@Leisure - Vol-10 | srei

@Leisure - Vol-10

Newsletter
 

Why the Indian government
encourages FII investment in equity markets but puts stricter caps on their investment in debt

India embarked on an exchange rate liberalisation drive in 1991, when the country was on the brink of a foreign exchange crisis. All efforts were directed towards encouraging foreign money to come into the country from sources beyond export earnings. This meant inviting foreigners to invest in India’s financial markets – debt and equity markets – and allowing them to invest in businesses too, in the form of Foreign Direct Investment or FDI.

Over the past two decades, the policies towards foreign investment in the equity markets and FDI have progressed towards having enhanced limits and becoming more flexible. However, according to a study on foreign investment in the Indian Government bond market, “the Indian policy framework on debt flows continues to be guided by the position adopted in the early 1990s. The regulatory framework is characterised by quantitative restrictions on foreign participation, resulting in limited investments by foreign investors.”

Ceilings on debt and equity

Currently, the limit for foreign investments in government securities stands at USD 30 billion. This is a small fraction of the size of the Government Securities market which has a capitalisation of Rs 27,713.66 billion (31 July, 2014).
Ceilings on Debt & Equity

Where equity is concerned, the restrictions are more liberal. FIIs have an overall investment ceiling of 24 per cent of the paid up capital of an Indian company (20 per cent of the paid up capital in the case of public sector banks), while NRIs/PIOs face a 10 per cent ceiling. Further, these caps can be raised, subject to the approval of the board and the general body of the company.

Why the caution towards foreign debt?

Foreign investment in both equity and debt has the effect of bolstering the rupee at the time of entry and dragging it down at the time of exit. Accordingly, on the face of it, it may appear preferable to invite foreign investment into debt rather than equity as it is more stable in nature and less likely to fly out of the country. More importantly, although foreign investments in debt may seem like foreign borrowing, they do not actually have to be serviced in foreign currency; the interest is paid in rupees and on maturity, the capital is returned in rupees too.

Yet from the experiences of giant economies like the US, we realise that allowing massive foreign investments in Government debt could have unpleasant consequences. Of the US’s public debt that is privately held, a very large chunk is held by foreigners, with Japan and China in the lead. This reliance on foreign money, beyond posing a risk to the domestic economy, fuels the fear that this could be used as leverage against the US in multi-lateral policies that it opposes.

 
 

Picking a winning investment

In tough economic times, markets have plenty of fixed income choices. Choose your investments carefully. Here is how to pick suitable fixed income investments.

When the stock markets are highly volatile, equity investors find the value of their portfolio doubled one day and reduced to a fraction the next. At the same time, when markets are dull and listless, stock investors find no appreciation in their investment. During both these scenarios, investors begin to perceive fixed income instruments as more attractive and such products begin to flood the market.

Inherent risk

There are various fixed income products that investors can choose from such as fixed deposits from banks and corporates, bonds issued by corporates and government organisations, and Non-Convertible Debentures (NCDs). Typically, investors are attracted to these products due to the steady returns that they offer and tend to choose those that offer a higher rate of return over those that offer more moderate rates. This may be beneficial if all goes well, i.e. the capital and interest are paid out on time and as stipulated. However, there are instances of companies that have defaulted on interest payments, and worse still, some do not return investors’ capital on time due to the financial exigencies that they are facing internally.

Staying safe

The best way to avoid such a misfortune is to check the ratings on the product. Rating agencies like CRISIL or CARE rate companies on various parameters which you can use to understand the credibility of a company and its ability to repay your money.

In addition, a company that is in a sector that is doing well or expected to do well soon will always be a safer bet than a company with uncertain fortunes. Lastly, choosing products of an experienced and stable company,which has a track record of being successful in its business, offers an advantage over others that are similar in all other terms.

Srei Infrastructure Finance Limited has been a pioneer in infrastructure financing in India with over 25 years of operations. Ithas steadily contributed towards infrastructural development in the country and has a track record of always honouring its commitments to all stakeholders.

