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In a little under two decades, the spread of market-oriented policies has turned the once so-
called lesser-developed countries into emerging markets. In 1982, the 32 developing country
stock markets surveyed by the International Finance Corporation (IFC) had a market
capitalization of $67 billion representing about 2.5% of world market capitalization. By the
end of 1999, the IFC identified 81 emerging stock markets with total market capitalization
exceeding $3,000 billion or 8.5% of world equity market capitalization. In 1999, the value of
outstanding domestic debt securities trading in emerging markets exceeded $1.4 trillion,
representing 4.7% of the global bond market and a several-fold increase over the total 20
years earlier. On the other hand, bank lending to emerging markets in 1999 totaled only
$783.7 billion, a relatively small increase over the $517.6 billion (36.9% of the total) in
claims held by banks in 1980.

Many forces underlie these broad trends. The debt crisis of the early 1980s cooled bankers’
appetite for sovereign loans to developing nations. The financial crises in the second half of
the 1990s (in Mexico 1995, Asia 1997, and Russia 1998 along with other hot spots) brought a
fresh reminder of the perils of cross-border lending. In contrast, public financial markets for
equity and debt securities were encouraged by market-oriented policies to permit private
ownership of economic activities, including ownership to a larger extent by foreigners.
Massive privatization programs, corporate restructuring, and financial innovations (such as
global offerings and changes to the financial infrastructure) helped to fuel the process.

As dramatic as these changes have been, emerging financial markets still reflect a continuum
of market conditions. Some markets are maturing and on course toward converging and
integrating into the world of mature, developed financial markets. Markets in other countries
are almost non-existent or deserving of the “frontier” to markets one step below emerging.

In international economics, it is often the case that the gains from international trade in goods
or capital are proportional to the difference in some measure between the two trading nations.
Thus, the gains from trade are enhanced when there is a greater difference in relative factor
endowments, relative prices, or technology on a pre-trade basis. In many respects, economists
have used this concept to assess the impact of bringing emerging financial markets into the
picture. The potential gains are greatest as the pre-trade marginal product of capital differs
(expected value gains) or as the time pattern of asset returns differ (diversification gains from
imperfect correlation in business cycles or financial market conditions).

However, an argument can be made that emerging markets have paid a price for being “too
different,” meaning laden with idiosyncratic risks, weak institutions, and poor corporate
governance. These are properties that discourage investors and lessen the prospects for
reaping the full gains from international trade in capital. If this is the case, then emerging
markets may find that their future lies in becoming more integrated into the world financial
markets rather than remaining on the fringes where they risk being marginalized. A related
consideration is whether countries should attempt to reform their own institutions and
markets to encourage this type of integration, or simply “outsource” many financial market
activities (such as listing, clearing and settlement) to more mature markets that have
experience and credibility.

Emerging Markets and Countries

The International Finance Corporation (IFC) uses income per capita and market capitalization
relative to GNP for classifying equity markets. If either (1) a market resides in a low- or
middle-income economy, or (2) the ratio of investable market capitalization to GNP is low,
then the IFC classifies the market as emerging. Countries that meet the income criteria (in
1998, high income was defined by the World Bank as $9,361 per capita GNP) and have an
investable market capitalization to GNP ratio in the top 25% of all emerging markets for
three consecutive years become part of the Emerging Markets Data Base (EMDB).

In September 1996, the IFC began calculating an index for “frontier” markets that were
relatively illiquid but still met several criteria based on market capitalization, turnover,
number of listings, and development prospects. Figure 1 charts GNP per capita against
market capitalization as a percentage of GNP to show the general characteristics of
developed, emerging, and frontier equity markets.
Perhaps surprisingly, several countries (South Korea, Mexico, Czech Republic, Hungary, and
Poland) are classified as emerging even though they are members of the Organization for
Economic Cooperation and Development (OECD). Greece, a member of the OECD as well
as the European Economic and Monetary Union (EMU), is also classified as an emerging

Bond markets are classified as emerging on a similar basis. However, on those criteria, both
Hong Kong and Singapore (nations with high per capita GNP and well developed equity
markets) are classified as “emerging” from the standpoint of their bond markets.

By definition, financial markets in EM nations have a smaller profile than in developed

countries. While all developed countries have an equity marketplace, of the 155 EM nations
only 81 have equity markets that are tracked in any way by the IFC. And in those 81 markets,
equity markets are small relative to their economies with market capitalization at only 30-
40% of GNP, as compared to 70-80% of GNP in the developed markets.
The major categories of financial markets have shown spectacular growth over the last 20
years, but with few exceptions, the role played by emerging market nations remains small.
World equity market capitalization has grown from under $3.0 trillion in 1980 to over $36
trillion in 1999. Over this period, the EM share has grown from roughly 3.0% to 8.5%, after
hitting a peak of 12.5% in 1994. Over the same period, the size of the world bond market has
grown on a similar scale, from $4.0 trillion in 1981 to more than $31 trillion in 1999. The
share of debt securities in emerging markets has grown from around 3.0% in 1990 to almost
5.0% in 1999, representing $1.4 trillion in outstanding bonds. Like equity markets, bond
market capitalization relative to GDP is far smaller in emerging markets than in developed
markets. Worldwide trading in the foreign exchange (FX) market has expanded from $620
billion per day in 1989 to $1,500 billion per day in 1998. This market is also predominately
located in the same high-income countries as other financial markets. But Singapore and
Hong Kong retain a 7% and 4% share (respectively) of total global trading, while another
3.3% of FX trading is spread across more than 20 other EM countries.

Over the last 25 years, derivatives markets for financial futures, options, and swaps have
grown from negligible or non-existent markets to gargantuan and essential components of
international financial management. The BIS estimates that the notional value of outstanding
financial derivative instruments (i.e. futures, options, and swaps on currencies, interest rates,
and stock market indices) exceeded $100 trillion at year-end 1999. And daily turnover in
exchange traded financial derivative instruments exceeded $1.3 trillion in 1999. Hong Kong
and Singapore together accounted for 10% of global over-the-counter FX derivative turnover
in 1998, but only about 2% of global over-the counter interest rate derivative turnover. Many
EM nations have organized futures and options exchanges for some agricultural products,
metals, or local foreign currency and interest rate products. These markets are small by world
standards with the exception of Brazil and Korea.

Overall, these figures leave the impression that financial markets in emerging markets are
small in comparison to their own economies and in comparison to markets elsewhere. Still,
small may be beautiful if investments in emerging markets offer superior returns or happen to
be weakly correlated with other investment returns so that they contribute a diversification
The Importance of Emerging Markets

The traditional arguments lending support to a role for emerging markets in developed
market investor portfolio rested on two simple points. First, as small, capital scarce countries,
emerging markets could offer investors higher returns than those available in more mature
capital abundant countries. Given their low initial income levels, continued capital flows
could support an extended period of economic growth. Second, gain as small countries,
emerging market returns were likely to be weakly correlated with returns in developed
markets, thus creating a diversification benefit. These effects could operate in tandem, thus
giving investors a free lunch of higher expected returns and lower risks. Using historical data,
portfolio theory was used to determine the optimal percentage of a portfolio to allocate to
international securities, including emerging markets.

While the simple story is appealing, it comes to a sudden halt when confronted with data
showing that investor portfolios are heavily weighted toward domestic securities. As typically
estimated is so severe that in 1995, U.S. portfolios in the aggregate are thought to hold only
about 10% foreign equities and fewer than 5% foreign bonds. US bias appears to be strongest
in Japan (roughly 5% in foreign equity holdings) but less severe in the United Kingdom and
Germany (roughly 20% in foreign holdings).

Some countries have severely limited foreign ownership of domestic equity shares. Investing
overseas takes greater resources in the form of trading costs and arranging for many details
attendant on foreign investing (e.g. the foreign exchange transaction, clearing, settlement and
custody of securities, collection of foreign dividends, rights offerings, etc.). The foreign
investor faces foreign exchange risk, and possibly an information disadvantage as local
investors may be better informed or better equipped to receive and interpret foreign financial
statements and news about the foreign macroeconomic environment. It is true that
institutional investors who employ professional agents can overcome many of these barriers.
But at the margin foreign investing may still entail additional costs and risks.

