Unplugging Alpha In Indian Markets
By Jyoti Rai, Associate Director, Business Development & Advocacy, Edelweiss Prime Brokerage Services
The investment case for India is compelling, overseas access is becoming easier, capital markets are developing rapidly and domestic financial firms are adopting the latest technologies.
Today, India is witnessing a paradigm shift owing to a convergence of steadfast vision, inclusive economic growth and deep policy reforms that are intended to benefit all Indians. In spite of global headwinds, India’s GDP rate has been sustainable with the government achieving a fine balance between fiscal prudence and growth.
Phases of reform
During a period of market liberalization in the early nineties, India introduced a raft of reforms that effectively ended the license raj, the expression for the serpentine assortment of bureaucratic regulations that often stifled business and enterprise. Private companies were allowed to enter key sectors, including manufacturing, oil and steel, foreign direct investment was encouraged and important regulators such as the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority (Irda) were established.
Economic growth was volatile during this transition phase, but it was a prelude to spectacular annual growth rates from 2004, reaching over 9% a year towards the end of the decade. Foreign portfolio investment flowed into the country’s expanding capital markets and the rupee strengthened.
The 2008 global financial crisis revealed that this hyper-expansion was unsustainable and fragile, and a period of steady consolidation was nurtured from 2008 to 2013. Prudent risk management insulated India from the worst of the fallout from the worldwide recession, but not from some domestic financial scandals.
High profile exits from India by Fidelity and Walmart could have shaken the confidence of policy makers committed to a careful and circumspect reform, but they remained firm and introduced important regulatory frameworks such as the General Anti Avoidance Rule and the BEPS Report.
Meanwhile, there has been significant reform and development across all sectors of the economy, including telecommunications, banking, asset management, aviation, fast-moving consumer goods and hospitality, as well as a vibrant technology sector.
Investor access to India growth
In a major restructuring three years ago, Sebi introduced the Foreign Portfolio Investment (FPI) regime that categorised non-resident investors into three groups determined by their risk profiles and know-your-client requirements. Registration procedures were also made simpler.
We at Edelweiss, have been seeing an influx of FPI registrations coming through during the past three years. Interestingly, the number of FPI registrations has gone up exponentially in the last calendar year, climbing to a high of over 8,500. This saw a further spike after the recent prohibition on offshore derivative instruments on Indian derivatives contracts. Building on the “ease of access” syntax, we have ensured that a new FPI does not have to approach multiple service providers – Edelweiss India is an authorized custodian and conducts the required KYC to issue new FPI certificates, in addition to helping apply for India tax ID, trade and execution set-up and futures clearing.
Edelweiss has set-up dedicated KYC and on-boarding teams at our offshore locations in Asia, London and New York as well, which has reduced the FPI set-up and Go-Live timelines. COOs across fund houses have appreciated this “one-stop-shop” approach along with dedicated hand-holding for the nuanced requirements of getting an FPI ID for India.
Investment rules are now clearer, and overseas funds are able to tap into India’s increasingly sophisticated capital markets more easily than before. The average daily trading volume of the National Stock Exchange and Bombay Stock Exchange combined is $3.5 billion and daily volume of the top five single futures contracts is between $75 million and $80 million.
Emerging trends in India’s financial markets include:
- Domestic savings are moving to equities
- Investments in mutual funds are rising steadily,
growing fourfold in the past five years.
- Corporate bond markets are opening up and
becoming exchange traded
- Currency markets are more accessible, with
offshore participation allowed
- New products such as REITs and InVITs offer great
- Distressed assets and the private debt market are
- Markets are supported by robust technology and
Direct market access
Indian financial services companies such the Edelweiss Group provide a range of high technology products and services to a large and diversified client base that includes corporations, institutions and individuals. Edelweiss’s offerings span multiple asset classes and consumer segments across domestic and global geographies.
As one of the country’s leading institutional equities businesses, Edelweiss delivers seamless execution and innovative research products to more than 300 active institutional investors. It is a pioneer in algorithmic trading in India and offers a complete suite of proprietary, exchange approved algorithms, tailored to suit the Indian markets.
Edelweiss offers direct market access (DMA) and FIX connectivity, catering to over 200 clients and also provides Direct Strategy Access (DSA) services with both one-touch and no-touch DSA options. Moreover, Edelweiss-DMA has a working relationship with major FIX connectivity providers that enables easy and quick on-boarding of clients with the platform. In addition, Edelweiss offers ultra-low latency DMA to high frequency trading clients.
The system is tested robotically for around one million cases and conditions and is continually upgraded with the latest certified hardware and software designs and coding techniques. Production support and monitoring is also automated.
The investment case for India is clearly compelling and policy makers are keen to ease foreign access to the country’s high potential capital markets in a steady and sober fashion. Meanwhile, domestic financial firms with ambition are prepared to facilitate overseas investment through the adoption of the latest technologies.
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