June 30, 2015

Competing for Capital: Hurdles and Hope in India

Competing for Capital Hurdles and Hope in India

Investors have a strong appetite for Indian equities, driven by “Modi Momentum,” but other EM countries are eating their lunch as challenges remain accessing the Indian market

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North American investors are crucial to India. They hold nearly two-thirds of disclosed global institutional equity assets under management (EAUM) – more than $20 trillion – and represent a majority of institutional investment across every sector of India’s private corporate economy. For years, they’ve sought more opportunities to invest in Indian companies. The country is uniquely positioned to be one of the fastest growing economies of its size, driven by its attractive demographic profile, an expanding workforce, as well as a rising middle class that will strengthen spending power. Since Prime Minister Modi came into office a year ago, investors also have been buoyed by prospects for political and financial reform.

Investors welcomed Modi’s drive to re-accelerate growth through economic, fiscal and capital market reforms. They’ve looked forward to progress trimming bureaucratic red tape, improving infrastructure, reforming taxes, evolving the banking system, and above all, opening India’s capital markets to greater foreign investment.

New rules intended to loosen India’s listing regulations by allowing non-capital raising depositary receipts came out last December, to the delight of Indian firms and global investors. Based on recommendations made by the M.S. Sahoo Committee in 2014, the changes were designed to promote greater integration of the Indian financial system with international capital markets, giving investors more convenient access to Indian companies, who in turn could broaden their shareholder base. But half a year later those recommendations have yet to become operational. Investors are becoming impatient.

“One year into the Modi administration, key reforms have been initiated to improve international investors’ access to Indian companies, which has clearly strengthened their appetite for Indian equities and their confidence in India’s economy,” says Neil Atkinson, Asia-Pacific head of BNY Mellon’s depositary receipts business. “While this is encouraging, North American investors believe more can be done to open up India to global capital, and it still lags behind other emerging markets in terms of ease of access.”

The competition for capital in emerging markets is intensifying. FTSE Russell has already admitted China's A-shares to their indices, and though MSCI recently decided to defer A-share admission to its indices, many experts believe they’ll reconsider within the next year. MSCI will, however, add some U.S.-listed Chinese ADRs to its indices in November 2015.

According to a recent survey by BNY Mellon’s Depositary Receipts business, Insights into North American Investors’ Appetite for Indian Equities, 69% of respondents see investing in India as more difficult than other emerging markets, while 59% are restricted from directly investing into India via ordinary shares. Some maintain near-term caution in the belief that current valuations are expensive, while others are concerned about risks such as economic volatility, tax uncertainty and corporate governance (read the full report online at www.bnymellon.com/dr).

Depositary receipts offer an obvious way to access Indian equity, a view shared by two-thirds of the investors surveyed. Historically, investing in Indian companies via DRs has been challenged by local regulations that permitted only capital raising DRs, leaving depositaries like BNY Mellon unable to establish programs for Indian companies despite strong investor demand.

"In order to access global capital to support future growth, India is taking steps to become more integrated with international financial markets. Depositary receipts can play a strategic role in this liberalization process, offering Indian issuers a valuable source of new investment from abroad, as well as new options for overseas investors looking to diversify portfolios with added exposure to Indian equities.

“Implementing these reforms takes time, and while the process is ongoing, there’s an immense opportunity for Indian issuers to benefit from the demand in global markets,” Atkinson adds.

“But other emerging markets are trying just as hard, if not harder, to appeal to the world’s big investors. It’s a competition for billions of dollars that will continue to unfold in the months and years ahead.”


BNY Mellon acts as depositary for more than 2,800 American and global depositary receipt programs as of March 31, 2015. Acting in partnership with leading companies from over 65 countries, BNY Mellon is committed to helping securities issuers access the world's rapidly evolving financial markets and delivers a comprehensive suite of depositary receipt services. Learn more at www.bnymellon.com/dr.

This release is for informational purposes only. BNY Mellon provides no advice nor recommendation or endorsement with respect to any company or securities. Nothing herein shall be deemed to constitute an offer to sell or a solicitation of an offer to buy securities. Depositary Receipts: Not FDIC, State or Federal Agency Insured; May Lose Value; No Bank, State or Federal Agency Guarantee. BNY Mellon provides no advice nor recommendations or endorsement with respect to any company, security or products based on any index licensed by BNY Mellon, and we make no representation regarding the advisability of investing in the same.