Investment Sectors In India

2010 The report is about the different investment sectors in India, factors affecting the investment trends in the respective investment sectors, and the three major investment projects running currently in India.

Anamika Tarafadar

M090700007

Source of Information: FTKMC knowledge books.

TABLE OF CONTENTS

INDIAN ECONOMIC OVERVIEW

AN INTRODUCTION TO INVESTMENT SECTOR

o BANK FIXED DEPOSITS

o LIFE INSURANCE

o REAL ESTATE/PROPERTY

o POSTAL SAVING SCHEMES

o GOLD

o SHARES AND MUTUAL FUNDS

o NSC AND PPF

o BONDS, CHIT FUNDS AND COMPANY FD’S

DEBT MARKET

o FACTORS IMPACTING DEBT MARKET

EQUITIES MARKET

o FACTORS IMPACTING EQUITY MARKET

CURRENCY MARKET

o FACTORS IMPACTING CURRENCY MARKET

MUTUAL FUND INDUSTRY

o FACTORS IMPACTING MUTUAL FUND INDUSTRY

COMMOTDITY MARKET

o FACTORS IMPACTING COMMODITY MARKET

FOREIGN DIRECT INVESTMENT

o An overview

o Determinants of foreign direct investments

MAJOR INVESTMENT PROJECTS IN INDIA

o VIRGIN INDIA

o RELIANCE POWER PROJECT

o BHARTI WALMART

CONCLUSION

REFERENCES

Indian Economic Overview

India’s financial market has been one on the centre stage since a decade with

it being one of the fastest growing economies in the world.

The last decade has witnessed a large evolution of the Indian market

becoming one of the strongest economies, standing head high even in the

times of global crisis.

India has been one of the best performers in the world economy in recent years, but rapidly rising inflation and the complexities of running the world’s biggest democracy are proving challenging. India’s economy has been one of the stars of global economics in recent years, growing 9.2% in 2007 and 9.6% in 2006. Growth had been supported by markets reforms, huge inflows of FDI, rising foreign exchange reserves, both an IT and real estate boom, and a flourishing capital market.

Introduction to INVESTMENT SECTORS in India

Investment has been a tool for the individuals or groups to convert their static money into a dynamic asset, giving them returns higher than the principle or n times the principle.

In today’s market scenario it has become mandatory to invest your money purposefully in the market in order to get high returns.

Investing wisely is an important part of financial security. Invest money as early as possible so that the money will grow accordingly in your lifetime. Today Indian youths are well paid compared to last decades thanks to Information Technology, ITES like BPO, Call Center and overall strong economy. So people are able to save more money. Choosing a wise investment is very crucial because there has to be a balance between the risks and returns. For example many people invest private firms

which offer very high interest rate but they may vanish after some time loosing all the invested money. Savings have been on the Indian blood since decades and to make this saving dynamic, benefiting the economy, giving it the impetus to grow, investment was given the right robust during 80’s in India by the then finance minister Mr.Manmohan Singh,letting the citizens an opportunity to get the tax benefits(subsequently a chance to convert the black money into white money), thus creating mobilization in the economy and since then India has never looked back.

Here are some major investment options popular in India. Bank Fixed Deposits This is a very common investment method. Risk is very less compared to other type of investments but return also not very high. Interest rate varies from bank to bank and depends on the scheme you choose. Tenure can be anything between 15 days to 5 years. All leading nationalized, private and co-operative banks offer fixed deposits. Different banks have different schemes and features like easy FD, cash certificate, auto renewal, free credit card with FD etc. Life Insurance This is another important investment option in India. Life insurance Corporation of India, a Government of India undertaking is the market leader followed by private players like ICICI Prudential Life Insurance, Bajaj Alliance Life Insurance, HDFC Standard Life, Birla Sunlife, Kotak Mahindra, Reliance Life Insurance, Tata AIG Life, Aviva Life Insurance etc. The life insurance/insurance sector is yet to see the robust growth in its market as the current scenario suggests that more than 60%(approx) of the Indian population is still untouched by this particular kind of investment.