Alternate theories can be constructed that support overweighting home assets. When the PPP
assumption is dropped, domestic securities may form a better hedge against exchange rate
uncertainty than foreign securities, thereby creating a rationale for US. In this context, a study
by Glassman and Riddick (1996) cannot reject that the observed US-biased portfolio weights
are equal to their optimal values. However a similar study by Cooper and Kaplanis (1994)
rejects PPP deviations as an explanation of US bias.

Effect of Sub-Prime Crisis on US

Liquidity Crisis: The credit markets, along with most other markets, have experienced a
liquidity crisis as an aftermath of sub-prime crisis. It induced a period in which most
securities have simply ceased to trade. High grade securities traded like junk bonds as
panicked investors dump them. This liquidity crisis has caused bids to disappear from the
market and makes it virtually impossible to properly price securities or to trade them because
it became harder to determine whom it is safe to do business with. In the atmosphere of acute
uncertainty, where no one knows which firms have exposure to subprime or the amounts
involved, banks decided to stop lending -- not just housing debt but other forms of debt as
well. This led to the liquidity crunch in August, 2007 which in turn hit the markets

Solvency crisis: Thus the gravest and most immediate threat to the banking system arose. For
the time being banks no longer trusted potential debtors enough so as to lend them money
except on onerous terms. They also lacked the confidence that other banks would will trust
them if they wanted to borrow from them. This led to a hoarding of money. At best, it
tightens monetary policy. At its worst, it creates a shortage of cash which would cripple the
payment system causing a run on otherwise solvent banks and businesses that can not rapidly
raise funds. The outcome is similar to a bank run, which engulfed the entire wholesale money
market. The status of liquidity in various money and credit markets in US can be gauged
from the fact that three-month Eurodollar loans carried an interest tag about 247 basis points
more than the yield on three month Treasury Bill (safe yield) in later part of September,
2007.The spread between these short term securities reflects the risk in lending to banks,
which in months before August, 2007 was 50 basis points.

Crash in stock price and dollar turmoil: The US housing bubble, resulted in a severe credit
crunch, threatening the solvency of a number of marginal private banks and other institutions.
The sharp rise in foreclosures after the housing bubble caused several major subprime
mortgage lenders, to shut down or file for bankruptcy leading to shortage of investible funds
for the US stock markets and consequent collapse of stock prices for many in the subprime
mortgage industry, and of some large lenders. The funds crunch, in turn, led to a vicious
cycle. Redemption pressures led to further suction of funds and stock market fall. Overall,
sub prime crisis has a disastrous effect on global stock markets. On July 19, 2007 the Dow-
Jones closed above 14,000 for the first time. By August 15, the Dow had dropped below
13,000 and the S&P 500 had crossed into negative territory year-to-date. Similar drops
occurred in virtually every market in the world, with Brazil and Korea being hard-hit. The
dollar dropped to its lowest level since 1996 according to a Fed index after the second rate
cut by Fed.

Impact on labor market: On September 7, 2007, a report by the US Labor Department

announced that non-farm payrolls fell by 4,000 in August 2007, the first month of negative
job growth since August 2003. The number fell well short of expectations, as analysts were
expecting payrolls to grow by 110,000. The Dow Jones Industrials fell by as much as 180
points on the news. The problems in the housing and credit markets are cited as a reason for
the unexpected weakness in the job market.

Effect of Sub-Prime Crisis on Japan

In Japan exports in June declined for the first time in about five years falling by 1.7 percent.
Exports to the United States and European Union fell 15.4 percent and 11.2 percent
respectively. The decline in exports and increase in imports cut Japan's trade surplus $1.28
billion a decline of 90 percent from the previous year. Japan's economy declined by 0.6
percent in the second quarter of 2008. Japanese exports grew 0.3 percent in August 2008
compared to a year before down from 8 percent the previous month. Exports to the U.S. fell
21.8 percent, the biggest decline on record, and exports to Europe fell 3.5 percent. Two
Japanese banks appeared on the list of major Lehman creditors.

Housing market:

The knock on effect of the US sub prime mortgage crisis seems to be having an effect on
Japan’s housing market. Japan´s Ministry of Land, Infrastructure and Transport, stated that
the seasonally adjusted annualized housing starts have been pushed down to a record-low of
720,000. Housing starts have shown steep year-on-year declines each month, with a 23.4 per
cent drop in July followed by a 43.3 per cent plunge in August. Construction starts for owner-
occupied homes dropped 21.6 per cent, while those for rental homes tumbled 51.3 per cent.
Building starts for homes for sale fell 55.6 per cent, with condominiums falling 74.8 per cent.

In the third-quarter GDP estimates, eight private-sector economic research institutes saw an
average 9 per cent decline in housing investment, the largest drop since the 11.1 per cent slide
in the April-June quarter of 1997, when the consumption tax was raised. A 9 per cent
decrease in housing investment translates into a 0.3 per cent drop in quarterly GDP.

Sub-prime crisis takes £5.3bn toll on Japan’s banks:

Profits in the Japanese banking sector have taken a 1.2 trillion yen (£5.3 billion) hit from the
US sub-prime mortgage crisis and the country’s central bank has said that worse turmoil may
be on the horizon.

The first estimate of the damage wrought by sub-prime was prepared by Japan’s Financial
Services Agency and follows grim first-half earnings figures from Japan’s largest bank,
Mitsubishi UFJ Financial Group.

Sub-prime problems left a big dent in the bank’s profits between April and September, which
were 49 per cent lower than they had been the year before. According to yesterday’s FSA
report, in combination, MUFJ and Japan’s two other “megabanks” have admitted to about
460 billion yen in sub-prime exposure in their first-half earnings.

Total sub-prime related writedowns by the three megabanks amounted to less than £500
million. Despite the colossal size of the banks, which also include Mizuho Financial Group
and Sumitomo Mitsui Financial Group, Japanese exposure to sub-prime is low relative to
global rivals.

Regional banks were even less affected, taking a combined hit of about 15 billion yen,
according to the FSA.
Effect of Sub-Prime Crisis on Spain

The 2008–2009 Spanish financial crisis is part of the world economic crisis of 2008. In
Spain, the crisis was generated by long term loans (commonly issued for 40 years), the
building market crash which included the bankruptcy of major companies, and a particularly
severe increase in unemployment, which rose to 13.9% in February 2009.

Spain continued the path of economic growth when the ruling party changed in 2004, keeping
robust GDP growth during the first term of Prime Minister José Luis Rodriguez Zapatero,
even though some fundamental problems in the Spanish economy were already self-evident.
Among these, according to the Financial Times, there was Spain's huge trade deficit (which
reached a staggering 10% of the country's GDP by the summer of 2008),the "loss of
competitiveness against its main trading partners" and, also, as a part of the latter, an inflation
rate which had been traditionally higher than the one of its European partners, back then
especially affected by house price increases of 150% from 1998 and a growing family
indebtedness (115%) chiefly related to the Spanish Real Estate boom and rocketing oil price.

The Spanish government official GDP growth forecast for 2008 in April was 2,3%. This
figure was successively revised down by the Spanish Ministry of Economy to 1.6. This figure
looked better than those of most other developed countries. In reality, this rate effectively
represented stagnant GDP per person due to Spain's high population growth, itself the result
of a then continuing strong level of immigration. Currently most independent forecasters
estimate that the rate was actually around 0.8% instead, far below the strong 3% plus GDP
annual growth rates during the 1997-2007 decade. Then, during the third quarter of 2008 the
national GDP contracted for the first time in 15 years and, in February 2009, it was confirmed
that Spain, along other European economies, had officially entered recession.

