PROJECT ON: CAPITAL MARKET IN BRIC ECONOMIES

SUBMITTED TO THE UNIVERSITY OF MUMBAI IN PARTIAL FULFILLMENT FOR THE AWARD OF THE DEGREE OF BACHELOR OF MANAGEMENT STUDIES (BMS) SEMESTER VI BY: NAME: JAY.N.DHARAMSHI ROLL NO: 30

S.K.SOMAIYA COLLEGE OF ARTS, SCIENCE & COMMERCE, VIDYAVIHAR , MUMBAI- 400077 2012-13

DECLARATION

I Mr JAY NITIN DHARAMSHI, the student of S.K.SOMAIYA COLLEGE, studying in T.Y-BMS, Semester 5th course for the academic year 2012 2013 declare that, I have completed the project on CAPITAL MARKET IN BRIC ECONOMIES in fulfillment of the course completion requirement at University of Mumbai. I further declare that, the information presented in this project is true and original to the best of my knowledge.

Date:

Signature of Student

Place:

(JAY.N.DHARAMSHI)

ACKNOWLEDGEMENT

First and foremost, I would like to thank Almighty God for energy, strength guidance and help that have been with me throughout my work.

While presenting this project at this moment, I feel deeply obliged to our Mumbai University for providing me with an opportunity to do this project.

This project could not have been light of the day without inspiring & Guidance from Prof. Nitin Pawar sir who guided me likes a bonfire in the dark. I would also like to thank my coordinator Prof Aparna Jain for motivating me through out.

Last but not the least; I am thankful to all my friends ans colleagues for their moral support and encouragement.

To sum up I would like to thank all those who have helped me in some or other way in successfully completing the project. It has been a warming experience for me, which surely help me in future.

INDEX
Chapter no. 1 Topic The Rise of BRIC Nations and How This Will Reshape Worlds Geopolitics in a Near Future And Why the United States Must Care GROWING ISSUE OF INTER DEPENDENCY THE PLAYERS CAPITAL MARKET IN BRAZIL CAPITAL MARKET IN RUSSIA CAPITAL MARKET IN INDIA CAPITAL MARKET IN CHINA WHY THE BRICS DREAM WONT BE GREEN? WHY THE BRICS DREAM SHOULD BE GREEN? 2001:A BRIC ODYSSEY CONCLUSION NEWS PAPER ARTICLES BIBLIOGRAPHY WEBLIOGRAPHY Page no. 1-4

2 3 4 5 6 7 8 9 10 11 12 13 14

5 6-19 20-31 32-37 39-48 49-57 58-61

62-65
66-67 68 69-75

76
77

EXECUTIVE SUMMARY
The BRIC [Brazil, Russia, India and China] idea was first conceived in 2001 by Goldman Sachs as part of an economic modeling exercise to forecast global economic trends over the next half century; the acronym BRIC was first used in 2001 by Goldman Sachs in their Global Economics Paper No. 66, "The World Needs Better Economic BRICs". The Fourth BRICS Summit was hosted in New Delhi on 29 March 2012 under the overarching theme of BRICS Partnership for Global Stability, Security and Prosperity. The Summit has imparted further momentum to the BRICS process. BRICS, is a unique Grouping with shared opportunities and common challenges. Formalized with the first meeting of the Foreign Ministers of Brazil, Russia, India and China in New York on the margins of the United Nations General Assembly in September 2006, in a short span of time, the Grouping has come a long way and has evolved a number of mechanisms for consultation and cooperation in a number of sectors. South Africa joined the Grouping at the third Summit in Sanya, China in April 2011. The agenda of BRICS meetings has considerably widened over the years to encompass topical global challenges such as international terrorism, WMDs, climate change, food and energy security, MDGs, international economic and financial situation, etc. Four BRICS Summits and meetings of Foreign Ministers, Finance Ministers, Agriculture Ministers, Health Ministers, High Representatives on Security and other sectoral meetings have helped further deepening of cooperation amongst BRICS countries. The objective of the project is to understand what BRIC is about and how the economies of Brazil, Russia, India and China are summiting towards it. According to me, choosing between the opportunities is on offer in the BRIC countries is no easy matter. The economic environment in each should encourage strong corporate growth. On one level, including exposure to all four emerging markets in a portfolio looks like a great idea. Unfortunately, emerging stock markets are all too prone to shocks, crises, and the inevitable flight to safe havens such as US treasury stocks. As ever, potential higher returns go hand in hand with potential higher risks.

The project contains all the information on capital markets of the four economies and why BRIC comes into picture. This project is based on secondary research and contains all the updated information. BRICs have become popular again because the economic growth of these countries is fast outstripping that of even the most developed of nations. This fact alone makes BRIC mutual funds particularly attractive to investors who have a stomach for investing in emerging markets. BRIC mutual funds are account managed by investment professionals. The professional investor or portfolio manager buys bulk interest in the foreign assets and pays the clientinvestor a return based on the performance of the holdings. The Delhi Declaration, capturing the essence of discussion as well as putting forth common position of BRICS countries on various economic and political issues of global and regional importance was issued at the end of the Summit. The Declaration included Delhi Action Plan which highlights the activities to be undertaken under Indias chairmanship of BRICS to further cooperation. Two agreements namely- Master Agreement on Extending Credit Facility in Local Currencies and BRICS Multilateral Letter of Credit Confirmation Facility Agreement- were signed by the Development Banks from BRICS countries. The Leaders also released The BRICS Report focusing on synergies and complementarities between the BRICS economies and highlighting their role as growth drivers of the world economy. An updated edition of BRICS Statistical Publication was also issued at the occasion.

CHAPTER 1 The Rise of BRIC Nations and How This Will Reshape Worlds Geopolitics in a Near Future And Why the United States Must Care
A common question we hear is: why just Brazil, Russia, India and China? The simple reason is that we think they represent the group of countries that have both the potential to become important (largely because of their size) and a reasonable chance of meeting the criteria. The case for China and India is especially straightforward, simply on the basis of their massive populations. These two economies, along with China and India, have the potential to be among the most interesting global economic stories and investment Themes for many years to come. In addition, we now believe even more strongly that optimal economic Policymaking cannot be undertaken without including all of the BRICs countries at the highest level. Indonesia, Pakistan, Turkey and some of the Middle Eastern nations that could become quite large, though may not have true BRICs potential. Estimated projections up to 2050 to include another broad group of possible candidates, a group we call the N11.the Next Eleven. It is still found that the BRICs stand out relative to the bulk of these other candidates, in terms of the potential to be a major economic force. Mexicos favorable demographics and scope to catch up place it among the BRICs in terms of economic size by 2050. Korea, albeit somewhat smaller, is better placed than most others to realize its potential due to its growth supportive fundamentals. Nigeria and Indonesia emerge as interesting prospects, but they face serious fundamental weaknesses in the conditions that we identify as necessary. Each of the Countries in the N-11, Korea and Mexico excluded, faces its own specific dilemmas, and perhaps unlike the four BRICs, they are not close to the heart of current and likely future globalization developments. That does not mean that these other countries cannot achieve their own BRICs-like aspirations. Indeed several probably will, but the probability is lower and their potential ultimate size is smaller. For almost half a century following the aftermath of the World War II, the global hegemony was divided between two factions: One was the free world led by the United States and the British Empire the western wing of the victorious Allied Powers, while the other being the Communist Bloc spearheaded by the Soviet Union and Communist China. 1