Real Estate/Property Property prices in major Indian cities are doubling in every 2-3 years so investing in property is a good idea. Investing in property is also a safe investment with good returns. Buy a flat, property or individual house is a prime area or suburbs of main cities and it will appreciate well in another few years. Getting a housing loan is not very difficult these days. Invest in property in main cities like Mumbai, Delhi, Chennai, Bangalore, Hyderabad, Calcutta, Kochi etc. India is viewed by many as having great potential for real estate investment, with both domestic and international firms raising private equity real estate funds targeting the region. Postal Saving Schemes Apart from postal services like delivering letters, registers, parcels and money orders Postal department of India offers financial services like recurring deposit, postal life insurance, saving account and national saving certificate. The past generation had a strong belief in this kind of low dynamic investment and they had a view that their money is safe in this investment than nowhere else. Gold Investing in gold is another good option for long term. Normally gold appreciate about 17% per year. It is a very good return when inflation is about 4 to 6%. When investing in gold it is better to invest in gold coins or gold

mutual funds. When you buy gold as ornaments you will loose money as making charges and wastage. But in the present market scenario the gold is traded as a commodity and it was, is and will be seen and recognized as a major sector of investment by Indians. Shares and Mutual Funds Investing in Shares and Mutual Funds are risky options but return is more. You will have to study about the company well before investing. To invest in shares you have to start a demat account first. If you have enough time to spend they study about the companies and invest wisely otherwise invest in mutual funds. National Saving Certificate and Public Provident Fund NSCs and PPFs are safe and secure investment method but return is less compared to current bank interest rates and share market returns. Bonds, Chit Funds and Company FDs Other possible investment options are bonds, chit funds and company FDs. Some chit funds and company FDs offer high interest rates but may vanish after some times. So be careful while investing in such firms.

These are the few investment sectors which have been in the lime light a half decade ago. Now the investment scenario has changed its position globally, with drastic change in investment trend and shift from the primitive investment tools to the novice global financial instruments, for instance the derivatives, futures and options and commodity exchange market.

As the global media transformed from black & white to colours, the financial(investment) market has changed its facet to distinguished CURRENCY MARKET, COMMODITY MARKET, DEBT MARKET, EQUITY MARKET and EQUITY DERIVATIVES MARKET and new terminologies.

Let’s have a brief look on these markets and the factors impacting the investment in each of these markets.

The Debt Market

The debt market in India, the government securities market in particular, dates back to 1859 when the British govt. took over the East India Company. The government has been issuing debt instruments both before and after independence. Corporate bonds, mainly debentures, were being issued by companies of good standing in the pre-war and post-war years. Lending institutions were set up during 196-70 as there was a decline in corporate bond issues during the period. These institutions supplied the bulk of the medium-term and long-term funding requirements of the private sector. The corporate bond market revived in 1980’s and, today, there is a well-segmented debt market in India comprising the government securities(G-secs) market, corporate bond market and money market.

The debt market plays a pivotal role in the economy as it helps in efficient mobilization and allocation of resources in the economy, besides financing the development activities of the govt. It transmits signals for implementation of the monetary policy and facilitates liquidity management in tune with the overall short-term and long-term objectives. The securities are used as an instrument for raising debt.

The returns on g-secs are normally taken as the benchmark rates of returns and are referred to as the risk-free return in financial theory.

Factors Impacting the Debt Market

so many factors influence the debt market and the following are the most prominent among them

Sound fiscal and monetary policy Effective legal, taxation and regulatory infrastructure Competitive market structure Low transaction cost Low levels of fragmentations Robust market infrastructure High level of heterogeneity among market participants Liberalized financial system with competing intermediaries Diversified investor base-the more investors, the more trading activity Availability of hedging instruments such as interest rate futures and

swaps Reliable benchmark yield curve to price long term risk Robust clearing and settlement system Availability of public information to assess credit quality

Bond Market (exchange traded) 2004 2005 2006 2007 2008 2009

Value of bond trading(USD million)

Global

11,644,371

13,003,062

14,04,070.3

15,155,407.7

19,004,464.1

13.03%

India 209,097 141,269.60

46,378.80 59,960.80 68,619.70 24.31%

source:ftkmc 1

EQUITIES MARKET

The history of Indian stock markets dates back to nearly 200 years. Stock

exchanges spread their roots in India in 1875 when 318 traders jointly formed

the Native Share and Stock Brokers Association, which later came to be known

as Bombay Stock Exchange(BSE), the oldest stock exchange in India.

