April 03, 2018
In a move designed to further boost overseas investment, India’s domestic exchanges took a significant step last month in deciding to cut off data feeds to overseas bourses, and to the Singapore and Dubai Exchanges in particular. The Finance Ministry in New Delhi quickly made clear that it supported the move, especially given significant negative impacts of trading in Indian derivatives over the last year which have been widely perceived as destabilizing domestic financial markets: particularly as this trading takes place outside the reach of India’s regulators. In that context, last month’s decision can properly be seen as the latest in a series of regulatory and supervisory initiatives taken on the subcontinent over recent years, each one designed to tighten up still further historic asymmetries in its markets. Far from being unduly protectionist, as some commentators have suggested, it can only be good news for overseas and domestic investors who wish to participate in the success of India’s burgeoning economy.
And there will also be a brand new home for India’s foreign investors: the new International Financial Centre in Gujarat (Prime Minister Modi’s home state), which offers execution with no taxes on either capital gains or transactions and no stamp duty either; it also offers dollar contracts which will effectively remove currency risk on derivatives trading (given transactions in that segment are regularly denominated in dollars); not to mention new, state of the art trading infrastructure as well. So far the new exchange has been surprisingly slow to gain traction (as most new exchange sare) but last month’s announcement should give it much needed shot in the arm.
And the Indian Government is unquestionably right to target overseas investment at the moment.
Take the news this month that US behemoths Blackrock, Oaktree Capital and Elliott Management have all three moved to increase their investment in the subcontinent’s ICT sector, each explicitly recognising the potential for further growth through India’s ongoing digital transformation. The concerted move reflects increased domestic spending on IT technologies so, perhaps inevitably, the sector is also attracting greater interest from overseas private equity funds as well, as indeed are other key areas in the economy at the moment, notably real estate.
On a macro scale, the Reserve Bank announced this month that India’s exports grew by 4.5% in February to USD 25.8 Billion, narrowing its trade deficit to USD 12 Billion, which may also go to explain the increase in returns on Indian Government Bonds reflecting increased demand from corporates and banks to fuel investment opportunities. The 10-year benchmark rate on Government Bonds rose from Rs 96.42 to Rs 96.83 while shorter Bonds (maturing in 2021) were trading at Rs 101.75 (up from Rs 97.81). Call rates on the Indian overnight money market were also up, reflecting a core strengthening in the value of the Rupee.
That combination of market resilience and progressively more robust regulation and compliance models makes it difficult to ignore the investment opportunities that India currently has to offer.
Red Ribbon Fund Management has placed Indian markets at the heart of its investment strategies since the company was founded more than a decade ago: priding itself on understanding more about India than virtually any other asset manager, with a team of more than a hundred expert analysts and advisers living and working on the ground in India’s key areas of economic expansion, seeking out the best and most profitable projects in the daily workings of its local markets. The Red Ribbon Private Equity Fund was launched last year to take full advantage of the resurgence in India’s Financial Markets.
Prime Minister Modi’s Government has introduced a series of initiatives that are likely to have a far-reaching impact on the economy. Everyone is familiar with Demonetisation, a bold and for the most part highly successful Programme to rid the subcontinent of its historic associations with unregulated and often illegal market activities. The new GST fiscal regime is equally well known: working progressively to unify markets across India’s vast territories, whilst at the same time reducing overall tax burdens and smoothing the previously over complicated process of Inter State trade.
Less well known perhaps are the equally important initiatives introduced to tighten up India’s regulatory and compliance structure. RERA was an important first stepping-stone in the process: clearing up beaureaucratic inefficiencies and often abusive hurdles to trade. And the Supreme Court has taken up the baton too, with its recently streamlined approach to dispute resolution, giving companies the certainty and assurance they need for effective decision making and removing at a stroke the sometimes sadly deserved reputation which the subcontinent had gained for judicial delay.
So all in all, India is a very different country today than it was even as recently as ten years’ ago. Investors are now much more likely to find Compliance, Legal and Regulatory structures which match Western models with which they are perhaps more familiar.
Last month’s decision by India’s Exchanges to dissuade offshore trading in Indian derivatives (a broadly unregulated activity) principally in the Dubai and Singapore markets, should properly be welcomed as part of this same process of Regulatory tightening. The markets can only be stronger for it and I am pleased that it signals in the strongest way that India’s markets, newly regulated and thriving, are very much open to business for foreign investors.