The two major reasons why Indian securities are attractive to international portfolios are: high returns and low correlation with world markets. The long run rate of return on the BSE Sensex has been 18% in real terms.
Until September 1992, the only entry available to Indian Capital Markets for the foreign investor was through listed country funds. The first fund of this type was launched by the UTI in London in 1986, followed by others.
Global Depository Receipts (GDRs)
Indian companies are now also allowed to raise equity capital in the international market through the issue of GDRs. GDRs are designated in dollars and are not subject to any ceilings on investment. Settlement of transfers of GDRs is linked to the international settlement systems like National Securities Clearing Corporation in the USA and Euroclear in Europe.
Direct Participation by Foreign Institutional Investors (FIIs)
Today, there are 323 FIIs and 29 foreign brokers operating in India and cumulative net investment by FIIs had reached nearly US $2.7 billion by end September 1994.
The opening up of the stock market to FII investment in 1992-93 has led to a surge in FII inflows, amounting to Rs 51,260 million in 1993-94. This represented a diversification of the portfolio of international investors into India, one of the emerging markets. FII investment in the Indian securities market has been quite diversified, with investment in over 600 securities. FIIs may invest only in :
Joint ventures between a number of domestic and foreign securities firms have been approved in the sectors of stock broking, merchant banking, assets management and other non-bank financial services.
FIIs are eligible for concessional capital gains tax rates of: