Asia Inc June 93

BUSINESS: Asia's oldest stock exchange, Bombay

May 1993

A Century Of Tradition
India's stock markets are among the oldest in Asia. Now that they are opening to foreigners will there be interest?

Early this January while Bombay burned in the worst religious rioting the city has ever known, dhoti-clad brokers at India's premier stock market in Bombay were busy bidding up the bourse. Several months later bombs ripped through the exchange and other sites in the country yet stock activity resumed the very next trading day -- much faster than anyone expected.

Not much seems to keep India's equities down. Apart from last year's huge stock scandal, which closed the Bombay Stock Exchange for six weeks, the market has kept on trading. But the business-as-usual, even bullish attitude of stock players, isn't evidence of a callous disregard of the mayhem around them. Rather, investors are betting that India's Finance Minister Manmohan Singh will hasten the pace of economic liberalization in defiance of the turmoil wracking the country. "Singh has to send a powerful signal abroad, otherwise he, his government and his reforms are doomed," observes Vikram Joshi, an independent broker in Bombay.

India's ambitious economic reform program, launched by Prime Minister Narasimha Rao three years ago, is shaking up all sectors of the country. And some of the biggest changes are taking place in the investment arena.

India has 22 stock markets and more than 5,700 listed companies, but they are still a mystery, an unknown, to most foreign investors. Says Sanjeev Saran, who runs his own investment firm: "Indian

equities are mind-boggling because of the sheer size. There are

gems to be discovered." With over 2,000 listings, the Bombay exchange -- India's oldest and largest -- alone accounts for 70 percent of the country's total trading activity.

In comparison, the Korean and Indonesian stock markets have only about 700 and 140 listings, respectively. Furthermore, India's $70 billion market capitalization represents merely 30 percent of its gross domestic product versus the 50 percent to 60 percent more common in developed economies. "The time to get into India is now," advises investment analyst Ajit Dayal, director of Bombay's Quantum Financial Services Pte. Ltd. "This is where the real action is."

Foreign institutional investors have been permitted to make direct stock purchases in India since last September. But they face a collective investment ceiling of 24 percent, and no single foreign entity can own more than 5 percent of an Indian company. The 5 percent cap was imposed in the early 1980s after Swraj Paul, an Indian-born, U.K.-based tycoon made predatory moves against two Delhi-based corporate giants -- Escorts Ltd., a tractor and motorcycle manufacturer, and diversified textile maker DCM Ltd. Indians living abroad or non-resident Indians like Paul got the green light to invest in the early 1980s, but other individual foreigners are still barred.

So far 32 institutional investors from Asia, Europe, the U.S. and tax-haven countries have taken advantage of the opening and set up shop in India. Some notable entrants include Barclays de Zoete Wedd Investment Management Ltd., Montgomery Asset Management, Citicorp Investment Bank Singapore, Hill Samuel Investment Management Ltd., Robert Fleming Nominees Ltd., Scottish Equitable International Trust, Sun Life Assurance Society PLC and G.T. Management (Asia) Ltd.

Despite their numbers, foreign institutional investors have invested relatively little. But Hemendra Kothari, former president of the Bombay Stock Exchange and chairman of brokerage firm DSP Financial Consultants, expects $200 million to $300 million of foreign investments in the next two years. A more bullish forecast comes from the exchange's executive director M.R. Mayya, who predicts inflows of $2 billion within five years. Bombay has the potential to become the most significant stock market between Tokyo and London, he says.

For all the hype, serious problems remain. A major concern is the short two-and-a-half-hour daily trading session. Another is taxation. India imposes a 20 percent tax on dividend and interest payments and has a draconian tax on short-term (less than a year) capital gains -- although that was recently lowered from 65 percent to 30 percent. It's a welcome step, says Mark Bullough, director of Jardine Fleming India Ltd., but taxes are still too high. Indian officials defend the rates, saying they prevent speculation. Analysts, however, say a further reduction in the short-term capital gains tax is necessary if India is serious about Bombay becoming a major financial center in Asia.

Futhermore, foreign investors are leery of Indian stocks' high price-earnings (P-E) ratios. At 45 times earnings, Indian stock multiples are double what is considered cheap in most emerging markets. But therein lies the problem, say Indian analysts, who consider the Indian stock markets mature, not emerging.

Sunil Gupta, research manager at Crosby Securities in Singapore, blames India's pricey P-E ratios on too many people chasing too few stocks, particularly good ones. A depreciating rupee, outlandish property prices (particularly in Bombay), double-digit inflation, and a government ban on citizens investing overseas make the stock market virtually the only investment option for many Indians. And a middle class of some 200 million people means the number of equity holders, currently numbering 25 million, is only likely to swell.

Yet some changes are in sight. Since the abolition last year of the Controller of Capital Issues, a government body that dictated the size of equity issues and the premiums companies charged, Indian corporations face less red tape and can come to market more easily with more reasonably priced shares. Furthermore, the weak performance of some outrageously priced new issues is a sign that market forces are reasserting themselves.

More realistic stock valuations, the recently relaxed investment guidelines, the fair handling of the stock scandal and the Indian government's containment of the religious rioting after Hindus razed a 16th-century mosque in the northern city of Ayodhya have combined to settle the stock markets. All this could make Indian equities more attractive to international institutional investors.

So Bombay's aspirations to become a world-class financial hub may not be a pipe dream after all. As experts in Hong Kong and New York note, the success of China's "B" shares is purely a novelty. China doesn't have business laws in place for foreigners, and its exchanges are as new as cellular phones. In India, on the other hand, stock markets are older than this century.