The post reform period has seen the emergence of a large number and variety of institutions
in the capital market
• Foreign Institutions: Foreign Institutional Investors (FIIs) registered with SEBI enjoy a
high degree of capital account convertibility in an otherwise closed capital account. FIIs
are allowed to buy and sell shares in the stock exchange and repatriate the proceeds freely
to their home countries. FIIs, as the name suggests, are institutions like mutual funds,
pension funds, banks and insurance companies. However, there is a provision for a
corporate or high net worth individual to also avail of the same benefits by coming in as a
registered sub account of a registered FII. There are restrictions on the aggregate holding
of FIIs in any company. As on December 31, 2001, FIIs had in the aggregate invested
$14.5 billion in the Indian market. This would represent about 15% of the market
capitalisation, but it must be noted that the figure of $14.5 billion is the cumulative
amount of money brought into India and not the current market value of their portfolio.
No estimates are available of this portfolio value. However, since the market index has
fallen sharply in dollar terms since the early 1990s, there is reason to believe that the FII
equity holding would be less than 10% of the market capitalisation.
• Mutual Funds: In the late 1980s, the mutual fund industry (which till then consisted only
of the public sector Unit Trust of India) was thrown open to the public sector banks and
financial institutions. In the mid-1990s, private sector mutual funds were permitted. As of
September 30, 2001, the mutual fund industry had assets under management of Rs 1.02
trillion. This represents about 20% of the market capitalisation, but since 70% of the
mutual fund assets are in schemes that are predominantly debt oriented, and another 17%
are in balanced funds, the actual equity holding of the mutual funds probably amounts to
only about 5-7% of the market capitalisation. In terms of the competitive structure of the
industry, UTI accounted for 50% of assets under management, the private sector funds for
42% and the public sector funds for 8%. In the last couple of years, private sector players
have rapidly gained market share from other players.
• Development Financial Institutions: In the pre-reform era, development financial
institutions and public sector insurance companies provided a major component of long© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
15
term finance for industry. Along with extending loans, these institutions often subscribed
to the equity as well. In many cases, the loans were at subsidised rates of interest, but
provided for conversion into equity at highly favourable rates. As a result, financial
institutions have a significant shareholding in many large Indian companies. Given the
historical background of these holdings, the financial institutions have often behaved like
strategic investors rather than portfolio investors. There have been repeated suggestions
for restructuring of these holdings including secondary market sales, auctions to strategic
bidders, and transfer to mutual funds or other special purpose vehicles. There have also
been suggestions that they should simply start behaving like portfolio investors. As
discussed earlier in this paper, there is a need for a radical restructuring, downsizing and
eventual privatisation of these institutions themselves.
• Venture Capital Funds: SEBI has recently liberalised the regulations for venture capital
funds and has also permitted foreign venture capital funds to operate in India. They will
have the freedom to invest in unlisted companies with the full freedom to repatriate sale
proceeds. These new regulations have been notified only recently and it will be some time
before these investors start playing a major role in the capital markets.
• Insurance Companies and Pension Funds: Private sector insurance companies have
started operations only recently. The regulatory framework for pension funds is still under
discussion. These institutions have therefore yet to make a impact on the capital market.
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