The world order as it was known during the Cold War era, however, went through a massive amount of changes after the breakdown of the Communist Bloc and ultimately the Soviet Union that occurred between 1989 and 1991. The Russian Federation, a noncommunist reincarnation of the RSFSR within the Soviet Union, assumed the role as a major world power from its Bolshevik counterpart. For much part of the 1990s, the newly-born Russian Federation attempted to recreate its image as a legitimate member of the western world. Some of such attempts proved successful to an extent, as seen in the Russian entry in the Group of Seven (now G8), which was initially meant to be a forum of influential nations within the western world. Furthermore, many Russian politicians started pointing that while Russia seemed to pioneer a more constructive relationship with the west through its participation in the G8, the western world in reality put effort to mount a greater geopolitical pressure to Russia, as seen in the entry of former Communist Bloc nations (e.g. Poland, Czech Republic, and the Baltic States to name a few) into NATO, a military alliance that was designed as the western counterpart to the Warsaw Pact, which went defunct for nearly two decades. To counter such pressures, Russia has aligned with the Peoples Republic of China, another non-western member of the United Nations Security Council. At the same time, Russias economic dependence towards the western world with its burgeoning oil industry could be alleviated through realignment with other emerging economies across the world, as vividly seen in a recent Goldman-Sachs thesis known as BRIC (Brazil, Russia, India and the PRC). Russias pro-western initiatives practically began with Yeltsins takeover of power in 1991. Many speculated that such cooperation with the west was necessary, as Russia, formerly the largest command economy in the world, was now obliged to transform itself into a free market economy in order to survive. While the reform itself proved to be a fiasco, Yeltsin attempted to implement yet another policy that would strengthen the ties between the western world and the Russian Federation, namely the Russian membership in the G8, then known as the Group of Seven. The G7, as mentioned earlier, was initially created as an international forum between the worlds major industrial democratic politics. Henceforth, it was viewed by many amongst both western and Russian politicians that such a transition would accelerate the Russian effort to integrate itself into the western world, whereas the alliance of established western industrial powers will obtain an undisputable hegemony over the world following the collapse of the Communist Bloc. Nonetheless, the failure of Yeltsins economic policies that was largely designed by western economists forced many to reconsider whether the aftermath of such transition would

be positive for Russias future. Further, the conflict of interest between Russia and the western world with regards to many geopolitical issues surrounding the globe also played a major role in making Russian political leaders to turn skeptical of a further collaboration with the west. Another major concern was Russias political system, which many westerners view as somewhat quasi-democratic or not democratic at all. While the western world has been known for its alignment with some of the worlds most loathed dictators in necessary cases, this clearly is an obstacle for Russia and the west to engage in a respectable degree of mutual collaboration. These factors, I observe, are the main causes of the recent split between Russia and the western world as seen in the Putin years, as I will clearly show during the course of this paper. Despite proving itself to be a formidable political and economic superpower during the Soviet era, Russia was extremely prone to such drawbacks from rapid westernization, as proved in the economic disaster of that happened through the grim decade of 1990s. Another major bottleneck was a division of labor within the former Soviet Union that became null and void since the breakdown of the Bolshevik dominion in 1991. This proved to be a disaster to not only minor former Soviet Republics, but to many regions in the Russian Federation, as the rapid privatization of such assets left the collapse of the countrys vast working class populace virtually unchecked. This, in turn, resulted in the breakdown of the potential consumer market in Russias newly operated market economy, which with the ever-growing effect of hyperinflation caused by Yeltsins rather clumsy handling on price control plunged Russia into an unprecedented economic depression that plagued the Yeltsin Administration till its very end. Despite such setbacks, Russia remained as a respectable world power throughout the 1990s, perhaps owing to its vast nuclear arsenal from the Soviet era bolstered by its status as one of the five permanent members of the U.N. Security Council. Thus, there was a series of attempts to groom Russia into the prestigious Group of Seven throughout the 1990s, most notably by the United States President Bill Clinton. The Russian Federation became an official member of the G8 in 1997, which to an extent seemed to prove that Russia was now a member of an exclusive group of major western industrial powerhouses. For the western world, Russias entry into the G8 meant the expansion of the sphere of influence of the market economy. Some even speculated that the inclusion of Russia into such an exclusive group would lead to the emergence of the United States as a sole superpower across the globe, as no other member of the nation did not seem to possess any chance to eclipse the United States, which was hailed as the leader of the free world for a long period of time, in

its military and economic powers. The age of reconciliation between Russia and the western world fell short, however, for several reasons. These reasons are what I intend to present in the latter part of this essay. Russia and its leaders had intended to reassert Russias geopolitical influence in the Soviet era once domestic affairs became stabilized. Russia also had to be cautious towards the growing insurgency within its own borders following the independence of various ethnic groups after the collapse of the Soviet Union, as vividly seen in the Chechnya crisis that nearly annihilated Yeltsins image as a democratic liberator in the eyes of the western populace. The Russian Federations skeptical attitude towards the Chechen independence and a subsequent war, though condemned by the west, is somewhat understandable from Russian standpoint, as a lax reaction towards such movement may have resulted in a series of violent uprising across the country that could have transformed this minor disorder into a full-scale chaos. Conversely, the western criticism of Russias decision to wage a war against Chechnya which, from a Russian perspective, could be seen as a mere act to stabilize the already fluctuating nation made many Russians question its alignment with the west, as the western world now seemed to be a threat to Russias domestic tranquility, not a reliable partner for mutual coexistence and prosperity. The cases where the BRIC nations proved themselves the worlds emerging economies could be most clearly shown in the private sector, as the BRIC thesis itself was developed in Wall Street, not the Capitol Hill. The British Telecommunications Group, for instance, emphasizes the potential of these countries in terms of their capability to adjust themselves in technological progress to a greater degree than established nations, while showing avid interest in working with these nations as part of the companys venture. The recent outsourcing of information technology firms to India must rank high among actual cases where the BRIC nations started playing a huge role in global economy, as an incredibly large portion of private enterprises from developed nations flocked into India looking for an effective, yet more affordable manpower. Outsourcing industries, most notably in the field of information technology, is also burgeoning in Russia to a limited degree.

Chapter 2 GROWING ISSUE OF INTER DEPENDENCY

Raisin g the issue of emerging powers and growing interdependence (economic, functional and systemic) triggers a questioning of the structure of the world system. To be sure, the structure of the world is extremely complex because all actors are inextricably intertwined in multiple layers of the system. Despite this complexity, one can still identify general patterns in the global structure. To begin with, although some scholars would argue that American hegemony is built to last, there is a broad consensus about the fact that the American unipolar moment has come to an end. If one dismisses unipolarity, it seems too early nonetheless to evoke true multipolarity. Indeed, the US remains the dominant power, or the lonely superpower, and is likely to maintain its status for years and probably decades to come. The much-debated American decline is nothing absolute: the pre-crisis US economy was still growing fast (and it seems to be slowly recovering from the crisis, although a relapse is possible); the US military is more advanced than any potential competitor; and US soft power is unchallenged even in Asia. Americas decline is not an illusion, but it must be understood in relative terms. US global influence is fading because it contrasts with the rise of the rest, i.e. the empowerment of other actors at the local, regional and global level. The concept of power is relative: the power of one actor is dependent on the power of other actors. Hence, America is declining not because it is weakening but because the rest is getting stronger.

Chapter 3 THE PLAYERS

The rise of a multipolar order implies the emergence of new poles. But who are the real emerging powers? And what is an emerging power anyway? Part of the answer came from Jim ONeill, economist at Goldman Sachs, who coined the now famous BRIC acronym which became tightly associated not to say synonymous with emerging countries. Other acronyms followed: BRICS (BRIC+South Africa); BRICSAM (BRIC+South Africa+ASEAN countries+Mexico); and BIC or RIC (depending on which country is seen as the weakest link in the BRIC). And yet, these acronyms tell us only part of the story.

3.1

INDIAS RISING GROWTH POTENTIAL

On the eve of the Industrial Revolution (around 1770), India was the second-largest economy in the world, contributing more than 20% of total world output. By the 1970s, after two centuries of relative economic stagnation, that share had fallen to 3%.the lowest in its recorded history. From a long-term perspective, the post-industrial economic decline of India (and China) is a historical aberration, driven to some extent by a lack of openness. After independence in 1947, India followed inward-looking and state-interventionist policies that shackled the economy through regulations, and severely restricted trade and economic freedom. The result was decades of low growth, pejoratively termed the .Hindu rate of Growth Reforms beginning in 1991 gradually removed obstacles to economic freedom, and India has begun to play catch-up, steadily re-integrating into the global economy. Since 2003, India has been one of the fastest-growing major economies, leading to rapid increases in per capita income, demand and integration with the global economy. On the back of high productivity growth GS baseline projections for Indias potential output growth show that the economy can sustain growth rates of about 8% until 2020, significantly higher than the 5.7% that what GS projected in our original BRICs paper. The key underlying assumption is that the government will continue to implement growth-supportive policies. The implications of this are that India will overtake The G6 economies faster earlier BRICs research. Indeed, Indias GDP (in US Dollar terms) will surpass that of the US before 2050, making it the worlds second-largest economy. Indias contribution to world growth will also be high and increasing. The higher growth rate will have significant implications for Demand in India. Comparisons with other countries that have experienced similar rapid rates of growth show that India is firmly on the growth expressway. There is considerable scope for catch-up and,

