Foreign Institutional Investors and the Indian Mutual Funds Industry

Following SEBI guidelines of 1993, which distinct the structure of mutual funds (MFs) and asset management companies, mutual funds were launched in the private sector for the exceptional. A few years former in 1987, public banks and insurance companies, were permitted to enter the mutual funds sector which was till then the preserve of Unit Trust of India. While primarily they raised considerable amounts, the mobilization suffered with the general industry performance. Recently, private sector mutual funds have started becoming significant once again. An essential contributory factor is the tax break allowed in the Budget 1999-2000 when the income distributed under the US-64 and other open-ended equity-oriented schemes of UTI and other Mutual Funds was exempted from dividend tax and income received by individuals from MFs was entirely exempted from income tax. Consequently, during April- December 1999, MFs raised Rs 35,915 crore in gross terms compared to Rs 16,288 crore in the consequent period of 1998. The presentation in net terms is more remarkable: Rs 12,194 crore against a net outflow of Rs 950 crore in the preceding period. During April-December 1999, share of private sector was 68.4 % in gross mobilizations and 74.33 % in net conditions. Private sector MFs accounted for nearly 10% of the net assets of all mutual funds at the ending of March 1999. By the ending of the year the share doubled to nearly 21 %from independent compilations on mutual funds, it does appear that within the private sector MFs, funds with foreign associates have come to inhabit a significant position.

At the same time as it can be expected that foreign affiliated mutual funds would follow the investment pattern of FIIs, it is imperative to note that many domestic ones also followed FIIs. The sectors favored by FIIs account for a considerable segment of the net assets under control of many MFs. still the UTI started focusing on certain of these sectors. UTI Chairman is reported to have said in February 2000 that US-64's (flag ship fund of UTI) exposure to the information technology sector rose to 19.13 % at the ending of December 1999 from 5.68 % a year earlier. UTI's involvement With IT and pharmaceutical sectors is additional exposed in its floatation of sector specific funds. UTI have floated five funds called UTI Growth Sector Funds. These include Brand Value fund (FMCG), Pharma and Healthcare fund, Software Fund, Petro Fund, and Services Sector Fund. At the same time as understandably the Software fund is exclusively for computer software companies, the Services Sector Fund also concentrates on.

Computer related companies. Amongst the others who promoted quarter specific funds are: Birla Mutual, IL & FS, Kothari Pioneer, Prudential ICICI, SBI Mutual and Tata Mutual. Entertainingly, it is reported that although it is not a quarter specific fund, JM Equity Fund's reliance on the software sector increased from 34% in September 1999 per cent at the end of December 1999.

From the above it emerges that mutual funds are gaining importance in the Indian Stock market and that

• The share of foreign affiliated MFs is emergent,
• A number of Indian funds are following the investment strategies of the foreign ones,
• These are sector specific funds for IT, Pharmaceuticals and FMCG,
• Schemes of many funds focus on these sectors without really claiming themselves to be one such. This provides additional explanation to the sectoral developments in the Indian stock market during 1999. Such concentrated attempt may have further underplayed the significance of the other sectors and widen the differences in P/E ratios between the so-called new economy sectors and the others. The hottest change in Sensex announced by BSE further acknowledges the increasing significance of IT, media and pharmaceutical companies. From April 10, 2000 Satyam Computer Services, Zee Telefilms, Reddy Labs and Reliance Petroleum would swap Tata Chemicals, Tata Power, IDBI and Indian Hotels Co. in the Sensex. It may be distinguished further that while there was net outflow on account of foreign portfolio investors during 1998-99, private sector mutual funds in India mobilized Rs 1,453 crore on net conditions. All through the first nine months of 1999-2000 the net collections were Rs 9,064 crore which contrast well with net inflows of foreign portfolio capital of Rs 6,766 and Rs 11,735 crore during 1997-98 and 1996-97, respectively. It can thus be predictable that progressively stock prices would be affected not only by net FII investments but also the size of funds under control of their local counterparts. At the same time as FIIs can remit capital and profits back to their home countries, the local affiliates will have to invest in the domestic market only. Yet an additional development during 1999 which affected share price progress in India is the listing of Infosys Technologies and Satyam Infoway, an auxiliary of Satyam Computers, on Nasdaq of USA. It is now understood in stock market circles that prices of information technology companies in India are subjective by the NASDAQ. This incident is going to be progressively more prominent as more and more Indian companies get traded abroad.