The Stock Exchange provides the means by which finance can be raised by the

sales of shares to investors. Companies are legal entities that produce goods

and services in a modern economy and in the process provide employment to

a large number of people. Exchange encourage the creation of companies and

provide a totally transparent mechanism for the valuation of companies

through the process of price discovery. Trading platforms on various

exchanges disseminate price information and price is discovered through free

market forces.

The stock market is known to be the barometer of an economy and reflects

how a country’s economy is performing at the macro level.

Factors impacting the Equity Market

Various factors impact the equity markets, which includes

Interest rates

Inflation rate

GDP growth rate

Money supply

Investment climate

Taxation

Regulatory infrastructure

Balance of trade and balance of payments

Currency rates

EQUITY TRADING

Particulars

2006-07

2007-08

2008-09

9-Aug

9-Sept

Percentage change over the previous month(col.6 over col5)

1 2 3 4 5 6 7

A. Indices BSE sensex 13072.1 15644.44 9708.5 15666.64 171226.84 9.32 NSE NCX Nifty

3821.55 4734.5 3020.95 4662.1 5083.95 9.05

S&P CNX 500

3145.35 3825.85 2294.85 3840.25 4118.65 7.25

B. Market Capitalizations(Rs. Crore) BSE 3545041.00 5138014.13 3086075.17 5825656.69 5708337.29 8.00 NSE 3367349.97 4858121.72 2896154.22 4975799.77 5353879.59 7.60

C. Gross Turnover(Rs. Crore) BSE 956186.00 1578855.29 1000073.70 122319.27 124219.90 1.55 NSE 1945286.55 3551038.00 2752022.98 364968.84 365063.09 0.03

D. P/E Ratio BSE sensex 20.33 20.11 13.65 20.45 22.19 8.51 BSE 100 index

17.64 19.95 15.3 21.85 23.28 6.54

S&P CNX Nifty

18.4 20.63 14.30 20.94 22.9 9.36

source:ftkmc 2

CURRENCY MARKET

The Foreign Exchange market is the largest and the most liquid market in the

world. The roots of trading of foreign currencies can be traced back to the

middle ages with the development of bills of exchange by international

merchant bankers. These bills of exchange represented transferable third-

party payments, which facilitated both flexibility and growth in international

trade that included foreign exchange.

The origin of the foreign exchange market in India could be traced back to

1978 when banks in India were permitted to undertake intra-day trade in

foreign exchange. The Forex market in India was given a boost by setting up of

the Expert Group on Foreign Exchange Markets in India.

The economic liberalization of the early 1990’s facilitated the introduction of

derivatives based on interest rates and foreign exchange. The Internal

Technical Group on Foreign Exchange Market(2005) was constituted to

undertake a comprehensive review of the measures initiated by the Reserve

Bank Of India(RBI) and identify areas for further liberalization or relaxation of

Equity market

primary market

public issues right issues bonus issues

secondary market

national level stock exchange (NSE, BSE,MCX)

regional exchanges

restrictions in medium-term framework. Since then, foreign exchange market

has acquired immense participation, depth, and liquidity.

The corporate uses the Forex market for hedging against currency

depreciation to protect future transactions and buying/selling currencies to

pay international employees. Changes in the exchange rate due to changes in

the value of each currency relative to the other in the pair, and are measured

in points in percentage, or pips.

Factors impacting Foreign Exchange Market

Business cycles

Economic growth and trends

Balance of payment

Balance of trade

Political developments

New tax laws

Stock market news

Inflationary expectations

International investment patterns

Government and RBI policies

Market psychology

International political and economic developments

Indicators of Indian foreign exchange market activity April 2005-March

2006 April 2006-March 2008

April 2007-March 2008

Total annual turnover

4,404 6,571 12,305

Inter-bank to Merchant ratio

2.6:1 2.7:1 2.5:1

Spot/Total turnover(%)

50.5 51.9 49.7

Forward/Total turnover(%)

19.0 17.9 19.3

Swap/Total turnover(%)

30.5 31.1 31.1

source:ftkmc 3, RBI

MUTUAL FUND INDUSTRY

Indian mutual funds in India commenced operations in 1964 as an initiative of

the Indian government and Reserve Bank of India(RBI).