even with baseline projection; the speed of Indias growth transition is not implausible when compared to the growth experiences of other East Asian countries. A turnaround in manufacturing productivity since 2003 has been crucial. The proximate cause is the increase in efficiency of private-sector firms in the face of growing competition. The gradual opening up of the economy introduced a competitive dynamic, which forced the private sector to restructure during the relative slowdown in growth and corporate profitability during 19972002. After the restructuring, the private sector emerged leaner, fitter and more productive. The underlying causes for the increase in efficiency of private firms have been trend accelerations in international trade, financial sector growth, and investments in and adoption of information and communication technology. These are also the cumulative effects of a decade of reforms. The re-allocation of land, capital and especially labor from lowproductivity agriculture to high-productivity industry and services is an essential dynamic behind sustained productivity growth. This process is being accelerated by higher returns in industry and services due to trade openness, cheaper credit, investments in IT and communications, and the building of highways. These processes are in their initial stages and have substantial distance left to run. The upside to baseline projections is significant. Thus far, the economy has logged high growth rates without significant increases in domestic or foreign direct investment. If it can accumulate significantly more capital to add to its favorable demographics and ongoing productivity gains, India could reach a growth rate of 10% by 2010 and sustain it thereafter. We show various combinations of factors that are necessary to achieve this. The downside risks to baseline growth projections come from a slowdown or reversal of reforms in part due to political or social instability, supply-side constraints to doing business that include shortfalls in educational attainment, and environmental degradation. Based on our analysis, FORCE Factors as critical to sustaining growth: Financial deepening, Openness to trade, Rural-to-urban migration, Capital deepening, Education and Environment.

What Will It Take to Reach 10% Growth?

Indias current growth rates of around 8% have been achieved without large increases in domestic capital accumulation or foreign direct investment, raising the possibility that increases in investment could boost growth further. India is well below its efficiency or productivity frontier, due to inefficiencies in production. The curve represents all optimal points of combining inputs into output, i.e., the .production possibilities frontier. Currently, India is at point

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A) Elimination of inefficiencies, or higher Productivity growth, would lead it to point. B) If it can increase its input of capital, it could Move to point. C) With higher output. Continued catch-up due to technological innovation would lead the curve to expand outwards, Thus increasing growth output. To determine the amount of investment required to reach 10% growth, we mapped out two scenarios based on different productivity growth rates: either 3% or 3.5% on average until 2020. For the labor and education input, we use the same assumptions as the baseline. Based on these assumptions, we calculated the real investment/GDP ratio required to reach and sustain 10% growth until 2020. If we assume more optimistically that productivity growth is sustained at 3.5%, the required increase in the investment/GDP ratio is of the order of 16%. Thus, India would have to boost its savings rate by roughly 16% of GDP, through a combination of domestic and foreign savings, in order to finance the investment required for a sustained 10% growth. Below, we assess whether this is feasible. If productivity growth were to decline to 3%, then 10% growth would be unsustainable. The large difference in required investment in the two scenarios is due to cumulative effects: a higher capital stock requires still higher investment to compensate for depreciation effects.

Why Productivity Growth Is Likely to Be Sustained? Reason 1: India opens up

With the onset of reforms in 1991, India began to unshackle its closed economy by gradually lowering its very high trade barriers and boosting exports. Average tariffs fell to below 15% zoom as high as 200% as the country began to re-integrate into the global economy. The impact of opening up has been significant. Exports have risen 14 times as India has rapidly gained trade share. This development has been most evident in the past three years, when trade has grown, on average, 25% a year. Indias trade/GDP ratio is still small, while average tariffs are still high by regional standards. India currently contributes less than 1% of world trade. Assuming that trade barriers continue to decline, productivity gains from further trade integration still has some distance to run.

Reason 2: The rise of the financial sector

Starting from a low base, the financial sector has grown rapidly in the past decade, and especially in the past four years, and has contributed to the jump in productivity. Credit to the private sector has grown by an average of 32% over the past two years. Increased financial intermediation improves resource allocation by effectively channeling savings into investment and raising productivity. Indias financial sector is still relatively small compared

with the size of its economy, as well as with those of its East Asian neighbors. Assuming that policies to open up the financial sector remain on track, including the entry of foreign banks starting from 2009, we expect financial deepening to continue and to contribute to increases in productivity in the medium term.

Reason 3: Back-office to the world

The success of the IT industry in India has had a material impact on productivity. Apart from the direct productivity gains of the major IT firms, it has had spillover benefits through two channels: It has provided powerful incentives for students to invest in IT skills. This has created a pool of technology-skilled labor that firms in other industries can tap into. It has had a demonstration effect on other domestic firms, leading them to ramp up their own technology spending, thereby boosting productivity. The rapid spread of mobile phones from a very low base provided a fillip to communications, further boosting productivity. Today, India is the fastest-growing market for mobile phones, with average growth rates of over 80% every year since 2000. Indias technology spending is still low and there remains substantial scope for catch-up and productivity gains.

Reason 4: The Golden Quadrilateral

The Golden Quadrilateral Highway project is the first part of Indias most ambitious infrastructure project since the building of the railway network by the British in the 19th century. In the last 50 years, the government has built just 334 miles of four-lane roads. The Golden Quadrilateral aims to build 3,625 miles of four- and six-lane highways. The highway will connect the four largest cities: Delhi in the north with Kolkata in the east, Chennai in the south and Mumbai in the west. Along the way it runs through 13 states and 17 other cities with a million or more inhabitants, and it is expected to be fully functional by 2007. The effort echoes the construction of a national highway system in the US in the 1920s and 1950s, which fuelled commerce and development. We expect the new highways to help jump-start Indias competitiveness, given that its dismal infrastructure has inhibited growth. They are expected to reduce travel times by half, lower fuel costs and freight delivery times and enable firms to leverage economies of scale. We expect the arteries to attract economic activity along the way. Already, hotels, petrol stations and shops are sprouting up along the highways. This will have implications for real estate, for location of industry and for decongestion of crowded cities. Areas close to urban centers stand to benefit most, as activity and people fan out of crowded cities along the highways.

Reason 5: The great migration

The 21st century is set to become Indias .urban century, with more people living in cities and towns than in the countryside for the first time in its history. India has 10 of the 30 fastest growing cities in the world and is witnessing rapid urbanization. The growth is happening not in large cities, but in small and mid-sized towns. In 1991, India had 23 cities with a million or more people. A decade later, it had 35. According to our projections, other 140mn rural dwellers will move to urban areas by 2020, while a massive 700mn people will have moved to urban areas by 2050. Indias current urbanization rate of 29% is still very low compared with 81% for South Korea, 67% for Malaysia and 43% for China. Rural-urban migration in India has the potential to accelerate to higher levels as, judging by the experiences of other countries, the pace of migration tends to accelerate after a critical level of 25%-30% urbanization is reached, and due to faster economic growth. Urbanization is spurred by both push and pulls factors. Deteriorating agricultural productivity, caste barriers and unemployment in villages push rural inhabitants out, while better opportunities in cities, very high growth in the construction industry and demonstration effects from other migrants pull rural workers into urban centers. The implications for productivity growth are significant. Our estimates show that movement of labor across sectors, primarily from agriculture to manufacturing and services, adds 0.9ppt to GDP growth a year. This process is likely to continue, if not accelerate, as urbanization continues. Demand for urban housing and infrastructure such as electricity, health care, sanitation and education is set to jump severalfold. Policy will, however, need to address basic infrastructure shortfalls in order to take advantage of the .urbanization bonus.

Reason 6: The land factor

The imminent shift in land from agriculture to urban use and industry constitutes another source of potential productivity gain. Land is a critical input needed to keep the development process moving, allowing for the shift of people from the rural to the urban sector. Access to land is needed for factories and housing projects, and to create tens of millions of jobs in construction in the short run, as well as longer-term employment. When land moves from low productivity agriculture to urban use and higher productivity sectors, overall productivity improves. However, India will need investments in agriculture to boost productivity, especially in rural connectivity, storage, etc., to improve the yield of remaining agricultural land. The creation of new Special Economic Zones (SEZs) has the potential to transform the Productivity of agricultural land. Ideally, India should develop economy-wide

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infrastructure and the necessary investment climate to enable the move from agriculture to industry and services. In the absence of governmental resources (or the ability) to do so, the SEZs will attract private-sector as well as foreign investment, thus helping to develop muchneeded infrastructure, generate employment and facilitate urbanization. Productivity gains for the economy tend to be a cumulative process. Higher productivity leads to more confidence and increased openness, which means more technology and investment and sustained productivity growth. The building of highways will not only lower costs for companies but also enable rural-urban migration, the development of cities and the process of moving land from agriculture to industry and services. These in turn attract more investment through agglomeration effects, and thus sustain growth.

