangible results with positive externalities that are distributed to everyone over the long term. But no one wants that, impatience for short-term selfish benefits and results create negative externalities that are distributed to everyone over the long term.

    In the end, I feel we Indians must be born with some special kind of selfish gene to see our nation rot in so many ways and still not mend our ways.


    1. Agree with you. No easy answers. And as regards exports > imports. Not in my lifetime do I see even a glimpse. We have to open up more. Make them build factories here.


  2. Sir,

    You have been writing for more than a decade now, may be two.

    Painful reality is, Indians simply refuse to drink from the’pond of equities’.

    Equity Kumbh Mela shall happen again for the wrong reasons. And alas! At the most inopportune of times like it did; Circa 1993, 2001 . . .


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