India stocks reform only ‘a partial boost’

January 8th, 2012

The Indian government’s decision to allow foreign nationals to invest directly in stock markets is an attempt to revive its reform agenda but any benefits will only be seen long-term, analysts say.

The move to liberalise share-trading was announced on January 1 amid growing concern over India’s slowing growth rate and an exodus of overseas capital during 2011.

The ministry of finance in New Delhi said that it hoped the reforms, which are due to come into place by next weekend, would “widen the class of investors, attract more foreign funds and deepen the Indian capital market”.

Until now, foreigners have been allowed to invest in India’s stock markets only via mutual funds or through registered institutions.

International investors may find it easy to resist the temptation after India’s benchmark Sensex index fell 25 percent last year, making it one of the worst-performing equity markets among major economies.

Overseas funds were net sellers of $358 million-worth of Indian stocks in 2011. In the previous 12 months, they bought stock worth $29 billion, according to the Securities and Exchange Board of India, the market regulator.

Analysts say the new regulations are designed to tackle the problem as foreign-buying into Indian stocks was drying up due to slackening domestic growth and global uncertainty.

“This policy is welcome as India needs more capital,” said Hemen Kapadia, chief executive with Chart Pundit, a Mumbai investment advisory firm.

But he told AFP that the move should have come sooner.

“At this stage, it appears to be more out of desperation to improve dollar flows and support a weakening rupee,” he said.

Prime Minister Manmohan Singh’s government spent much of 2011 waylaid by corruption scandals, rather than pushing ahead with economic reforms that kick-started India’s boom 20 years ago.

The market reforms are one small step in the liberalisation programme — and they could also help business confidence, which has taken a hit due to relentless interest rate hikes and the rupee’s slide against the dollar.

Jigar Shah, head of research with Kim Eng Securities, called the new policy “a good move” but said the impact would only be felt over time.

“Money will not immediately come into India as global economic conditions remain very volatile,” he said.

“The domestic macro-economics are unattractive at the moment. But if rates start to fall or if big-ticket reforms come in, the outlook could improve.

“We want to see what the government does at ground-level.”

Nick Paulson-Ellis, the India head of Espirito Santo Securities, agreed. “(The policy) is helpful at the margins,” he said.

But like Shah and Kapadia, Paulson-Ellis does not forecast a major immediate impact.

Shah predicted that foreign nationals will wait for quality offerings — like that for Coal India back in 2010 — before making an entrance in India’s markets.

The state-run Coal India, a mining heavyweight, raised $3.4 billion in November 2010 when it sold a 10 percent stake in an initial public offering (IPO) that was hugely oversubscribed.

Experts will also be keen to read the fine print of the policy guidelines.

Indian companies have specific foreign holding limits and in several blue-chips like HDFC Bank and ICICI Bank, the foreign holding limit has been reached, which may make them inaccessible to new foreign investors.

Shares are also unlikely to rise sharply in coming months, with inflation still high at above nine percent and a weak outlook for corporate earnings.

India emerged relatively unscathed from the global financial crisis in 2008 when domestic demand for goods and services insulated the country from foreign shocks.

But the effect of the eurozone debt crisis and hesitant US recovery is being felt more this time round.

Annual growth in India slid to a two-year low of 6.9 percent in the July-September quarter and the government now expects growth of about 7.5 percent for the 2011-12 fiscal year.

Avinash Vazirani, a fund manager with Britain’s Jupiter Asset Management, said the reform would provide a partial boost after the government’s disappointing withdrawal of plans to open up the retail sector.

“The direct impact on this foreign investment (reform) will be limited but the government’s decision indicates a more investor-friendly stance. It is this that is likely to boost sentiment,” he said.

source form: yahoo