3.2

RUSSIA: A SMOOTH POLITICAL TRANSITION

On October 1, 2007, Russias President Valdimir Putin announced that he would lead the party list of the pro-Presidential United Russia party in the upcoming parliamentary elections and said that it was entirely realistic. That he could become PM after the elections. At a stroke, he has both confounded and confirmed the consensus view of how Russian politics would evolve over the coming years. On the one hand, very few observers had anticipated that Putin might move into the PM.s seat after relinquishing the presidency next year but, on the other hand, the statement lent strong credence to the widely-held view that, regardless of where Vladimir Putin sits after the inauguration of the next President in May, he will continue to play a central role in the countrys political life We review the record of the Putin presidency, and argue that the Putin era is likely to continue for the foreseeable future, quite likely for another 5-10 years or more. Putins continued presence on the political stage would all but eliminate the risk of the kind of political disorder and policy gridlock that Russia suffered in the 1990s.and that continues to hamper reforms and macroeconomic stability in neighboring Ukraine and some other emerging market democracies.

Decentralization under Yeltsin

The lack of any perceived alternative is in large part the result of a re-centralization of power over the course of the last eight years, reversing the chaotic decentralization that had occurred during the turbulent 1990s. During his rule, President Yeltsin variously shared and fought over power with a number of other state and non-state actors, including his opponents in the federal legislation; directly-elected regional governors; a new oligarchy that controlled large parts of the bureaucracy, courts and legislature through corruption; managers of state-

owned firms who turned them into personal fiefdoms; and media chiefs who at times used the threat of negative coverage to put pressure on or even extort money from the state. By 1999, with the state bankrupt and the ailing Presidents approval rating in single digits, the Kremlin was directly controlled by a small group of business oligarchs. It was they who identified Vladimir Putin, at the time the obscure head of the Federal Security Service, as someone who would be electorally viable but who would not seek to reverse the privatization process of the 1990s. Putin appealed to the patriotic electorate but also had an understanding of the workings of the market economy. In Russian terms, the oligarchs saw Putin as a preemnik (a successor) who would ensure preemstvennost. (Continuity) rather than a reversal of Yeltsins unpopular and incomplete market reforms.

Re-centralization under Putin

After taking power in 2000 with a strong popular mandate, President Putin proved far less pliant than the oligarchs may have expected. He immediately began to reverse the political pluralism that had frustrated many of his predecessors efforts at reform and had contributed to the breakdown of central state authority. His supporters forged a majority in the previously fractious Dumas, and he has taken steps to eliminate independent deputies and small parties from the legislature. In effect, the Dumas have been transformed over time from a staunch opponent of market reforms into a body that approves all of the Presidents initiatives with minimal debate. Putin also eroded the power of regional governors, ultimately reducing them to the status of Presidential appointees. Finally, he reasserted government control over state-owned companies, either replacing the management with close allies or appointing senior administration officials to their boards.

External surpluses past their peak

The ongoing increases in oil prices have caused the current account and fiscal surpluses to expand. The current account surplus averaged over 10% of GDP between 2004 and 2006, while the budget surplus was 7.5% of GDP in 2005 and 2006. As oil price growth has slowed, rapidly rising imports and government spending have begun to catch up. Even using the Goldman Sachs Commodities teams bullish forecasts of oil price reaching $90/bbl by 2009, we expect the current account to fall to 6% of GDP this year, and possibly to go into balance by 2010-11, while we expect the budget surplus to fall to 4% of GDP in 2007 and to be essentially in balance by 2010. In 2007, for the first time in more than five years, Russia

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had a positive gross external financing requirement, meaning that its current account was not large enough to cover its maturing external debt; the GEFR is likely to rise over time as Russian companies integrate into international capital markets. The government has saved much of its fiscal windfall in an oil stabilization fund that receives most of the tax take from oil at prices above $27/bbl, a policy that has bolstered the states credit-worthiness and partly insulated the economy from high oil prices. The fund currently amounts to $141bn, even after the government used $45bn from the fund to prepay its external debt. In 2008 the government plans to split it into a reserve fund of 10% of GDP, to be held in liquid securities, and a National Welfare Fund, which will initially be used to finance domestic investment but in future might evolve into a sovereign wealth fund that invests in foreign assets. The shift of the governments external balance sheet from net debtor to net creditor has crowded in external borrowing by Russian companies and banks, which over the last two years have increased their external debt from $128bn to $343bn.

State refocuses on infrastructure

Growth over the last eight years has been investment-free, with fixed capital expenditures a mere 18% of GDP. While this is much better than in the 1990s, it is far below the investment rates of other fast-growing emerging markets. This has been possible thanks to the countrys extensive Soviet-era infrastructure and underutilized capacity. As a result, labor productivity has grown by an impressive 6.0% annually, as underemployment has disappeared. As the economy has returned to its pre-transition Magnitude in real terms (according to official statistics, Russias GDP will cross its 1990 Level this year), infrastructure bottlenecks have begun to appear in areas such as power generation and roads. There are signs that investment has begun to accelerate over the last 12 months, with capital expenditures up over 21%yoy in 2007H1. Private investment growth may suffer a brief interruption due to the recent troubles in the local credit markets. But public investment may make up some of the shortfall: after repairing its balance sheet and accumulating a substantial rainy-day fund, the government has announced ambitious plans to invest over $1trn over the next ten years in roads, rail, ports, pipelines and other infrastructure projects.

3.3

CHINA TURNS OLD BEFORE GETTING RICH

China has sustained rapid economic growth for 30 years without significant fluctuations or interruption so far. Excluding the 1989-1990 slowdowns that followed the Tiananmen crisis, average annual growth over this period was 9.45%, with a peak of 14.2% in 1994 and 2007, and a nadir of 7.6% in 1999. While most major economies in their early stages of

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growth suffered crises, Chinas story seems abnormal (or accidental), and has elicited periodic predictions of an upcoming crash. All such predictions have proved wrong, but the longer the story lasts, the more people forecast a bad end. For me, there is nothing more abnormal about Chinas unbroken pattern of growth than effective macroeconomic intervention in boom times. To be sure, both economic development and institutional reforms may cause instability. Indeed, the type of central government inherited from the old planned economy, with its over-stretched growth plans, causes fluctuations, and contributed significantly to instability in the early 1980s.But the central government must be responsible for inflation in times of overheating, lest a bursting bubble fuel unemployment. Local governments and state-owned enterprises do not necessarily have those concerns. They want high GDP growth, without worrying much about the macroeconomic consequences. They want to borrow as much as possible to finance ambitious investment projects, without worrying much about either repayment or inflation. Indeed, the main cause of overheating in the early 1990s was over-borrowing by local governments. Inflation soared to 21% in 1994 its highest level over the past 30 years and a great deal of local debt ended up as nonperforming loans, which amounted to 40% of total credits in the state banking sector in the mid-1990s. This source of vulnerability has become less important, owing to tight restrictions imposed since the 1990s on local governments borrowing capacity. Now, however, the so-called animal spirits of Chinas first generation of entrepreneurs have become another source of overheating risk. The economy has been booming income has been rising, and markets have been expanding: all this creates high potential for enterprises to grow; all want to seize new opportunities, and every investor want to get rich fast. They have been successful and, so far, have not experienced bad times. So they invest and speculate fiercely without much consideration of risk. The relatively high inflation of the early 1990s was a warning to central government policymakers about the macroeconomic risks posed by fast growth. The bubble bursts in Japans economy in the early 1990s, and the Southeast Asian economies later in the decade, provided a neighborly lesson to stop believing that bubbles never burst. Since then, the central governments policy stance has been to put brakes on the economy whenever there is a tendency toward over-heating. Stringent measures were implemented in the early 1990s to reduce the money supply and stop over-investment, thereby heading off hyperinflation. In the recent cycle, the authorities began cooling down the economy as early as 2004, when China had just emerged from the downturn caused by the SARS scare in 2003. In late 2007, when GDP growth hit 13%, the government adopted more restrictive anti-bubble policies in industries (steel, for example) and asset markets (real