Phase I (1964-87) - establishment of UTI

Phase II (1987-93) – entry of public sector funds

Phase III(1993-96) – entry of private sector funds

Phase IV (1996-99) – growth and SEBI regulations

Phase V (1999-2004) –emergence of a large & uniform industry

Phase VI (from 2004) – consolidation and growth

Mutual funds are simply a pool of investments. The fund is organized as a

trust that collects funds from investors and collectively invests them in

different asset classes such as equity, debt, commodity, real estate, etc. as per

the pre-defined investment objectives. The trust manages these investments

to achieve the returns as set by the scheme objectives. Once the funds are

collected from the investors, units are allotted to the investors depending

upon the investment made by them and returns made by the fund are

distributed to the investors.

FACTORS IMPACTING MUTUAL FUNDS

Various factors impact investments in mutual funds

Performance of fund investments

Units sold or redeemed

Personal experience with a mutual fund company

Current events in the financial markets

Professional financial advisors

Stock market fluctuations

Media coverage about fund companies

INVESTORS

FUND MANAGERS

SECURITIES

RETURNS

INVESTORS POOL

FUNDS WITH

FUND MANAGERS

SECURITIES

GENERATE RETURNS

FUND MANAGERS

INVEST FUNDS IN

SECURITIES

RETURNS ARE PASSED

ONTO INVESTORS

COMMODITY MARKET

History of trading in commodities in India dates back to several centuries. But

organized futures market in India emerged in 1875 when Bombay Cotton

Trade Association was established. In the post-liberalization era of Indian

economy, it was the Kabra Committee and the World bank-UNCTAD study

that finally assessed the scope for forward and futures trading in commodities

markets in India and recommended steps to revitalize futures trading.

Futures market facilitates discovery of prices at a future date on the basis of

information collected by many stakeholders. Efficient functioning of future

markets results in many benefits for optimal decision making and resource

allocation by price discovery, risk reduction and risk sharing. Thus, futures

markets promote more efficient production planning, storage, marketing and

better margins for producers by providing a mechanism for risk management

and price discovery.

FACTORS IMPACTING THE COMMODITY MARKET

Commodity prices are susceptible to a multitude of factors and the major

factors are enumerated below

The demand-supply equation

Seasonality

News

Geo-political developments

Macroeconomic conditions

Currency movement

COMMODITY MARKET 2006 2007 2008 Gold(in tones)

Global 1,13,383.3 131695 167134.4 21.41% India (mcx) 10204.5 7901.70 15042.1 21.41%

Global 1431771.91 1614694.74 1875003.81 14.44%

Silver(in tones)

India (mcx) 300672.1 306792 393750.80 14.44%

Copper (in tones)

Global 529396400 768775300 713889800 16.12% India (mcx) 5293964 15375506 14277796 64.23%

Crude oil(in tones)

Global 147472967741.9 23626088813.6 256333425000 31.84% India (mcx) 457166200 1393934524 2050667400 111.70%

Indices Global(DIJA AG commodity index)

166.509 184.964 117.244 -11.85%

India (COMDEX)

2200.78 2373.16 1788.05 -1.11%

Foreign Direct Investment

FDI or Foreign Direct Investment is any form of investment that earns interest

in enterprises which function outside of the domestic territory of

the investor.

FDIs require a business relationship between a parent company and its

foreign subsidiary. Foreign direct business relationships give rise to

multinational corporations. For an investment to be regarded as an FDI, the

parent firm needs to have at least 10% of the ordinary shares of its foreign

affiliates. The investing firm may also qualify for an FDI if it owns voting

power in a business enterprise operating in a foreign country.

Types of Foreign Direct Investment: An Overview

FDIs can be broadly classified into two types: outward FDIs and inward FDIs.

