Emerging Capital Market

TERM PAPER ON EMERGING CAPITAL MARKETS

SUBMITTED TO Prof. M V S KAMESHWAR RAO

SUBMITTED BY: MURLI SABHNANI-122410138 RAHUL RANJAN-122410144 RAJENDRA BABU-122410145 RAJYA VARDHAN-122410146 SUNITA JHAKHAR-122410157 SWEATHA GOTHI-122410159 V.SRIKANTH-122410162

GITAM INSTITUTE OF INTERNATIONAL BUSINESS GITAM Campus, Rushikonda Visakhapatnam-530045, Andhra Pradesh

Introduction In a little under two decades, the spread of market-oriented policies has turned the once socalled 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 market. 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 3040% 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 benefit

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 worldwide. 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 DowJones 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 owneroccupied 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 economies. 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 mediumsize 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 crossborder 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.[ Unemployment: March 2009 Number of people employed Unemployment Rate

10,794,900 5.4%

April 2009 10,790,600 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 privately. 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 price. 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, exchangetraded 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 institutions.) 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 market. 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 market. 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 interest. 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, 2008)

NSE Family NSCCL 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 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. IISL 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. DOTEX INTERNATIONAL LTD. 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. NCDEX 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. NCCL 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. PXIL 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 Tbond 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 nontradable 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 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.

MARKET CAPITALIZATION: INDIA 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 period. 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 computerization.

MARKET CAPITALISATION - BSE AND ALL-INDIA (Rupees crore) Year/

Apr

May

Jun

BSE All

175093 190318

180904 196635

183775 199755

India BSE All

364868 396596

372977 405410

India BSE

455315

All

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

192080 208783

217291 236186

223549 242988

220587 239768

266738 289933

305000 332000

364139 395803

390696 424670

368071 400077

398044 432657

408230 443729

446884 485743

416966 453224

415381 452045

401692 436622

400000 434783

352443 383090

348516 378822

435481 473349

456781

462238

465145

503630

530819

518623

435107

447297

436396

499705

526476

494908

495414

506780

505592

547424

576977

563721

472942

486192

474343

543158

572257

India 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

India 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

580238

561849

485461

483420

464887

479711

452779

446728

477010

502451

504233

545361

Month 1993-94

1994-95

1995-96

1996-97

1997-98

India 1998-99

BSE

All

610777

591420

511012

508863

489355

504959

476609

470240

502116

528896

530772

574064

BSE

488229

560965

584788

648932

710956

704568

673462

709613

803353

927383

1029257

912842

All

513925

590489

615566

683086

-

-

-

-

-

-

-

-

India

1999-00

India 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

1987170

2123901

2254378

2065612

2323065

2489386

2616194

2695543

3022191

8 2005-06

BSE

1635766

1783221

185037 7

2006-07

BSE

3255565

2842050

272167

2712144

2993780

4529772

4538005

8 2007-08

BSE

3828337

4074552

416827 2

Source : Bombay Stock Exchange Limited (BSE).

3185680

3370676

3577308

3624357

3779742

3489214

3545041

MARKET CAPITALIZATION: CHINA 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 billion.

CHINA: Market capitalisation by classification(HK$ Mil.) 200

Finance

Utilities

Properties

Enterprises

Industrials

Hotel

Miscallaneous Total

6 Jan

3222187.1

462129.1

981778.74

2452983.5

1587086.6

68385.13

26463.96

88010143.31

Feb

5 3446859.5

5 474727.0

1003710.5

4 2462918.3

4 1620801.1

69477.83

27306.77

9112860.14

Mar

0 3428743.6

6 478528.0

6 1073598.5

6 2548093.5

6 1704534.4

69319.54

28967.19

9331784.89

Apr

1 3439384.8

6 498883.6

1 1110094.9

6 2732462.9

2 1780556.1

73979.45

34648.75

9670011.50

May

6 3462725.0

7 469937.6

7 1035175.0

6 2526986.3

4 1723825.9

76639.36

33206.59

9328495.93

Jun

4 3799702.8

8 475886.0

0 1036493.8

4 2638850.6

4 1399367.9

75260.27

32810.72

9758372.27

Jul

3 3840868.1

9 487557.6

2 1090816.6

3 2777787.7

1 1726178.5

81372.16

33973.95

10038504.89

Aug

7 3868340.7

9 502375.2

1 1145710.1

8 2857042.3

3 1770156.3

80101.99

32415.07

10256141.85

Sep

4 3968251.8

3 503611.2

0 1159331.4

7 2951296.4

5 1822250.8

86130.68

34032.03

1525904.43

Oct

4 4382969.7

2 514806.1

4 1221612.4

2 3183883.1

0 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

Dec

2 5229461.0

7 564675.9

3 1427798.1

0 3617230.3

2 2253700.0

103944.8

52010.07

13248820.50

2

9

7

3

5

7

FOREIGN INSTITUTIONAL INVESTORS REGULATIONS: INDIA 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:(1)PRELIMINARY 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. (2)REGISTRATION OF FOREIGN INSTITUTIONAL INVESTOR 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 subregulation (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 subregulation (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 securities; (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 account; (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 subregulation (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 subaccount 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 regulation. (3) An application for registration as a sub-account shall contain particulars specified in

(3) INVESTMENT CONDITIONS AND RESTRICTIONS 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 apply:(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 securities. (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.

(4)GENERAL OBLIGATIONS AND RESPONSIBILITIES •

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.

(5)PROCEDURE FOR ACTION IN CASE OF DEFAULT 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.

FOREIGN INSTITUTIONAL INVESTORS REGULATIONS : CHINA 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 ChineseForeign 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 ChineseForeign Equity Joint Ventures, The Law of the People’s Republic of China on ChineseForeign 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 foreignfunded 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.