Friday, February 04, 2005
Equity market reform in India
The Economist is also carrying a story on equity market reform in India, something I missed while watching the Telecom FDI cap story. If these pension/provident fund reforms go through, it will almost certainly create more liquidity in the stock markets and make them far less dependant (since only about 1% of Indian household savings are in the equity markets) on the whims and fancies of foreign institutional investors.
From April non-government “provident” funds may invest 5% of their new inflows directly in shares. A further 10% can be put into equity-linked mutual funds. Provident funds manage over 1.5 trillion rupees ($34 billion) in assets—currently, all of it in government-guaranteed securities or in debt instruments issued by government-owned companies and banks. Any money received when earlier investments mature will also be subject to the new rule. According to one observer in Mumbai, over the next 18 months perhaps a quarter of the provident funds' assets are likely to mature. In all, more than 200 billion rupees are likely to be available for investment in the stockmarket, either directly or through mutual funds. About 100 billion rupees can be invested in the first year of the new system.
The country's mutual-fund industry should also benefit. At present, it manages just 300 billion rupees in equity assets, or 1.5% of market capitalisation. (By contrast, American funds' share of their country's stockmarket is perhaps 20%.)Many believe that provident funds, which lack fund-management skills, will prefer to place money with mutual funds rather than buy shares directly, at least at first.
From April non-government “provident” funds may invest 5% of their new inflows directly in shares. A further 10% can be put into equity-linked mutual funds. Provident funds manage over 1.5 trillion rupees ($34 billion) in assets—currently, all of it in government-guaranteed securities or in debt instruments issued by government-owned companies and banks. Any money received when earlier investments mature will also be subject to the new rule. According to one observer in Mumbai, over the next 18 months perhaps a quarter of the provident funds' assets are likely to mature. In all, more than 200 billion rupees are likely to be available for investment in the stockmarket, either directly or through mutual funds. About 100 billion rupees can be invested in the first year of the new system.
The country's mutual-fund industry should also benefit. At present, it manages just 300 billion rupees in equity assets, or 1.5% of market capitalisation. (By contrast, American funds' share of their country's stockmarket is perhaps 20%.)Many believe that provident funds, which lack fund-management skills, will prefer to place money with mutual funds rather than buy shares directly, at least at first.