In July 2009, the IMF worsened the estimates for Spain's 2009 contraction, to minus 4% of
GDP for the year (close to the European average of minus 4.6%), besides, it estimated a
further 0.8% contraction of the Spanish economy for 2010, the worst prospect amid advanced

Spanish banking system:

The Spanish banking system has been credited as one of the most solid and best equipped
among all Western economies to cope with the worldwide liquidity crisis, thanks to the
country's conservative banking rules and practices. Banks are required to have high capital
provisions and demand various proofs and securities from intending borrowers.

Spain's largest bank, Banco Santander, took part in the UK government's bail-out of part of
the UK banking sector.

Employment crisis:

As for the employment, after having completed substantial improvements over the second
half of the 1990s and during the 2000s which put a few regions on the brink of full
employment, Spain suffered a severe setback in October 2008 when it saw its unemployment
rate surging to 1996 levels. During the period October 2007-October 2008 Spain had its
unemployment rate climbing 37%, exceeding by far the unemployment surge of past
economic crises like 1993. In particular, during this particular month of October 2008, Spain
suffered its worse unemployment rise ever recorded and, so far, the country is suffering
Europe's biggest unemployment crisis. By July 2009, it had shed 1.2 million jobs in one year
and was to have the same number of jobless as France and Italy combined. Spain's
unemployment rate hit 17.4% at the end of March, with the jobless total now having doubled
over the past 12 months, when two million people lost their jobs. In this same month, Spain
for the first time in her history had over 4,000,000 people unemployed, an especially
shocking figure even for a country which had become used to grim unemployment data.
Although rapidly slowing, large scale immigration continued throughout 2008 despite the
severe unemployment crisis, thereby worsening an already grave situation. There are now
indications that established immigrants have begun to leave, although many that have are still
retaining a household in Spain due to the poor conditions that exist in their country of origin.

Prices and Inflation Rate:

Due to the lack of own resources, Spain has to import all of its fossil fuels, which in an
scenario of record prices added much pressure to the inflation rate. Thus, in June 2008 the
inflation rate reached a 13 years high of 5.00%. Then, with the dramatic decrease of oil prices
that happened in the second half of 2008 plus the confirmed burst of the property bubble,
concerns quickly shifted to the risk of deflation instead, as Spain registered in January 2009
its lowest inflation rate in 40 years which was then followed in March 2009 by a negative
inflation rate for the first time ever since this statistic was recorded.
Property bubble:

The residential real estate bubble in Spain saw real estate prices rise 201% from 1995 to
2007. € 651,168,000,000 is the current mortgage debt (second quarter 2005) of Spanish
families (this debt continues to grow at 25% per year - 2001 through 2005, with 97% of
mortgages at variable rate interest). In 2004 509,293 new properties were built in Spain and
in 2005 the number of new properties built were 528,754. 2004 estimations of demand:
300,000 for Spanish people, 100,000 for foreign investors, 100,000 for foreign people living
in Spain and 300,000 for stock; in a country with 16.5 million families, 22-24 million houses
and 3-4 million empty houses. From all the houses built over the 2001-2007 period, "no less
than 28%" are vacant as of late 2008.

House ownership in Spain is above 80%. The ownership feeling was inducted by the
government in the 60s and 70s, thus being deeply embedded in a Spaniard's mind. Apart from
that, tax regulation encourages ownership: 15% of your mortgage payments is deductible
from your income taxes, nothing if you pay a rent. Even more, the oldest part of the
apartments suffer from non-inflation-adjusted rent-controls and eviction is slow, therefore
discouraging renting.

As feared, when speculative bubble popped Spain has been one of the worst affected
countries. According to eurostat, over the June 2007-June 2008 period, Spain has been the
European country with the sharpest plunge in construction rates. Actual sales over the July
2007-June 2008 period were down an average 25.3% (with the lion's share of the loss
arguably happening in the 2008 tract of this period). So far, some regions have been more
affected than others (Catalonia was ahead in this chapter with a 42.2% sales plunge while
sparsely populated regions like Extremadura were down a mere 1.7% over the same period).

Banks offer 40 years mortgages and, more recently, 50 years ones. As opposed to the Ireland
case, in Spain the labour cost does not follow the rise of the house market in the same
proportion. While some observers suggest that a soft landing, others suggest that a crash in
prices is probable. Lower home prices will allow low-income families and young people to
enter the market, however there is a strong perception that house prices never go down. As of
August 2008, while new constructions have come virtually to a halt, prices have not had
significant movements, neither up nor downwards. The national average price as of late 2008
is 2,095 euros/m2
Effect of Sub-Prime Crisis on China

In China, the International Monetary Fund predicts GDP growth for 2008 will be 9.7% and
drop to 8.5% in 2009. A struggle was underway to see who would swallow the losses on US
Agencies and Treasuries. On November 9, 2008 China announced a package of capital
spending plus income and consumption support measures. Four trillion yuan ($586 billion)
will be spent on upgrading infrastructure, particularly roads, railways, airports and the power
grid; on raising rural incomes via land reform; and on social welfare projects such as
affordable housing and environmental protection. So far at least 670,000 small and medium-
size enterprises have been closed.

Effect of Sub-Prime Crisis on Singapore

Singapore's economy saw its biggest drop in five years in the second quarter, falling by 6.6
percent; however, the Managing Director of Singapore's central bank said a technical
recession was not likely. Singapore cut its 2008 GDP forecast to between 4 and 5 from 4 to 6
percent before, and then again down to 3 percent. Singapore's economy contracted in the
third quarter, placing the country in recession.

Effect of Sub-Prime Crisis on Germany

In Germany officials had warned the economy could contract by as much as 1.5 percent in
the second quarter because of declining export orders. The economy of Germany indeed
contracted in both the second and third quarters putting Germany now in a technical
recession. Although the idea was fought for a moment Angela Merkel and the German
government approved a €50 billion strong rescue plan to protect the German economy of the
crisis, making of it Western Europe's biggest rescue plan for now in this crisis. Germany's
industrial output was down 2.4 percent in May, the fastest rate for a decade. Orders have now
fallen for six months in a row, the worst run since the early 1990s. The German Chamber of
Industry and Commerce warned of up to 200,000 job losses in coming months. German
retails sales fell 1.4 percent in June more than any expectations. The German economy
declined by 0.5 percent in the second quarter.
Effect of Sub-Prime Crisis on Australia

The Australasian business community has been hit hard by the global financial crisis for a
number of reasons. Although regional banks generally have good liquidity requirements, the
commercial wing of the industry was overexposed to sovereign wealth funds and
governments made few provisions for the drop off in trade with China. Additionally, many
institutions of the New Zealand economy are regulated by Australian authorities, as cross-
border banking has been allowed to gather pace since the late 1980s.

There has been a credit market crisis in the Australian economy since early 2008. The
taxation system is currently being reviewed in order to reduce its complexity and increase the
tax concessions made for investment income, although it remains uncertain what — if any —
financial products will be excluded in the proposed changes.

In July 2008, the National Australia Bank cut a A$850 million bond sale by two thirds
following investor flight and opted for a 100 percent write-off on a clutch of "senior strips" of
AAA-rated collateralized debt obligations (CDO) worth A$900 million. Banks began
avoiding lending for land, to focus on refinancing existing clients, and small developers held
on to their properties as second-tier loan costs (up to $15 million) were, reportedly,
unaffordable since February. Housing prices consequently fell in the second quarter for the
first time in about three years, restricting consumer confidence to its lowest level in 16-years.
High profile casualties of the credit crunch include Allco Finance, MFS, ABC Learning,
Babcock & Brown and Centro while numerous other institutions have lost a significant part
of their value.

Sources such as the IMF and the Reserve Bank of Australia predict Australia is well
positioned to weather the crisis with minimal disruption, sustaining more than 2% GDP
growth in 2009 (while many Western nations go into recession). The World Economic Forum
recently ranked Australia's banking system the fourth best in the world, while the Australian
dollar's 30% drop is seen as a boom for trade, shielding from the crisis, and for helping to
slow growth and consumption.