 
 

Securing your golden years

Investing in bonds offers you a safe and convenient way of financing your retirement. Read on to understand exactly what bonds are and why they are an ideal investment for your retirement years...

A retirement plan is crucial for everyone because at some point, we have to retire from work, and our income will then diminish. Your current savings would prove insufficient as inflation continues to rise; besides, we don’t have a credible social security system in our country as in advanced nations.

When you plan for your retirement income, you need to be more certain about your investment returns. A bond is a fixed income instrument that is issued by governments and public and private corporations that wish to raise funds for their functioning and for new projects. Like fixed deposits, these instruments pay the holder a fixed amount of interest at a specified date and at a fixed rate, which is called coupon rate. Bonds are, however, usually more liquid that fixed deposits as they are typically traded on exchanges. The rate of interest offered depends on benchmark rates prevailing in the economy at the time of their issue.

Bonds would be an ideal option because they offer a steady stream of returns. Bonds are perceived as a risk-free instrument as the issuer must pay bondholders the periodic coupon amount even if it incurs a loss, and bondholders have the privilege that allows them to be paid before stockholders in the event of a bankruptcy or dissolution.

Types of Bonds:
Fixed rate bonds - They offer a fixed coupon rate for the entire life of the bond. Let’s assume that you buy a bond of Rs 10,000 with a coupon rate of 9% for a maturity period of 5 years. You will get 9% of Rs 10,000 i.e. Rs 900 every year throughout the five years.

Floating rate bonds - Thesebonds do not offer a steady stream of returns and the coupon is re-set at pre-announced intervals taking into account the prevailing interest rate scenario.

Zero coupon bonds - These bonds offer no coupon at all; they are issued at a discount to the face value but can be redeemed at the face value. For example, you can buy Rs 10,000 worth of a zero coupon bond at Rs 7,000 and sell at Rs 10, 000 on a specific maturity date. Your return would be the difference between the two prices The first type of bonds is suitable for retirement plans because the other two do not offer a regular income.

 
 

Buddy Jokes

1. A successful businessman from Mumbai visits a small village in Goa. There he meets a Goan fisherman who has just returned from the sea with his catch.
Businessman: How long did it take you to catch this fish?
Fisherman: About an hour...
Businessman:You work for only one hour a day?! How do you spend the rest of the day?
Fisherman: I wake up late in the morning, go fishing for an hour or so, then I play with my kids, have lunch with my wife and then take a nap. In the evening, I stroll along the beach and at night, I meet up with friends for drinks and a chat.
Businessman: If you spend a little more time fishing, you could catch more fish, earn more money, buy bigger boats and use hired help to catch more fish...in 15-20 years you could actually have a booming fish business that supplies products to other cities too. Finally you could sell off your business for a large amount and retire.
Fisherman: Then what would I do?
Businessman: Whatever you like! ...wake up late in the morning, go fishing for an hour or so, play with your grandchildren, have lunch with your wife and then take a nap. In the evening you could stroll along the beach and at night you could meet up with friends for drinks and a chat.

2. A teacher, a doctor and a stock broker all die and go to heaven. When the guardian at the gates asks the teacher why she should be allowed into heaven, she explains, “I have taught little children to read, write and count.” The guardian of the gates allows her in. Then he asks the doctor, “What about you? Why should I let you into heaven?” The doctor proudly talks about how he has helped the sick and the suffering.
Finally it is the turn of the stock broker. He is worried as he is unable to think of a single selfless deed he has done all his life. But to his surprise the guardian of the gates smiles broadly at him and says, “You don’t need to give me any reasons for being allowed into heaven... it’s because of you that millions of people pray day in and day out!”

3. What do you call someone who keeps changing from being a bull to a bear and then a bear to a bull and so on?
A donkey

4. Sign in the reception area of a portfolio manager: “If you want a guarantee, buy a branded electronic product.”