This classification is based on the types of restrictions imposed, and the

various prerequisites required for these investments.

Movement of Foreign Direct Investment across countries in the world in the

last couple of years presents an interesting phenomenon. FDI increased by 5%

worldwide in the year 2007.

In 2007 China succeeded in retaining its 2006 ranking as the country in the

world, which attracted the highest level of multinational investment. The

number of FDI related projects stood at 1,171. The level of investment in 2007

stood at US$90 billion in comparison to the US$116 billion that was registered

in 2006. China also recorded substantial job creation in 2007. Out of an

estimated 1.2 million jobs created in the Asia-Pacific region, 366,000 were

credited to China.

Determinants of Foreign Direct Investment

One of the most important determinants of foreign direct investment is the size as well as the growth prospects of the economy of the country where the foreign direct investment is being made. It is normally assumed that if the country has a big market, it can grow quickly from an economic point of view and it is concluded that the investors would be able to make the most of their investments in that country. In case of foreign direct investments that are based on export, the dimensions of the host country are important as there are opportunities for bigger economies of scale, as well as spill-over effects. The population of a country plays an important role in attracting foreign direct investors to a country. In such cases the investors are lured by the prospects of a huge customer base. Now if the country has a high per capita income or if the citizens have reasonably good spending capabilities then it would offer the foreign direct investors with the scope of excellent performances. he status of the human resources in a country is also instrumental in

attracting direct investment from overseas. There are certain countries like

China that have taken an active interest in increasing the quality of their

workers.

They have made it compulsory for every Chinese citizen to receive at least

nine years of education. This has helped in enhancing the standards of the

laborers in China.

If a particular country has plenty of natural resources it always finds investors

willing to put their money in them. A good example would be Saudi Arabia and

other oil rich countries that have had overseas companies investing in them in

order to tap the unlimited oil resources at their disposal.

Inexpensive labor force is also an important determinant of attracting foreign

direct investment. The BPO revolution, as well as the boom of the Information

Technology companies in countries like India has been a proof of the fact that

inexpensive labor force has played an important part in attracting overseas

direct investment.

Infrastructural factors like the status of telecommunications and railways play

an important part in having the foreign direct investors come into a particular

country.

It has been observed that if the infrastructural facilities are properly in place

in a country then that country receives a substantial amount offoreign direct

investment. If a country has extended its arms to overseas investors and is

also able to get access to the international markets then it stands a better

chance of getting higher amounts of foreign direct investment.

It has been observed in the recent years that a couple of countries have

altered their stance vis-a-vis overseas investment. They have reset their

economic policies in order to suit the interests of the overseas investors.

These companies have increased the transparency of the legal frameworks in

place. This has been done so that the overseas companies can understand the

implications of their investment in a particular country and take the

appropriate decisions.

CUMULATIVE FDI EQUITY INFLOWS

In Rs Crore

In US$ Million

Cumulative amount of FDI inflows (From April 2000 to March 2009)

3,93,020 89,819

Amount of FDI inflows during 2008-9 (From April 2008 to January 2009)

105,673 23, 885

Cumulative amount of FDI Inflows (Up to April 2009)

4,04,728 92,158

SOURCE: DIPP, Federal Ministry of Commerce & Industry, Government of India

FDI Equity Inflows (2008-09)

MONTHS In Rs crore In US$ Million

April 2008 15005 3749

May 2008 16563 3932

June 2008 10244 2392

July 2008 9627 2247

August 2008 9995 2328

September 2008 11676 2562

October 2008 7284 1497

November 2008 5305 1083

December 2008 6626 1362

January 2009 13347 2733

Year 2008-09 (Up to January 2009) 105673 23885

Year 2007-08 (Up to January 2008) 58203 14466

YOY Growth (%) (+) 81 (+) 65

SOURCE: DIPP, Federal Ministry of Commerce & Industry, Government of India

Major Investment Projects in India

Now since the investment market has grown many folds than what it was a

decade ago, it would be good have an overview of a few major projects

currently running in India.