Some analysts have predicted the continuing decline of trade in 2009 could put the economy
into recession for the first time in 17 years. Unemployment will increase because of slower
growth, declining profits and government revenues.
First Commonwealth Government stimulus package:

In order to avoid or cushion the impact of a recession, the Federal Government proposed a
AU$10.4 billion stimulus package. The package would provide cash payments to those
already on government transfer payments. $4.8 billion of this package went to pensioners,
careers and war veterans with individuals getting a lump sum of $1,400 and couples getting
$2,100. $3.9 billion was to be paid for people who were receiving family tax benefit A and
people who were receiving family tax benefit B. $1.5 billion was set aside for the first home
grant with it being doubled to $14,000 for existing homes and trebled to $21,000 for newly
built homes. Other smaller programs would make up the rest of expenditure. Treasury
estimated that it would boost GDP by 1% and UBS chief economist predicted that if all of the
stimulus money were spent then it would boost Christmas sales by 30%.

In March 2009, Canberra announced that the Australian economy contracted by 0.5% in the
last quarter of 2008, leading to fresh worries of recession. On Wednesday the 22nd of April,
2009 it was declared officially that Australia was in recession by Prime Minister Kevin Rudd.

On June 3, the Federal Government announced that Australia did not show negative growth
for two consecutive quarters, and thus has not officially entered recession, providing an
optimistic outlook for the economy. The positive GDP figure was due to a increase in the
trades surplus due to an increase in exports and a large decrease in imports. This combined
with steady consumption figures to prevent the economy contracting in this quarter.[


March 2009 April 2009

Number of people employed 10,794,900 10,790,600

Unemployment Rate 5.4% 5.5%
Stock Markets
A stock market is a public market for the trading of company stock and derivatives at an
agreed price; these are securities listed on a stock exchange as well as those only traded

The size of the world stock market was estimated at about $36.6 trillion US at the beginning
of October 2008. The total world derivatives market has been estimated at about $791 trillion
face or nominal value, 11 times the size of the entire world economy. The value of the
derivatives market, because it is stated in terms of notional values, cannot be directly
compared to a stock or a fixed income security, which traditionally refers to an actual value.
Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an
event occurring is offset by a comparable derivative 'bet' on the event not occurring.). Many
such relatively illiquid securities are valued as marked to model, rather than an actual market

The stocks are listed and traded on stock exchanges which are entities of a corporation or
mutual organization specialized in the business of bringing buyers and sellers of the
organizations to a listing of stocks and securities together.

Participants in the stock market range from small individual stock investors to large hedge
fund traders, who can be based anywhere. Their orders usually end up with a professional at a
stock exchange, who executes the order.

Some exchanges are physical locations where transactions are carried out on a trading floor,
by a method known as open outcry. This type of auction is used in stock exchanges
and commodity exchanges where traders may enter "verbal" bids and offers simultaneously.
The other type of stock exchange is a virtual kind, composed of a network of computers
where trades are made electronically via traders.

Actual trades are based on an auction market model where a potential buyer bids a specific
price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at
market means you will accept any ask price or bid price for the stock, respectively.) When the
bid and ask prices match, a sale takes place, on a first-come-first-served basis if there are
multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities between buyers
and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time
trading information on the listed securities, facilitating price discovery.

A few decades ago, worldwide, buyers and sellers were individual investors, such as wealthy
businessmen, with long family histories (and emotional ties) to particular corporations. Over
time, markets have become more "institutionalized"; buyers and sellers are largely
institutions (e.g., pension funds, insurance companies, mutual funds, index funds, exchange-
traded funds, hedge funds, investor groups, banks and various other financial institutions).
The rise of the institutional investor has brought with it some improvements in market
operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being
markedly reduced for the 'small' investor, but only after the large institutions had managed to
break the brokers' solid front on fees. (They then went to 'negotiated' fees, but only for large

However, corporate governance (at least in the West) has been very much adversely affected
by the rise of (largely 'absentee') institutional 'owners'

Importance of stock market

The stock market is one of the most important sources for companies to raise money. This
allows businesses to be publicly traded, or raise additional capital for expansion by selling
shares of ownership of the company in a public market. The liquidity that an exchange
provides affords investors the ability to quickly and easily sell securities. This is an attractive
feature of investing in stocks, compared to other less liquid investments such as real estate.

History has shown that the price of shares and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of social mood. An
economy where the stock market is on the rise is considered to be an up and coming
economy. In fact, the stock market is often considered the primary indicator of a country's
economic strength and development. Rising share prices, for instance, tend to be associated
with increased business investment and vice versa. Share prices also affect the wealth of
households and their consumption. Therefore, central banks tend to keep an eye on the
control and behavior of the stock market and, in general, on the smooth operation of financial
system functions. Financial stability is the raison d'être of central banks.

Exchanges also act as the clearinghouse for each transaction, meaning that they collect and
deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk
to an individual buyer or seller that the counterparty could default on the transaction.

The smooth functioning of all these activities facilitates economic growth in that lower costs
and enterprise risks promote the production of goods and services as well as employment. In
this way the financial system contributes to increased prosperity. An important aspect of
modern financial markets, however, including the stock markets, is absolute discretion. For
example, in the USA stock markets we see more unrestrained acceptance of any firm than in
smaller markets. Such as, Chinese firms with no significant value to American society to just
name one segment. This profits USA bankers on Wall Street, as they reap large commissions
from the placement, and the Chinese company which yields funds to invest in China. Yet
accrues no intrinsic value to the long-term stability of the American economy, rather just
short-term profits to American business men and the Chinese; although, when the foreign
company has a presence in the new market, there can be benefits to the market's citizens.
Conversely, there are very few large foreign corporations listed on the Toronto Stock
Exchange TSX, Canada's largest stock exchange. This discretion has insulated Canada to
some degree to worldwide financial conditions. In order for the stock markets to truly
facilitate economic growth via lower costs and better employment, great attention must be
given to the foreign participants being allowed in.

Bombay Stock Exchange (India)

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now
spanning three centuries in its 133 years of existence. What is now popularly known as BSE
was established as "The Native Share & Stock Brokers' Association" in 1875.

BSE is the first stock exchange in the country which obtained permanent recognition (in
1956) from the Government of India under the Securities Contracts (Regulation) Act 1956.
BSE's pivotal and pre-eminent role in the development of the Indian capital market is widely
recognized. It migrated from the open outcry system to an online screen-based order driven
trading system in 1995. Earlier an Association Of Persons (AOP), BSE is now a corporatized
and demutualised entity incorporated under the provisions of the Companies Act, 1956,
pursuant to the BSE (Corporatization and Demutualization) Scheme, 2005 notified by the
Securities and Exchange Board of India (SEBI). With demutualization, BSE has two of
world's best exchanges, Deutsche Börse and Singapore Exchange, as its strategic partners.

Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by
providing it with an efficient access to resources. There is perhaps no major corporate in
India which has not sourced BSE's services in raising resources from the capital market.

Today, BSE is the world's number 1 exchange in terms of the number of listed companies and
the world's 5th in transaction numbers. The market capitalization as on December 31, 2007
stood at USD 1.79 trillion . An investor can choose from more than 4,700 listed companies,
which for easy reference, are classified into A, B, S, T and Z groups.

The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic stature ,
and is tracked worldwide. It is an index of 30 stocks representing 12 major sectors. The
SENSEX is constructed on a 'free-float' methodology, and is sensitive to market sentiments
and market realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral
indices. BSE has entered into an index cooperation agreement with Deutsche Börse. This
agreement has made SENSEX and other BSE indices available to investors in Europe and
America. Moreover, Barclays Global Investors (BGI), the global leader in ETFs through its
iShares® brand, has created the 'iShares® BSE SENSEX India Tracker' which tracks the
SENSEX. The ETF enables investors in Hong Kong to take an exposure to the Indian equity

The first Exchange Traded Fund (ETF) on SENSEX, called "SPIcE" is listed on BSE. It
brings to the investors a trading tool that can be easily used for the purposes of investment,
trading, hedging and arbitrage. SPIcE allows small investors to take a long-term view of the

BSE provides an efficient and transparent market for trading in equity, debt instruments and
derivatives. It has a nation-wide reach with a presence in more than 359 cities and towns of
India. BSE has always been at par with the international standards. The systems and
processes are designed to safeguard market integrity and enhance transparency in operations.
BSE is the first exchange in India and the second in the world to obtain an ISO 9001:2000
certification. It is also the first exchange in the country and second in the world to receive
Information Security Management System Standard BS 7799-2-2002 certification for its BSE
On-line Trading System (BOLT).

