Mumbai: The government promises policy initiatives that will attract more investment in the stock markets, and predicts a greater role for domestic mutual funds (MFs) and insurance companies in bolstering the bourses, which have so far been dominated by foreign institutional investors (FIIs).
“Strong projected economic growth and supportive policy initiatives would enhance investors’ preference to invest in financial instruments, such as equity and debt papers,” the finance ministry said in its annual Economic Survey.
In addition, strong inflows into MFs would find their way to the capital markets and the launch of innovative products by insurance firms will stimulate their participation in equity and debt markets, it said.
Nilesh Shah, chief executive of brokerage Ambit Capital Ltd, said “removing the surcharge on income tax paid by companies” could be one of the steps to boost both corporate earnings and the market. The surcharge is currently pegged at 12%, and if removed, corporate profits could increase by 3-4%.
The corporate sector could get a fillip by raising the limit on FII investment in select industries such as media, banking and insurance, said Apurva Shah, head of research at Mumbai-based Prabhudas Lilladher Pvt. Ltd.
Since India’s growth performance is relatively better than other emerging economies, it would continue to attract significant cross-border portfolio investments, the survey said. However, FIIs have sold Indian equities worth more than $2.8 billion (Rs11,170 crore) so far in 2008.
Many large foreign brokerages such as Goldman Sachs, Credit Suisse, Morgan Stanley and Lehman Brothers have said current valuation of Indian stocks is high compared with peer markets.
Industry players endorse the view given in the survey. “Domestic institutions like mutual funds and insurance companies have usually emerged as net buyers into equities whenever FIIs are in selling mode. But the pace at which domestic institutions invest in markets has gathered momentum in recent years,” said Krishnamurthy Vijayan, CEO ofJPMorgan Asset Management India Pvt. Ltd.
Domestic players have so far in 2008 increased their footprint in local markets, more than the foreign players. Currently, 33 MF players manage assets worth Rs5.4 trillion.
According to the Bombay Stock Exchange, domestic institutional investors have bought shares worth Rs19,000 crore whereas FIIs have sold equities worth Rs11,000 crore. Ever since Sebi imposed restrictions on how FIIs invest in India, they have been net sellers in the stock markets.
Since November, they have sold stocks worth Rs22,608 crore, whereas domestic players have bought equities worth Rs32,452 crore. The data on FIIs is sourced from Sebi and includes investments made in initial public offerings, whereas figures for the domestic players only include their secondary market investments.