14

estate), which set the stage for an early correction. Economic theory holds that all crises are caused by bubbles or over-heating, so if you can manage to prevent bubbles, you can prevent crises. The most important thing for ironing out cycles is not the stimulus policy implemented after a crash has already occurred, but to be proactive in boom times and stop bubbles in their early stages. Chinas unrivalled economic growth over the past quartercentury has surpassed all records and created a new standard in the history of economic development. With an average annual real GDP growth rate of 9.6% from 1978 to 2004, Chinas pace of growth is faster than that achieved by any East Asian economy during their fastest-growing periods. Nonetheless, demographers have warned that rapid ageing will limit Chinas future growth prospects and that the demographic tailwind will turn into a significant headwind. China has benefited from strong raw labor growth from the late 1970s until now, but the future demographic outlook suggests that the growth of the labor force will slow and ultimately decline after 2030. Two forces drive these changes: 1) Increased longevity, which is raising the number of elderly, and 2) The one-child policy, which has slowed the growth rate of young adults in the population. The implication for workforce growth is immediate and significant. When more workers reach retirement age and growth of the young adult population slows, the dependent perworker ratio will increase and the .demographic bonus Will end. Many observers are thus concerned that .China may get old before it gets rich. Ageing has been perceived almost exclusively as a problem for industrialized economies, following years of urbanization and industrialization. Fewer people have associated ageing with a developing Country where labor is often ample and the cost of child-raising inexpensive. China may be an exception. Although it is still considered a developing country by many standards, China has the fastest ageing trend among the 14 developing economies in the BRICs and the N-11.analysis suggests that by the time China becomes an aged society. In 2027, it will probably be considered a developed country, although it will still be considerably poorer than the US or Japan on a per-capita income basis. We believe the rapid build-up of human capital and the continued release of surplus labor from the agriculture sector will mitigate the negative influences on the labor supply from ageing. Despite the slowdown in labor force growth, improved labor quality is likely to help sustain .quality-adjusted labor supply. Growth Chinas economic growth has coincided with a tremendous boost in human-capital accumulation. In addition to advances in education from improved living standards, the onechild policy has led to increased human-capital investment on a per-child basis. As public and

15

private education expenditure has per person increased, the education attainment of the labor force has boomed. Smaller family Sizes have helped China to achieve great success in promoting higher education and producing college graduates. This accumulation of human capital contributed 15% of overall growth between 1979 and 2004, while labor force growth only contributed 13%. Further educational improvement should continue to support qualityadjusted labor growth. The release of rural laborers into the industrial and service sectors will also augment the available supply of labor. The ongoing gradual relaxation of the household registration (hukou) system should facilitate this.

Rich but Not Richest

Together, these results suggest that by the time China becomes old, it should be fairly developed, but still not richer than the US or Japan in terms of per-capita income. Richness is usually defined in relative terms, while economic development is both an absolute and relative concept. Generally, an economy is considered to have achieved developed status upon its accession into the OECD. An effective rule of thumb has put per-capita income of $10,000 as the threshold of developed country status. Economies above this line are fairly developed, and are often consistent in sectoral composition of output, urbanization, life expectancy, national wealth, capital stock per labor hour, education and service-sector development, etc. For China, this day may not be too far away. Our analysis shows that by the time China becomes an aged society in 2027; its per-capita GDP should have surpassed $10,000 (in 2005 terms) in all scenarios.

3.4 B. IN BRICS: UNLOCKING BRAZILS GROWTH POTENTIAL

Average labor productivity has declined since the 1980s but has recovered somewhat since the Real plan. This is in part because Brazil is inefficient at spending on education and because its labor laws are outdated. Brazil spends almost twice as much (4.1% of GDP a year) on education as China, but even so, it ranks poorly in terms of the average number of years spent in school. Trade liberalization has exerted a strong positive influence on TFP, and thus has been a key driver of growth. Although Brazil has recently reduced trade barriers and opened up the economy to trade, it remains too closed to trade when compared with other fast-growing emerging markets. In fact, the share of Brazilian exports and imports in total world trade has plunged to less than 2.0% from a peak of 4.3% in the 1950s. Since the 1990s, as macroeconomic policies have improved, Brazil has gradually reopened its economy to trade and lifted trade barriers. The large devaluations of 1999 and 2002 also helped to make

16

the BRL more competitive. Together with the boom in the global demand for raw materials, this has increased the degree of openness, with the sum of exports and imports reaching 24.2% of GDP in 2006 from 11.1% in 1990. In all, we believe it is unrealistic to expect that Brazil will once again grow as quickly as it did during its miracle years or at the same rate as the Asian economies. This is simply because this phase of rapid growth propelled by a high level of investment, rapid population growth and easy jumps in growth rates resulting from the elimination of stifling economic distortions. Is over it is reasonable to expect Brazil to grow once again at its secular growth rate of about 5.0%. To this end, the government will have to implement policies that would raise savings and investment, by improving the quality of fiscal policy, and increase the contributions to growth from TFP, through better education, trade openness, investment in technology and institutional reforms. Fiscal policy is a key reason why investment, savings and growth have declined in Brazil. This is because the government has built an onerous welfare state, which has led to ballooning total spending, an increased tax burden and public indebtedness. Fiscal largesse and its associated inefficiencies have crowded out the private sector, ultimately stifling growth. Over the past seven years, Brazil has tightened fiscal policy to rein in inflation and reduce the stock of public debt. Since 1999, the government has raised the primary surplus of the consolidated public sector to a peak of 5.0% of GDP in 2005, though it reduced the target to 4.25% in 2006. The adjustment has reduced the nominal fiscal deficit to 3.5% of GDP, from Almost 7% in 2003, and reduced the stock of net public-sector debt to 49.5% of GDP in 2006 from a peak of 65.5% in 2002. Although Brazil has tightened fiscal policy and improved its debt dynamics, fiscal policy Have two big problems. The primary fiscal surplus is not high enough to reduce the debt ratio more quickly. The fiscal adjustment has been achieved solely by raising taxes, while real primary public spending continues to grow at double-digit rates. Rather than attacking the roots of the structural fiscal problems, the fiscal adjustment has only mitigated their effects on macroeconomic stability and debt dynamics. The main casualty of this approach has been growth. The structural fiscal problem has five main causes: the generous welfare state, which in aggregate is in deficit to the tune of 4.5% of GDP; the system of revenue earmarking, which makes fiscal policy highly pro-cyclical and resistant to spending cuts; the loss of the (regressive) tool of using high inflation to balance the budget; ongoing growth in the civil service, resulting in federal wage costs averaging 5.1% of GDP in 20012006; and higher current spending to combat poverty, with social assistance spending currently rising by 20% per year in real terms. In all, since 1990, primary government spending has increased by almost 11 percentage points of GDP, raising total nominal and

17

primary government spending to 42% of GDP and 34% of GDP, respectively. In order to finance such high levels of spending, during the same period, the government raised the tax burden by roughly the same amount, to 38% of GDP in 2006 higher than in the US and close behind France and Italy. As a result, the tax system is complex and highly distortionary it has crowded out the private sector; and it increases informality by encouraging firms and labor to move underground. Informality reduces TFP, because it influences a firms decisions about size and markets, precluding them from fully benefiting from returns to scale. In order to finance higher current spending, the government has also cut public investments, reducing the effective ratio of public investment to 0.5% of GDP from 1.0% since 2002. This has accelerated the depreciation of infrastructure, which has also weighed on TFP. The fiscal imbalances also help to explain why real interest rates are so high: (1) The stock of public debt is large relative to a small stock of private financial wealth (2) The markets demand a high risk premium because of contractual uncertainty; and (3) Heavy taxation and high reserve requirements on sight and time deposits discourage financial intermediation. Expansionary fiscal and wage policies have increased the risk that the central bank may not meet its inflation target of 4.5%, preventing it from cutting real interest rates faster. Moreover, high real interest rates have attracted large capital inflows, forcing the central bank to continue to buy international reserves to avoid a further appreciation of the BRL. While campaigning for his second term, which begins in January 2007, Brazils President Lula da Silva promised to implement economic policies that would boost GDP growth rates to 5.0%. This growth target sounds ambitious given that, since we published our first BRICs studies in 2003, Brazil has grown only at a disappointing 2.7% a year on average, compared with the 3.7% that we had estimated its long-term growth potential to be. Brazil has underperformed not only relative to our expectations but also compared with all the other BRICs. Brazils growth potential, at least in terms of what we have envisaged in our BRICs studies. The main reason for Brazils underperformance is that, until now, the government had been in the process of implementing a stabilization programmed, with a view to achieving macroeconomic stability. This is a key precondition for growth. Thanks to these adjustment efforts, macroeconomic conditions are more favorable now than they have been for decades. The large balance of payments surpluses have been used to prepay external debt and accumulate reserves, while a credible central bank (BACEN) has reduced inflation to 3.0% in 2006. Brazil saves and invests too little. To address this issue, the government will have to deepen and improve the quality of the fiscal adjustment. The economy should be opened to trade. The government must improve the overall quality of education. The

18

government should implement structural reforms to improve institutions, with a view to increasing total factor productivity. The Lula II administration and Congress will be ambitious enough to implement this politically difficult agenda. Therefore, while Brazil has the potential to grow at or above 5.0%, this is unlikely to happen during the next four years. Nevertheless, Brazil will remain a valuable out of the money option on growth. In the meantime, it will be an important destination for fixed income and equity inflows, given the high carry trade, the embedded growth option for equities and the reassurance of stable macro policies and sound external credit fundamentals.