National Stock Exchange (India)

National Stock Exchange of India (NSE) is India's largest Stock Exchange & World's third
largest Stock Exchange in terms of transactions. Located in Mumbai, NSE was promoted by
leading Financial Institutions at the behest of the Government of India, and was incorporated
in November 1992 as a tax-paying company. In April 1993, NSE was recognized as a Stock
exchange under the Securities Contracts (Regulation) Act-1956. NSE commenced operations
in the Wholesale Debt Market (WDM) segment in June 1994. Capital Market (Equities)
segment of the NSE commenced operations in November 1994, while operations in the
Derivatives segment commenced in June 2000. NSE has played a catalytic role in reforming
Indian securities market in terms of microstructure, market practices and trading volumes.
NSE has set up its trading system as a nation-wide, fully automated screen based trading
system. It has written for itself the mandate to create World-class Stock Exchange and use it
as an instrument of change for the industry as a whole through competitive pressure. NSE is
set up on a demutualised model wherein the ownership, management and trading rights are in
the hands of three different sets of people. This has completely eliminated any conflict of

NSE provides a trading platform for of all types of securities for investors under one roof –
Equity, Corporate Debt, Central and State Government Securities, T-Bills, Commercial Paper
(CPs), Certificate of Deposits (CDs), Warrants, Mutual Funds (MFs) units, Exchange Traded
Funds (ETFs), Derivatives like Index Futures, Index Options, Stock Futures, Stock Options
and Currency Futures. The Exchange provides trading in 4 different segments viz., Wholesale
Debt Market (WDM) segment, Capital Market (CM) segment, Futures & Options (F&O)
segment and the Currency Derivatives Segment (trading on which commenced on August 29,

NSE Family
The National Securities Clearing Corporation Ltd. (NSCCL), a wholly-owned subsidiary
of NSE, was incorporated in August 1995 and commenced clearing corporation in April
1996. It was the first clearing corporation in the country to provide novation/settlement
guarantee that revolutionized the entire concept of settlement system in India. It was set
up to bring and sustain confidence in clearing and settlement of securities; to promote
and maintain short and consistent settlement cycles; to provide counter-party risk
guarantee, and to operate a tight risk containment system. It carries out the clearing and
settlement of the trades executed in the equities and derivatives segments of the NSE

NSE Infotech Services Ltd

NSE Infotech Services Ltd Information Technology has been the back bone of
conceptualization, formation, running and the success of National Stock Exchange of India
Limited (NSE). NSE has been at the forefront in spearheading technology changes in the
securities market. It was important to give a special thrust and focus on Information
Technology to retain the primacy in the market. Towards this a wholly owned subsidiary M/s.
NSE Infotech Services Limited (NSETECH) was incorporated to cater to the needs of NSE
and all it’s group companies exclusively.

NSE.IT Limited, a 100% technology subsidiary of NSE, was incorporated in October
1999 to provide thrust to NSE’s technology edge, concomitant with its overall goal of
harnessing latest technology for optimum business use. It provides the securities industry
with technology that ensures transparency and efficiency in the trading, clearing and
risk management systems.

India Index Services and Products Limited (IISL), a joint venture of CRISIL and NSE, was
set up in May 1998 to provide indices and index services. It has a licensing and marketing
agreement with Standard and Poor’s (S&P), the world’s leading provider of investible equity
indices, for co-branding equity indices. IISL is India’s first specialized company focusing
upon the index as a core product. It provides a broad range of services, products and
professional index services. It maintains over 96 equity indices comprising broad-based
benchmark indices, sectoral indices and customised indices.
Many investment and risk management products based on IISL indices have developed in the
recent past, within India and abroad. These include index based derivatives on NSE and on
Singapore Exchange, India’s first exchange traded fund, a number of index funds, and
Licensing of the Index for various structured products.


The data and info-vending products of NSE are provided through a separate company DotEx
International Ltd., a 100% subsidiary of NSE, which is a professional set-up dedicated solely
for this purpose. DotEx data provides products like : On-line streaming data feed, Intra-day
Snapshot data feed, end of day data and Historical Data.


NSE joined hand with other financial institutions in India to promote the NCDEX which
provides for a world class commodity exchange platform for Market Participants to trade in
wide spectrum of commodity derivatives. Currently NCDEX facilitates trading of 48 agro
based commodities, 2 precious metal, 6 base metal, 3 energy products and 3 polymers.

National Commodity Clearing Limited (NCCL) is a company promoted by National Stock
Exchange of India Limited (NSEIL). It was incorporated in the year 2006. One of the
objectives of NCCL is to provide and manage clearing and settlement, risk management and
collateral management services to commodity exchanges. NCCL is having the requisite
experience and exposure in providing clearing and settlement facility, risk and collateral
management services in the commodities market including funds settlement with multiple
clearing banks. Currently NCCL is providing clearing and settlement services to NCDEX.

A National Level Power Exchange by the name of Power Exchange India Limited (PXIL) has
been set up through a Joint Venture by India's two leading Exchanges, National Stock
Exchange of India Ltd (NSE) and National Commodity & Derivatives Exchange Ltd
(NCDEX). PXIL has got the in-principle approval from CERC to set up and operate the
power exchange and will operate as a National Level electricity exchange covering the entire
Indian electricity market.

Shanghai Stock exchange (China)

The Shanghai Stock Exchange (SSE) was founded on Nov. 26th,1990 and in operation on
Dec.19th the same year. It is a membership institution directly governed by the China
Securities Regulatory Commission(CSRC). The SSE bases its development on the principle
of "legislation, supervision, self-regulation and standardization" to create a transparent, open,
safe and efficient marketplace. The SSE endeavors to realize a variety of functions: providing
marketplace and facilities for the securities trading; formulating business rules; accepting and
arranging listings; organizing and monitoring securities trading; regulating members and
listed companies; managing and disseminating market information.

After several years' operation, the SSE has become the most preeminent stock market in
Mainland China in terms of number of listed companies, number of shares listed, total market
value, tradable market value, securities turnover in value, stock turnover in value and the T-
bond turnover in value. December 2007 ended with over 71.30 million investors and 860
listed companies. The total market capitalization of SSE hit RMB 26.98 trillion. In 2007,
Capital raised from SSE market surpassed RMB 661.6 billion. A large number of companies
from key industries, infrastructure and high-tech sectors have not only raised capital, but also
improved their operation mechanism through listing on Shanghai stock market.

Shenzhen Stock Exchange

The Shenzhen Stock Exchange (the SSE) is a mutualised national stock exchange under the
China Securities Regulatory Commission (the CSRC), that provides a venue for securities
trading. A broad spectrum of market participants, including 540 listed companies, 35 million
registered investors and 177 exchange members, create the market. Here buying and selling
orders are matched in a fair, open and orderly market, through an automated system to create
the best possible prices based on price-time priority.

Since its creation in 1990, the SSE has blossomed into a market of great competitive edges in
the country, with a market capitalization around RMB 1 trillion (US$ 122 billion). On a daily
basis, around 600,000 deals, valued US$ 807 million, trade on the SSE.
China securities market is undergoing fundamental changes. The implementation of the new
Securities Law, Company Law, self-innovation strategy as well as the development of non-
tradable share reform embodies enormous opportunities to the market.

Hongkong Stock market

Hong Kong stock market was started in 1891. It is one of the most established stock markets
in the world, classified by the International Finance Corporation (IFC) as a developed market.