VIRGIN MOBILES

Virgin Mobile is a brand used by many mobile phone service providers based

in the United Kingdom and operating in India, Australia, Canada, South Africa,

the United States and France; the brand survived only briefly in Singapore.

The international Virgin Mobile businesses each act as independent entities,

usually in a partnership between Sir Richard Branson's Virgin Group and an

existing phone company. Virgin Group provides the brand, and the phone

company operates the network infrastructure.

Virgin Mobile India Limited is a cellular telephone service provider

company which is a joint venture between Tata Teleservices and Richard

Branson's Virgin Group. Currently, the company uses Tata's CDMA network to

offer its services under the brand name Virgin Mobile, but it has also

announced plans to foray into the GSM space as well.

RELIANCE POWER PROJECTS

The Reliance Power Projects provide detailed overview of the several assignments undertaken by the Reliance Energy Limited. Instituted in the year of 1929, Reliance Energy Limited has become one of the pioneer companies in the present era, in the field of generating, transmitting and distributing electrical energy. A part of the Anil Dhirubhai Ambani Group, the Reliance Energy Limited Company supplies 28 billion voltage of electricity to more than 25 million customers of India. The company has its power stations in Kerala,

Maharashtra, Goa, Andhra Pradesh and Karnataka that produces a total of 941 MW of electrical energy.

Projects of Reliance Energy Limited

At present, Reliance Energy Limited is engaged in several projects in the area of Engineering, Procurement and Construction (EPC) section of power generation. Apart from the EPC project, the companies under Reliance Energy Limited are involved in other power generating projects through the use of wind energy, hydro-power, coal energy and natural gas. The company has its bases in Arunachal Pradesh, Maharashtra, Uttarkhand and Uttar Pradesh. Reliance Energy Limited has also invested in several projects related to the development of infrastructure that comprises the ambitious Mumbai metro rail project and many other assignments of the National Highways Authority of India. Some of the important projects that were undertaken by the Engineering, Procurement and Construction (EPC) section of power generation in the past few years are:

Establishment of Reliance Energy Limited- Samalkot Power Station at Andhra Pradesh

Thermal Power Station in Dahanu in Maharashtra Co- generation Power Plant on behalf of Godavari Sugar Mills Limited in

Sameerwadi at Karnataka

BHARTI WALMART

Bharti Enterprises and Wal-Mart join hands in wholesale cash-and-carry to

serve small retailers, manufacturers and farmers.

Business-to-business wholesale cash-and-carry joint venture to set up world-class modern supply chain and back-end logistics infrastructure

Driving efficiencies across the supply chain will help minimize wastage and provide small retailers quality merchandise at competitive wholesale prices

Bharti Enterprises and Wal-Mart Stores, Inc. have signed an agreement to

establish Bharti Wal-Mart Private Limited, a joint venture for wholesale cash-

and-carry and back-end supply chain management operations in India, in line

with Government of India guidelines. Under the agreement, Bharti and Wal-

Mart will hold a 50:50 stake in Bharti Wal-Mart Private Limited.

Wholesale cash-and-carry operations provide small retailers and business

owners a wide range of quality products at competitive wholesale prices that

help them enhance their businesses and profitability. The Bharti Wal-Mart

business-to-business (B2B) wholesale cash-and-carry joint venture will serve

kirana stores, fruit and vegetable resellers, restaurants and other business

owners. It also will serve other retailers such as Bharti Retail, which is setting

up a chain of stores in India that are 100 percent owned and operated by

Bharti.

The wholesale cash-and-carry venture will invest in setting up an efficient

supply chain. This will link farmers and small manufacturers directly to

retailers, thereby maximizing value for farmers and manufacturers on the one

end and retailers, and in turn, consumers on the other. The venture will

support farmers and small manufacturers who have limited infrastructure

and distribution strength, and the supply chain will enable minimum wastage,

particularly of fresh foods and vegetables.

Conclusion

Overall the investment in different sectors shows an uprising trend, thus

implying the growth in economy. The investors now are more comprehensive

of the current scenario of the financial market and are coming forth to invest

extensively with the help of different financial tools to enhance growth and

maximize profit and generating unimaginable bottom-line.