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Chapter 4 CAPITAL MARKETS IN BRAZIL

4.1 REACTION OF BRAZILIAN STOCK MARKETS TO POSITIVE AND NEGATIVE SHOCKS. Introduction
Many empirical attempts to consistently encounter the efficient markets hypothesis in different markets have failed. The implications of new information on financial assets are often exaggerated and therefore time for adjustment is required to equate the price levels with the mean rate of returns. However an alternative version to the EMH has been pointed out to be more realistic and capable of explaining some apparent anomalies without actually violating efficiency. Making use of event study the examination traces the effects of passage of time on stock returns following favorable and unfavorable news. The benchmark adopted for generating abnormal returns for Brazilian stock exchange is the down Jones stock index which is associated to the New York stock exchange the returns of the Brazilian market index is then regressed on the returns of the Dow Jones index to generate events. The Brazilian stock market is virtually represented by a single stock exchange i.e. Sao Paulo stock exchange which was founded in the year august 23,1890.up to the mid sixties Bovespa and other Brazilian exchange

The Brazilian Stock Market

The Brazilian stock market is virtually represented by a single stock exchange Bovespa (Sao Paulo Stock Exchange) which was founded on August 23, 1890. Up to the mid sixties, Bovespa and other Brazilian exchanges were official entities linked to finance departments of state governments, and brokers were appointed by the public sector. After the enactment of the Securities Act in 1965, the Brazilian financial system and capital market underwent a series of reforms, which provided the institutional character the Brazilian stock exchanges still have today The Brazilian stock exchanges became non-profit self regulating institutions, with administrative and financial autonomy. Brokerage firms replaced the traditional individual government securities brokers, and firms were established as joint stock companies or private limited liability companies. Located in the City of Sao Paulo, Bovespa is a selfregulating entity operating under the supervision of CVM Comissao de Valores Mobilizations, the Brazilian equivalent to the SEC - Securities and Exchange Commission in

the US. In 1972, Bovespa implemented automated trading sessions with information displayed online and in real-time via a computer terminal network and in the late 70s, Bovespa introduced the options market in Brazil. By using electronic technology', Bovespa has expanded the potential information processing volume and has consolidated its position as the most important trading center in the Latin American market. The Bovespa Index (Bovespa) is the oldest and most traditional indicator of the average stock-price behavior in Brazil. In terms of liquidity, the stocks that integrate Bovespa theoretical portfolio represent more than 80% of the number of trades and the financial value registered on Bovespa cash market and in terms of market cap. Firms with stocks included in the Bovespa are responsible, in average, for approximately 70% of the sum of all Bovespa firms cap. To ensure the representativeness of Bovespa indexes over time the stock exchanges indexes portfolios are recalculated at the end of each four months. At the rebalancing, the changes in the relative participation of each stock in the index are identified, as well as their maintenance or exclusion, and possible inclusions of new papers are defined. Thus, Bovespa theoretical portfolio is valid for four months, for the periods of January to April, May to August and September to December.

4.2 THE ROLE OF INSTITUTIONAL INVESTORS AS A PROVIDERS OF LONG TERM FINANCING IN BRAZIL Introduction
This paper analyzes the role of institutional investors as suppliers of long-term capital resources in the Brazilian capital market. For firms in general, corporate finance theories sustain that fixed assets should be financed by long-term liabilities and equity. The search for long-term resources in the capital markets leads to icy and long-term debt security issues. In order to achieve liquidity and equilibrium in the market for long-term capital, it is necessary that the supply of these securities match a demand specialized on these types of financial assets, which is exerted by long-term investors. On this field, institutional investors, grouped as investment mutual funds, pension funds, insurance companies, capitalization firms, and open social security funds stand out. Institutional investors develop and program their ink element policies with longer time horizons than individual investors and, in general, they employ a buy-and-hold strategy i.e, they purchase an asset and maintain it in the portfolio for a long period. Hence, they are capable of making feasible large projects that are necessary for the survival and growth of large corporations and that would not be attractive for short-term investors. Considering that since the 1980s the Brazilian state lost its capacity to invest in

2 11

large-scale projects as it had done in the past the long-term capital resources supplied by institutional investors have acquired strategic importance to the country's economic development. There is, of course, the extremely important role played by the National Bank for Economic And Social Development (BNDES), as provider of long-term capital rescue Brazilian-based firms, but BNDES financing is mostly focused on I loans and its capacity of granting resources is certainly insufficient for the economy as a whole. One of the most serious obstacles hampering institutional investor contributing more effectively to the longterm capitalization of Brazilian the market for government bonds. In the economic literature, the term crowed out represents the economic externality where government debt securities with equity and debt corporate securities issued by the private sector governments with the dual purpose of refinancing its debt and controlling - sets high interest rates, so that investors become keener on buying low government bonds rather than relatively more risky private corporate bands. This, of course, dampens the development of the private capital gain Another factor that has affected negatively the Brazilian pension-fund is political interference, which derives from the fact that state-owned maintain some of the country's largest pension funds. During these terms, political in was used either to influence the outcome of certain dramatization auctions raise illegal financial resources for the government's political party as published on the Brazilian press and the academic literatures. The international literature reveals that the participation of institution investors in the accumulation of domestic savings across countries has extraordinarily during the last decades. Besides, these investors have crucial role in the development of the capital markets, both on developed emerging countries. Brazil, despite the problems pointed out above, is not different in this respect.

The role of institutional investors in Brazilian economy

The growth of institutional Investors in the Brazilian Economy the growth of Importance of Institutional investors the Brazilian economy is significant - In particular, the real asset growth of pension funds during the last ten years overcomes economic growth in real terms. The total of rs 270 billion in investment assets of funds, as of July 2005, there is only Rs.52 billion directly invested in financial assets representing equity or debt of Brazilian firms. Considering the regulatory limits for fixed income and variable income portfolios previously mentioned, we can see that the investments of pension funds both in corporate bonds and stocks are still very modest. With respect to investment funds, one can see that their growth in Brazil over the last ten years, when measured by their net worth, was well

above that of the pension funds and very superior to the average real growth of the Brazilian economy as a whole, with an accumulated real growth rate of 152% from December 1996 to July 2005, corresponding to an annual real average rate of 11.5 the major part of the investment funds portfolios has been invested over the last years in fixed income, whereas investments in the stock market have remained around 7%.We can also verify here the preponderance of fixed income and public bonds Assets. Actually the investment of these institutions in public bonds is much larger then what it seems since inside the fixed income portfolio there is a large amount of investment fund share backed on public bonds.

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4.3 CAPITAL MARKETS FOR SMEs IN BRAZIL

Between 2004 and 2006, Brazil experienced a significant expansion of Initial Public Offerings (IPO) on the Brazilian Stock Exchange (Bovespa). The 40 new entrants raised approximately US$10 billion. While this came somewhat as a surprise after years of a shallow IPO market, it has also marked the existence of a new breed of financial intermediaries in Brazil, the Private Equity and Venture Capital (PE/VE) firms.PE/VC firms are financial intermediaries that perform investments eat in equity or quasi-equity instruments of unlisted companies and projects. It has been used around the world to finance privatization of government-owned firms, infrastructure development buyouts, and specially the creation and expansion of high-growth Small and Medium-sized Enterprises (SMEs).Different from most sources of financing, PE/VC firms provide more than money after a careful screening process; they usually require a seat on the board of directors of the companies in which they inset during the long-term relationship PE/VC managers provide portfolio companies with strategic advice and access to their valuable business network. Due to the rigor of the PE/VC investment and monitoring. Process, which includes detailed due diligence and the adoption of serious corporate governance, PE/VC recipients have a stamp of approval that reduce the risks vis-a-vis their suppliers, customers. External finance providers and employees. After a maturation period, PE/VC firms seek to exit their investments by selling shares to strategic buyers, external investors or even to existing shareholders, in order to obtain significant capital gains. Sometimes, exits take place in the stock exchange, indicating that the invested company has successfully graduated to the stage of receiving investment from a great number of institutional investors and individuals. IPOs on Bovespa between 2004 and 2006. It reveals that 19 lPOs were made by companies that received PE/ VC financing, representing US$4.59 billion in new funds raised, or close to half the total amount raised in that period. In 2004, PF/VC-backed companies represented 76.7% of total.