In Hong Kong, there is a strong presence of the world's major financial institutions: 167
foreign banks including 85 of world's top 100 banks, 323 overseas securities and commodity
trading companies, 122 overseas insurers, and 1,182 unit trusts and mutual funds.

Hong Kong market capitalization was over $403 billion. The territory continues to feature as
a capital raising centre for China, with 17 H-share companies having been listed on the Stock
Exchange of Hong Kong with market capitalization of $3.5 billion,.

In addition, multilateral agencies launched a total of 11 Hong Kong dollar bond issues in
Hong Kong in the first three quarters of 1995, involving $455 million.


Market capitalization represents the aggregate value of a company or stock. It is obtained by

multiplying the number of shares outstanding by their current price per share. For example, if
XYZ company has 15,000,000 shares outstanding and a share price of $20 per share then the
market capitalization is 15,000,000 x $20 = $300,000,000. Generally, the U.S. market
recognizes three market cap divisions: large cap (usually $5 billion and above), mid cap
(usually $1 billion to $5 billion), and small cap (usually less than $1 billion), although the
cutoffs between the categories are not precise or fixed. In our example above, XYZ would be
considered a small cap company. also called market cap.

Market capitalization represents the public consensus on the value of a company's equity. An
entirely public corporation, including all of its assets, may be freely bought and sold through
purchases and sales of stock, which will determine the price of the company's shares. Its
market capitalization is the share price multiplied by the number of shares in issue, providing
a total value for the company's shares and thus for the company as a whole. Many companies
have a dominant shareholder, which may be a government entity, a family, or another
corporation. Many stock market indices such as the S&P 500, Sensex, FTSE, DAX, Nikkei,
Ibovespa, and MSCI adjust for these by calculating on a free float basis, i.e. the market
capitalization they use is the value of the publicly tradable part of the company. Thus, market
capitalization is one measure of "float" i.e., share value times an equity aggregate, with free
and public being others.


There are 22 stock exchanges in India, the first being the Bombay Stock Exchange (BSE),
which began formal trading in 1875, making it one of the oldest in Asia. Over the last few
years, there has been a rapid change in the Indian securities market, especially in the
secondary market. Advanced technology and online-based transactions have modernized the
stock exchanges. In terms of the number of companies listed and total market capitalization,
the Indian equity market is considered large relative to the country’s stage of economic
development. The number of listed companies increased from 5,968 in March 1990 to about
10,000 by May 1998 and market capitalization has grown almost 11 times during the same

Before 1992, many factors obstructed the expansion of equity trading. Fresh capital issues
were controlled through the Capital Issues Control Act. Trading practices were not
transparent, and there was a large amount of insider trading. Recognizing the importance of
increasing investor protection, several measures were enacted to improve the fairness of the
capital market. The Securities and Exchange Board of India (SEBI) was established in 1988.
Despite the rules it set, problems continued to exist, including those relating to disclosure
criteria, lack of broker capital adequacy, and poor regulation of merchant bankers and
underwriters. There have been significant reforms in the regulation of the securities market
since 1992 in conjunction with overall economic and financial reforms. In 1992, the SEBI
Act was enacted giving SEBI statutory status as an apex regulatory body. And a series of
reforms was introduced to improve investor protection, automation of stock trading,
integration of national markets, and efficiency of market operations.
International Comparison

India's total market capitalization touched Rs 644.67 billion, with an average daily turnover
of Rs 2,384 million, in December 1995. India's market capitalization was the 6th highest
among the emerging markets. The number of companies listed on the BSE at the end of
December 1994 was 4,702. This was more than the aggregate total of companies listed in 9
emerging markets (Malaysia, S.Africa, Mexico, Taiwan, Korea, Philippines, Thailand, Brazil
and Chile). The number of companies was also more than the that in developed markets of
Japan, UK, Germany, France, Australia, Switzerland, Canada and Hong Kong. India's capital
market features a wide variety of capital market instruments.

Capital Markets: Previous Year Scenario

The Capital markets remained subdued through most of 1995-96 and the bear phase which
began in October 1994, continued through most part of 1995-96. There was a slow down in
Foreign Institutional Investors (FIIs) inflow and domestic liquidity conditions were relatively
tight. Notably, between April to December 1995, the value of primary issues was marginally
higher than the corresponding period last year, despite a downtrend in stock prices and low
turnover in stock exchanges. The process of reforms in the capital markets, including the
money markets, was further strengthened. Securities and Exchange Board of India (SEBI),
was empowered to regulate all market intermediaries. An Ordinance to establish depositories
was announced, thus addressing one of the major lacunae in the system. The National Stock
Exchange expanded rapidly, providing an incentive to other stock exchanges to accelerate

(Rupees crore)

Year/ Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

1993-94 BSE 175093 180904 183775 192080 217291 223549 220587 266738 305000 364139 390696 368071
All 190318 196635 199755 208783 236186 242988 239768 289933 332000 395803 424670 400077
1994-95 BSE 364868 372977 398044 408230 446884 416966 415381 401692 400000 352443 348516 435481
All 396596 405410 432657 443729 485743 453224 452045 436622 434783 383090 378822 473349
1995-96 BSE 455315 456781 462238 465145 503630 530819 518623 435107 447297 436396 499705 526476

All 494908 495414 506780 505592 547424 576977 563721 472942 486192 474343 543158 572257
1996-97 BSE 585919 518640 530815 501538 497113 476805 455805 416750 439231 458261 484624 463915

All 636868 563739 576973 545150 540340 518266 495440 452989 477425 482380 510131 488332
1997-98 BSE 502082 506391 588496 595346 550883 547728 526142 493573 503716 469513 526357 560325

All 528507 533043 619469 626680 579877 576556 553834 519551 530227 494224 554060 589816

1998-99 BSE 580238 561849 485461 483420 464887 479711 452779 446728 477010 502451 504233 545361
All 610777 591420 511012 508863 489355 504959 476609 470240 502116 528896 530772 574064

1999-00 BSE 488229 560965 584788 648932 710956 704568 673462 709613 803353 927383 1029257 912842

All 513925 590489 615566 683086 - - - - - - - -


2000-01 BSE 755914 702777 793230 720884 766642 692657 653437 699230 691162 736631 716173 571553

2001-02 BSE 567729 595938 553230 531576 523036 456263 481851 535724 532328 544397 596716 612224

2002-03 BSE 625587 605065 637753 584042 605303 570273 563750 601289 628197 611472 619873 572198

2003-04 BSE 572526 660982 734389 775996 905193 933087 1000494 1065853 1273361 1206854 1196221 1201207

2004-05 BSE 1255347 1023129 104725 1135589 1216755 1309318 1337191 1539595 1685989 1661532 1730941 1698428

2005-06 BSE 1635766 1783221 185037 1987170 2123901 2254378 2065612 2323065 2489386 2616194 2695543 3022191
2006-07 BSE 3255565 2842050 272167 2712144 2993780 3185680 3370676 3577308 3624357 3779742 3489214 3545041

2007-08 BSE 3828337 4074552 416827 4529772 4538005


Source : Bombay Stock Exchange Limited (BSE).


China’s economic performance over the past quarter of a century has been one of the
strongest in history. Following years of rapid expansion, China has become one of the
world’s largest economies, a key global exporter and an important trading partner for many
developed and developing economies. It has also been a large recipient of foreign investment
for some time and, recently, it emerged as a leading investor in global financial markets.
Alongside the obvious domestic and global benefits, this rapid expansion has brought about a
number of policy challenges, and structural imbalances have emerged both internally and
externally. Currently, these imbalances relate to the risks of abundant liquidity, overcapacity
in some industries and external surpluses, and appear linked among other factors to the
tightly managed exchange rate regime, which hinders the effectiveness of monetary policy
and diverts it from domestic objectives.

Several factors may explain the direction and composition of China’s capital flows, including
the adoption of an “open-door” policy to foreign investment (particularly FDI), the pragmatic
strategy that prevailed in the aftermath of the Asian crisis and the focus on reserve
accumulation for precautionary purposes.

In more recent times, mounting evidence suggests that China is facing an increasing
challenge to maintain its currency’s hard peg to the US dollar. The essence of the argument
lies in Robert Mundell’s “inconsistent trinity” hypothesis, which postulates that it is
impossible for a country to achieve simultaneously a fixed exchange rate and an independent
monetary policy if capital is free to move internationally.

However, capital controls tend to lose their effectiveness over time. Rising capital inflows,
compounded by large current account surpluses, have exacerbated the trade-off between the
fixed exchange rate and monetary autonomy. China recorded a current account surplus of
USD 250 billion in 2006 (9.3% of GDP), on top of which net financial inflows contributed to
increase further the overall balance of payments surplus. Net FDI inflows averaged nearly 5%
of GDP annually in the five years prior to the Asian crisis. They have fallen since then, but
were still USD 61 billion in 2006 (2.3% of GDP). Other capital flows – probably mostly
speculative in nature – grew significantly in 2004 (to USD 91 billion) but were negative in
the following two years.

Development of the Chinese Capital Market

The Chinese capital market has progressed in parallel with the Chinese economic structural
reform, which is now an important component of the Chinese socialist market economy
system. The rapidly growing capital market has played an important role in restructuring
state-owned enterprises (SOEs) and the financial market, optimizing resource allocation, and
promoting economic growth and structural adjustment. The capital market has begun to take
shape. Even due to its late start, the Chinese capital market still lags behind developed capital
markets in terms of market scale and transaction volume. With over a decade’s rapid
development, however, it has grown in both size and investment varieties.
Government bonds and financial bonds dominate the Chinese bond market with corporate
bonds taking up a minor proportion.At the end of 2004, medium and long-term bond stock
was valued at RMB3.82 trillion, among which government bonds, financial bonds and
corporate bonds respectively amounted to RMB2.21 trillion, RMB1.49 trillion and RMB120
CHINA: Market capitalisation by classification(HK$ Mil.)

200 Finance Utilities Properties Enterprises Industrials Hotel Miscallaneous Total

Jan 3222187.1 462129.1 981778.74 2452983.5 1587086.6 68385.13 26463.96 88010143.31
5 5 4 4
Feb 3446859.5 474727.0 1003710.5 2462918.3 1620801.1 69477.83 27306.77 9112860.14
0 6 6 6 6
Mar 3428743.6 478528.0 1073598.5 2548093.5 1704534.4 69319.54 28967.19 9331784.89
1 6 1 6 2
Apr 3439384.8 498883.6 1110094.9 2732462.9 1780556.1 73979.45 34648.75 9670011.50
6 7 7 6 4
May 3462725.0 469937.6 1035175.0 2526986.3 1723825.9 76639.36 33206.59 9328495.93
4 8 0 4 4
Jun 3799702.8 475886.0 1036493.8 2638850.6 1399367.9 75260.27 32810.72 9758372.27
3 9 2 3 1
Jul 3840868.1 487557.6 1090816.6 2777787.7 1726178.5 81372.16 33973.95 10038504.89
7 9 1 8 3
Aug 3868340.7 502375.2 1145710.1 2857042.3 1770156.3 80101.99 32415.07 10256141.85
4 3 0 7 5
Sep 3968251.8 503611.2 1159331.4 2951296.4 1822250.8 86130.68 34032.03 1525904.43
4 2 4 2 0
Oct 4382969.7 514806.1 1221612.4 3183883.1 1886514.8 87730.65 37551.55 11315068.58
0 8 3 8 9
Nov 4712968.4 528472.3 1328144.2 3380911.7 2021093.6 97658.50 43466.56 12112715.40
2 7 3 0 2
Dec 5229461.0 564675.9 1427798.1 3617230.3 2253700.0 103944.8 52010.07 13248820.50
2 9 7 3 5 7
In exercise of the powers conferred by section 30 of the Securities and Exchange Board of
India Act, 1992 (15 of 1992) the Board hereby, makes the following regulations, namely:-


Short title and commencement

(1) These regulations may be called the Securities and Exchange Board of India (Foreign
Institutional Investors) Regulations, 1995.

(2) They shall come into force on the date of their publication in the Official Gazette.


Application for certificate

(1) No person shall buy, sell or otherwise deal in securities as a Foreign Institutional Investor
unless he holds a certificate granted by the Board under these regulations.

(2) An application for the grant of certificate shall be made to the Board in Form A.

(3) Notwithstanding anything contained in sub-regulation (2), any Foreign Institutional

Investor who has made an application for the grant of a certificate to the Board prior to the
commencement of these regulations shall be deemed to have made an application under sub-
regulation (2) and the application shall be accordingly dealt with under these regulations.

(4) Notwithstanding anything contained hereinabove, any person who has before the
commencement of these regulations, made an application for registration and has been
granted registration by the Board under the Government of India Guidelines to act as a
Foreign Institutional Investor shall be deemed to have made an application under sub-
regulation (2) above may continue to buy, sell or otherwise deal in securities subject to the
provisions of these regulations, till the grant or refusal of a certificate under these regulations.
Furnishing of information, clarification, and personal representation.

(1) The Board may require the applicant to furnish such further information or clarification as
the Board considers necessary regarding matters relevant to the activities of the applicant for
grant of certificate.

(2) The applicant or his authorized representative shall, if so required by the Board, appear
before the Board for personal representation in connection with the grant of a certificate.

Application to conform to the requirements

Subject to the provisions of sub-regulation (3) and sub- regulation (4) of regulation 3, any
application, which is not complete in all respects and does not conform to the instructions
specified in the form or is false or misleading in any material particular, shall be rejected by
the Board. Provided that, before rejecting any such application, the applicant shall be given a
reasonable opportunity to remove, within the time specified by the Board, such objections as
may be indicated by the Board.

Consideration of application

For the purpose of the grant of certificate the Board shall take into account all matters which
are relevant to the grant of a certificate and in particular the following, namely:-

(a) The applicant's track record, professional competence, financial soundness, experience,
general reputation of fairness and integrity;

(b) Whether the applicant is regulated by an appropriate foreign regulatory authority;

(c) Whether the applicant has been granted permission under the provisions of the Foreign
Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for making
investments in India as a Foreign Institutional Investor;

(d) Whether the applicant is -

(i) An institution established or incorporated outside India as Pension Fund or

Mutual Fund or Investment Trust

(ii) An Asset Management Company or Nominee Company or Bank or

Institutional Portfolio Manager, established or incorporated outside India and
proposing to make investments in India on behalf of broad based funds [and
its proprietary funds, if any]
(iii) A Trustee or a Power of Attorney holder, incorporated or established
outside India, and proposing to make investments in India on behalf of broad
based funds [and its proprietary funds, if any]

Procedure and grant of certificate

Where an application is made for grant of certificate under these regulations, the Board shall,
as soon as possible but not later than three months after information called for by it is
furnished, if satisfied that the application is complete in all respects, all particulars sought
have been furnished and the applicant is found to be eligible for the grant of certificate, grant
a certificate in Form B , subject to payment of fees in accordance with the Second Schedule.

Validity of certificate

The certificate and each renewal thereof shall be valid for a period of five years from the date
of its grant or renewal, as the case may be.

Application for renewal of certificate

(1) Three months before the expiry of the period of certificate, the Foreign Institutional
Investor, if he so desires, may make an application for renewal in Form A .

(2) The application for renewal under sub-regulation (1) shall, as far as may be, be dealt with
in the same manner as if it were an application made under sub-regulation (2) of regulation
(3) for grant of a certificate.

(3) The Board shall, on such application, if satisfied that the applicant fulfils the requirements
specified in regulation (6), grant a certificate in Form B , subject to payment of fees in
accordance with the Second Schedule.