Turning SME into Publicly Listed companies

There are two companies - Odontoprev and totus - that provide some Insights into how a small and a medium size enterprise become larger to the point of posing the stock markets after receiving a few rounds of PE/VC Investment. These cases illustrate the positive Impact of PE/VC Investment in Brazilian SMEs to face difficulty in raising capital to undertake ambitious growth plans. Furthermore they show how the external finance provider can help the SME circumvent the initial skepticism of new clients about their ability to provide high quality and reliable services, especially those that are most critical to financial Institutions.

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Concluding Remarks
In the end of the 1940s, a new type of financial intermediation emerged in the US named private and venture capital. It has quickly become an important segment of capital markets in that country responsible for successful investment cases in entrepreneurial ventures and undervalued corporations that because leading companies. From 1970 to the beginning of the l990s, the world has witnessed a silent globalization of PE/VC International management firms started to investments emerging markets. Local executives with financial expertise and managed experience opened their own independent PE/VC firms. Investment banks with the legal environment is Inefficient, making It difficult to enforce business and Investment agreements, and foreign competitors with strong brand names represent a real and constant threat. At the same time these successful Investment cases reveal the existence of wellmanaged Brazilian SMEs with good products and seduces that-are both credit constrained and apt to receive PE/VC Investment. The lack of governmental investment in fundamental sectors (e g , health) represent opportunities for the private sector, and fragmented markets makes it possible for SMEs to grow following acquisition strategies These companies have shown that It is possible to succeed in a challenging environment and transform small and medium-sized businesses into leading corporations In turn, the PE/VC firms that Invested in them have proved the catalytic role of PE/VC. It also shows that privatization of formerly state-owned Industrial companies and public service providers contributed to the formation of the layout segment and to the entry of PE/VC firms of bigger size and scope. finally the reopening of the market for IPOs is now facilitating exists which attracts new entrants and promote the restart of a new and prosperous investment cycle In addition to the changes in the macro environment, the actions taken by governmental bodies legislators, Most of these actions took place during the downturn of 2001-2003, thus contributing to the survival and the sustainable development of this Industry. Given the continuous Improvement in the regulatory and legal aspects, the emergence of PE/VC success cases, the consistent market for IPOs, the lowering interest rates, It is expected that PE/VC will grow In this country to become an integral part of its capital markets, granting financing to Innovative SMEs and to non-listed companies In sectors of high-growth expectations with the prospect of long-term economic development in the BRICs the PE/VC Industry is well-positioned to allocate resources within the economy for the ever-greater number of companies that are not yet ready to access the stock markets or traditional sources of debt Acknowledgement.

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4.4 BRAZILS HEDGE FUNDS: A BREAK THROUGH Brazilian hedge funds

In October 2005 Latin America hosted two hedge funds conferences simultaneously within a gap of one week 1st in Miami and then in Geneva .Both events attracted the best American hedge funds managers to converse about the prospects of investing in the region. It was not strange in handling two events that discussing the US hedge fund industry just seven days apart downturn of 2001-2003, thus contributing to the survival and the sustainable development of this Industry in Brazil Now, other countries In Latin America are Implementing PE/VC development programs similar to those implements in Brazil Given the continuous Improvement in the regulatory and legal aspects, the emergence of PE/VC success cases, the consistent market for IPOs, the lowering interest rates, It is expected that PE/VC will grow In this country to become an integral part of its capital markets, granting financing to Innovative SMEs and to non-listed companies In sectors of high-growth expectations with the prospect of long-term economic development in the BRICs the PE/VC Industry is well-positioned to allocate resources within the economy for the ever-greater number of companies that are not yet ready to access the stock markets or traditional sources of debt Acknowledgement but this is the first time for Latin to reflect a growing interest in the hedge fund sector. Miami and Geneva are better homes for potential investors; so the events were held there, as the Latin 'hedge funds were focusing on the foreign investors. Looking for better yield Brazil remains remain focus for such investors, as the Latin

American economy'' accounts for the majority of that region's hedge funds. As per the given data of Eureka hedge, there are 109 Brazilian domiciled funds (that can only invest Inc Brazil's securities) of which 97 are based offshore. The funds in Latin funds posted healthy performances. Average annualized return for onshore funds posted 26.44% and for offshore vehicles, it is 17.78%. In total 75% of $23.7 ban of these funds is invested in offshore vehicles Compared to onshore funds, the offshore funds face fewer regulations Offshore: funds are normally dollar denominated while the onshore funds are open to all foreign and local investors, which could expose foreign investors to risks such as.- Interest rate and currency risks. Both funds have been emerging from the past, three years, but the huge development has been seen in the offshore funds, where in more than $8 ban was raised in 2005, which is $600 man higher than the previous year. The US and European private banks, high-net-worth individuals and fund of, funds investors, which have been sniffing around sago Paulo and Rio de Janeiro seeking investment opportunities, have approached most of the Brazilian hedge' funds. Funds were invested in Asia and Latin America through global emerging markets, as investors did not have exposure to local Latin America. Earlier, there were not even two international investors in the Latin American market; but now there are five to ten international visits per month. Even hedge funds are reassessing their approaches that are more reliant on local clients. Renate Abu ham, a hedge fund manager claims that their biggest challenge is not to build a global client base. They are waiting for investors from London, Geneva and the US, wherein they have already received visits in Sao Paulo' from foreign investors. This is never contacted before Fama Invrstimentos, in Feb. so far the funds has $10 mn assets under management although the goal is to raise $200mn with the road show to be held by the fund managers in Miami, London, New York.

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Structural Changes
For long/short equity funds, even structural changes are giving a boost. Hedge fund managers could short individual stocks more easily than before-with the developments in corporate governance and liquidity. There would be more shorting opportunities in die market there is greater transparent Increasing the number of stock listed the companies are looking more readily at the equity markets to raise cash In the last two year, there were 24 initial and secondary offerings in Bowama (so Paulo stock exchange). however there would be more opportunity to profit from shorting, as there is lets correlation between individual stocks and the overall index an investor could make money on both the long and short sides, as he could find stocks that considerably underperform or fall in value. Now the industry has evolved and the fund managers are analyzing specific company risks. This evolution has allowed young and sophisticated to succeed now; hedge funds are borrowing stock from pension funds and have $3 ban of shorts outstanding that could be an important source of income for hedge funds. One more advantage for the Brazilian short sellers is that there is no uplink rule as in the US. The process to short shares is relent on the fund manager actively looking for shares and organizing the operational aspects of renewing contracts and assuring accessibility to avoid a squeeze.

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Conclusion
Fund managers have to adopt considerable resources and time to manage the procedure and build relationship with different brokers. Another general Issue Is many investment managers do not leverage their funds but try to have a hedged position with the risk associated in the country with the economy on track and with regulations and infrastructure improving communally the potential is great compared to the other emerging economies the derivative volumes are relatively high in brazil the industry's growth could be rapid if the local pension funds learn to trust their hedge funds more and breaks free from their conservative market

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Chapter 5 CAPITAL MARKET IN RUSSIA

5.1 CORPORATE BOND MARKET Introduction and summary
The Russia financial market of 1999-2006 is one of the most dynamic markets In the world It produces high risks and is one of the most liquid of emerging markets, yet It offers Investors the full package of traditional financial Instruments and techniques on electronic basis According to estimates over 30% of Investors In domestic market are non-resident (in 2003-2004 all restrictions for their entrance into the market were cancelled) He modern infrastructure of the Russian financial market was created m the 1990s There was formed an electric market model combining advantages of universal banking and benefits of specialization of securities companies Over 1300 commercial bank about 700 brokerages, over 1200 Insurance companies, several hundred investment and pension funds make its institutional basis. The system of financial market regulation is formed in analogy with developed markets models. It is focused on protection of Investors and maintenance of Information transparency in 1994 was created an Independent securities commission, aims to reduce information barriers concerning entrance into the Russian corporate bond market, In Russia, first of all such as an ownership structure and investors preferences, showed the scope of development of the rouble bond market In 1999-2005, Including its physical growth (number of Issuers and traded Issues, value of initial offerings and outstanding debt, turnover indicators and strengthening of its qualitative characteristics diversification of product lanes, Improvement of term structure, risk and yield profiles, sophistication of market's industrial structure)

1. Debt Preferences of Investors

Structure of investors demand also drives the capital market to debt model the commercial banks (by nature are focused on debt investments) generate over 95% of financial assets in Russia. Institutional investors are unable to create significant demand for shares. Households prefer either hard currency in cash holdings or simple debt products bank deposits or debt securities) as means of savings. The reasons are social and culturaladherence of retail investors to lower risks, than in the countries with Anglo Saxon culture (wide-spread risk aversion); extremely sizeable expectations of Russians concerning the

proper depth of social protectionism social market'' economy in its excessive manifestations); absence of any market experience for three generations economic - massive losses of households as concerns their investments in stocks in the 1990 financial pyramids of 19931996, negative influence of voucher dramatization on welfare of households, crises in the securities markets of (1997-1998) ultra high volatility of the Russian stock market as one of the 6-8 most risky emerging markets in the world; low level of dividends in Russia due to absence of interest of controlling owners to pay dividends; wide-spread practice of under declaration of profits as a tax and dividend base; insignificance of shares as assets of minority shareholders, lack of influence on decisions are made by stakeholders and managers.