Conditions for grant or renewal of certificate to foreign institutional investors

The grant or renewal of certificate to the Foreign Institutional Investor shall be subject to the
following conditions namely -

(a) He shall abide by the provisions of these regulations;

(b) If any information or particulars previously submitted to the Board are found to be false
or misleading, in any material respect, he shall forthwith inform the Board in writing;
(c) If there is any material change in the information previously furnished by him to the
Board, which has a bearing on the certificate granted by the Board, he shall forthwith inform
the Board;

(d) He shall appoint a domestic custodian and before making any investments in India, enter
into an agreement with the domestic custodian providing for custodial services in respect of

(e) He shall, before making any investments in India, enter into an arrangement with a
designated bank for the purpose of operating a special non-resident rupee or foreign currency

(f) Before making any investments in India on behalf of a sub-account, if any, he shall obtain
registration of such sub-account, under these regulations.

Procedure where certificate is not granted

(1) Where an application for grant or renewal of a certificate does not satisfy the
requirements specified in regulation 6, the Board may reject the application after giving the
applicant a reasonable opportunity of being heard.

(2) The decision to reject the application shall be communicated by the Board to the applicant
in writing stating therein the grounds on which the application has been rejected.

(3) The applicant, who is aggrieved by the decision of the Board under sub-regulation (1)
may, within a period of thirty days from the date of receipt of communication under sub-
regulation (2), apply to the Board for reconsideration of its decision.

(4) The Board shall, as soon as possible, in the light of the submissions made in the
application for reconsideration made under sub-regulation (3) and after giving a reasonable
opportunity of being heard, convey its decision in writing to the applicant.

Application for registration of sub- accounts

(1) A Foreign Institutional Investor shall seek from the Board registration of each sub-
account on whose behalf he proposes to make investments in India.
(2) Notwithstanding any thing contained in sub regulation (1) above, any sub-account which
has been granted approval prior to the commencement of these regulations by the Board shall
be deemed to have been granted registration as a sub-account by the Board under these

(3) An application for registration as a sub-account shall contain particulars specified in


Commencement of investment

A Foreign Institutional Investor shall not make any investments in securities in India without
complying with the provisions.

Investment restrictions

A Foreign Institutional Investor may invest only in the following:-

(a) securities in the primary and secondary markets including shares, debentures and warrants
of companies listed or to be listed on a recognised stock exchange in India

(b) units of schemes floated by domestic mutual funds including Unit Trust of India, whether
listed on a recognised stock exchange or not

(c) dated Government securities

(d) derivatives traded on a recognised stock exchange.

In respect of investments in the secondary market, the following additional conditions shall

(a) The Foreign Institutional Investor shall transact business only on the basis of taking and
giving deliveries of securities bought and sold and shall not engage in short selling in

(b) No transactions on the stock exchange shall be carried forward.

(c) The transaction of business in securities shall be only through stock brokers who have
been granted a certificate by the Board under sub-section (1) of section 12 of the Securities
and Exchange Board of India Act, 1992.

• Appointment of domestic custodian

• Appointment of designated bank

• Maintenance of proper books of accounts, records, etc.

• Preservation of books of accounts, records, etc.

• Information to the Board period of five years.


Suspension of certificate

A penalty of suspension of certificate of a Foreign Institutional Investor may be imposed if -

(a) Indulges in fraudulent transactions in securities;

(b) Fails to furnish any information related to his transaction in securities as required by the
Board or the Reserve Bank of India;

(c) Furnishes false information to the Board; or

(d) Does not co-operate in any enquiry conducted by the Board.

Cancellation of certificate

A penalty of cancellation of certificate of a Foreign Institutional Investor may be imposed if

he -

(a) Indulges in deliberate manipulation or price rigging or cornering activities prejudicially

affecting the securities market or the investors' interest;

(b) Is guilty of fraud or a criminal offence, involving moral turpitude;

(c) Does not meet the eligibility criteria laid down in these regulations;

(d) violates the provisions of the Securities and Exchange Board of India (Insider Trading)
Regulations, 1992 or of the Securities and Exchange Board of India (Prohibition of
Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 1995,
made under the Act; or

(e) Is guilty of repeated defaults of the nature mentioned in regulation 22.


In order to create a congenial investment environment and to encourage overseas firms to

invest in China, China has gradually set up a relatively complete legal system. In 1979 the
National People’s Congress issued The Law of the People’s Republic of China on Chinese-
Foreign Equity Joint Ventures. In the following 20-odd years, the Chinese government has
promulgated and issued a series of laws and statutes concerning the establishment, operation,
termination and liquidation of foreign-invested enterprises. The main laws and regulations
include the three basic laws ― The Law of the People’s Republic of China on Chinese-
Foreign Equity Joint Ventures, The Law of the People’s Republic of China on Chinese-
Foreign Contractual Joint Ventures, and The Law of the People’s Republic of China on
Wholly Foreign-Owned Enterprises; detailed rules for the implementation of the three basic
laws; The Company Law of the People’s Republic of China; The Income Tax Law of the
People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises;
Interim Provisions for Guiding Foreign Investment; Industrial Catalogue for Foreign
Investment; Interim Provisions Concerning the Investment within China of Foreign-invested
Enterprises, Provisions Regarding the Merger and Separation of Foreign-invested
Enterprises, and Liquidation Measures for Enterprises with Foreign Investment. These
provide legal bases from which to guarantee the independent operation rights of foreign-
funded enterprises and to protect the legitimate rights and interest of both domestic and
overseas investors.

Currently, the Chinese government is reexamining its existing laws and statutes in
accordance with the framework of the WTO. It has abolished certain obsolete laws and
regulations, and will gradually revise the laws and regulations that are incompatible with the
rules of the WTO. For instance, in 2000 China revised The Law of the People’s Republic of
China on Chinese-Foreign Contractual Joint Ventures and The Law of the People’s Republic
of China on Wholly Foreign-Owned Enterprises, and discarded certain restrictions regarding
the balance of foreign exchange account and localization of supplies. In 2001 The Law of the
People’s Republic of China on Chinese-Foreign Equity Joint Ventures was also revised.
In accordance with the existing laws of China, the establishment of enterprises with foreign
investment is subject to project-by-project examination, approval and registration by the
government. In general, the following steps should be followed for the establishment of
Chinese-foreign equity joint ventures and Chinese-foreign contractual joint ventures:

1. Submit the project proposal to the relevant department (planning department or

technological renovation administration) and get approval before investors can
proceed with various jobs centered round the feasibility study of the project.

2. Submit the feasibility study report to the planning department or technological

renovation administration and get approval before investors can sign legal documents,
such as the contract and articles of corporation of the enterprise.

3. Submit the contract and articles of corporation of the enterprise to the examination
and ratification department, who shall issue the Approval Certificate for Enterprises
with Foreign Investment after approval by the Ministry of Foreign Trade and
Economic Cooperation.

4. With the Approval Certificate issued by the examination and ratification authorities,
the investors can go through registration procedures with the administration of
industry and commerce.

The procedures for the establishment of enterprises with foreign investment are quite simple.
After the initial project application is approved in writing by the examination and ratification
authorities, the investors may submit a formal application, with articles of corporation and
other required documents. On receipt of the Approval Certificate, they can proceed with the
registration formalities by presenting the Approval Certificate.

In accordance with China's existing laws, the state adopts a classification administrative
system for foreign investment. The provinces, municipalities, autonomous regions and cities
listed as independent units in state plans have the authority to examine and approve
investment of less than US $30 million in areas encouraged and permitted by the state. When
an investment exceeds this amount, the project application and feasibility study report shall
be examined and approved by the State Development Planning Commission or the State
Economic and Trade Commission, while the contract and articles of corporation shall be
examined and approved by the Ministry of Foreign Trade and Economic Cooperation.
Many provinces, autonomous regions and municipalities directly under the central
government have established foreign investment service centers, which offer foreign
investors with a one-stop service, ranging from legal consultation to procurement of project
approval. With the improvement of China's social services system, intermediary service
agents, including consultation companies, lawyers, and accountants, are all expected to
provide investors with efficient and qualified services.