2. Corporate Bonds: Current Situation and Development 2.1 Volumes of Corporate Bond Market 2.1.1 Initial Offerings and Repayments of Corporate Bonds From start of Russian corporate debt market
In 1999, and up to the end of the 3rd quarter of 2005, 233 non-financial issuers of various industries placed 381 issues of corporate bonds, for total face value of about 15.7 billion USD During this period. Financial institutes including banks non banking credit organizations and their subsidiaries placed 122 issues for the face value of 3.83 billion USD Data analysis shows that corporate bond market is dynamically growing. Thus it developed mostly in 20022004 when 95 96 and 91 issues were placed.

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2.1.2 Market Capacity and Number of Traded Issue:

Dynamical growth of number and volumes of issues with excess of number and volume's of placed Issues over those of redeemed issues in most quarters of the period under analysis caused of such important Indicators of corporate bond market as its capacity (total face-value of traded bonds and number of traded Issues large increase in volumes of initial bond offerings by non-financial organization determined the meaningful acreage in market capacity m 2004-2005: the cumulative gain made 4.02 and 4.09 billion USD during 2004 and 9 months of 2005 accordingly or 81% and 45% of the value of this indicator as of the end of the previous period In the sector of non financial Issues, these parameters made 3 25 and 3 12 balloon USD or 85% and 44% accordingly similar to the above mentioned trend the number of traded Issues was characterized by essential Increase achieved basically due to Increase in numbers of Issues placed by non financial organizations which made 77% of total traded issues by 10/01/2005.

2.2 Structure of Corporate Bond Market 2.2.1 Maturity Structure of Market

As Issues of corporate bonds are traditionally considered as an instrument used for financing of long-term Investment projects aimed at modernization of equipment. development of technologies, mergers and acquisitions and other capital intensive growth strategies, the question of bond maturity is crucial A large part of Issues registered in 2000-2005 contained options for pre-scheduled early buy-back, structured as a contractually binding commitment of the Issuer to make an offer to buy back the bond from the current holder at pre-set time points through the life of the bond at prearranged prices (Bermudan-style putt able bond). Accordingly when analyzing risks Involved in the purchase of such security an Investor could consider it as a bond with maturity equal to the first date on which the attaching option can be executed From the Issuers point of view, however, the actual maturity of these bonds was longer. The buyback did not signify the final redemption of the bond, but merely a temporary transfer from the market to the asset side of the Issuers balance sheet, that would shortly be followed by the re-sale.

2.2.2 Structure of Corporate Bond Market by Volumes of Issues

The size of individual bond issues is an important subject to analyze because it highlights a comparative advantage of bonds over bank. Credits in that the size of an individual bond issue tends to exceed the size of a typical bank credit. The share of small

issues (with value below 10 million USD, referred to as non-market as it is impossible to create a liquid secondary market in them) significantly decreased from 50.00% of total number of issues in 2000 to 14.29% in 2004 and 9.09% as of 3 quarters of 2005. In terms of volumes of registered issues, dynamics of share of small loans was less clear cut: in general it did not exceed 16%, as of 9 months of 2005 it made 10.7%, however in 2001-2002 it was rather high - 13.5 and 15.6%, accordingly. In 2003-2005 the role of large issues (over 1000 million roubles or 35.5 Million USD) in the total value of registered issues increased greatly in comparison with 2002. So, in the sector of issues by financial organizations their share increased to 89.20% in comparison with 28.21% in 2002, by non-financial organizations 83.43% in 2004 and 70.86% .in 2005 in comparison with 45.56% in 2002, and across the entire market' to 80.23% in 2004 and 78.81% In 2005 in comparison with 41.24% in 2002. Thus, such a substantial increase in the share of large issues took place die to increase in their volumes from 730 million USD in 2002 to 4 762 million USD as of 9 months of 2005, coupled with stable value of average issues (within the limits of 764-1216 million USD during the period under analysis). Mirroring the direction of trend for illiquid loans reduction, the share of small Issues in the total number decreased from 55% in 2002 to 9.09% in the first 9 months of 2005.

2.2.3 Industrial Structure of Corporate Bond Market

The industrial structure of corporate bond issues underwent certain changes in 1999 - 9 months of 2005 In 1999-2000, the market was focused on key industries, but their share was decreasing (in 1999 the share of issues by oil and gas refinery companies accounted for 67.09% of the total amount, energy - 23.78%; in .2000 energy - 39%, oil and gas industry 19.85%, 16.81% was attributable to machinery construction, and in 2001 oil and gas refinery made up 45%). The additional trend of the period that showed corporate bond market development was the diversification of industrial structure of issuers and growth of the share of issues attributable to light industry trade, agro-industrial sector companies, both in terms of number and value of registered issues. This is proved by the growth rate of shares of other industries'' in terms of volumes of registered issues. The characteristic of 2003 was a sharp change in ratio of volumes of issues by financial vice versa non-financial organizations. While in 2000-2001, the ratio remained at the level of 1:2, in 2002, it reached 1:3, and in 2003, the ratio made 1:7:5 whereas in 2004, this ratio returned to more suitable base of 1:3,

3 15

and according to the results of 9 months of 2005, it fell to its minimum value for the period under analysis In comparison with indicators of 2000-2002, the share of mining companies decreased substantially. In 2003-2005: only 2 such issues were registered, and the volume of issues did not exceed 4% of the total volumes of the registered issues by non-financials, whereas in the recent years the share of issued attributable to this industry in the total amount of the funds ranged from 10.5% to 13.5%. In practically full absence of bond issuers from machinery construction in 1999-2000, this industry took stable positions in 2001-2005. The share of these issues in number of registered issues by non-financial accounts to about 1012%, and their share in value of registered issues is approximately 6.24% to 9.36%. Issuing activities of machine-building industry reached its maximum in 2005 when these issues amounted to 20.83% of the total number and 21.64% of total value of the registered bond issues by non-financial organizations.

36

Forecast of Corporate Bond Market in Russia Long-term Factors

The forecast of the dynamics of Russian corporate bond market and financial engineering developments in our opinion could be built taking into account the followed The debt model of capital market in Russia (not stock based or market-based financial system) a major role of the foreign investors in creating demand for the Russian securities; a conservative nature of retail investors inside country Financial intermediaries, and sometimes issuers are very innovative and pro-Western; corporate bond market development is accompanied by the trend implying expansion in number of financial engineering products based on derivatives and modern financial technologies The main focus in financial innovations will be not minimization of volatile since 1990-s); the bonds will be mostly engineered to mitigate microeconomic risks of

specific industries and issuers.

Dynamics of Corporate Bond Market

Considering the scope of development of this financial market segment in 1999-2005 and assuming that high prices for Russian exported goods and macroeconomic stability will remain in the mid-term. It is possible to predict the further growth in the number of issues with accompanying growth of market value and liquidity of the corporate bonds. Considering gradual development of domestic financial market, weakening of corporate conflicts and risks together with pertaining simplicity of the structure of mid-term securitized debt (predominately bonds with maturities of 2-3 years), it is possible to predict qualitative changes in structure of issuers including marker entrance of affiliates of foreign non-financial companies, as well as of insurance companies (not present in the market as issuers) and increase in the share of the businesses not related to telecommunication, power and mining industries, for example ones with roots in light, chemical and food-processing industries. Thus, the industrial structure of issuers will be significantly determined by. structural changes in the Russian economy Financial engineering will be fully applied to design risky bonds of Russian mid caps that can be deemed promising, for example for young and dynamically developing holding structures to finance further developments and business consolidations and to provide their gradual entrance to the capital market with diversified lines of financial products (commercial paper, corporate bonds, IPO).

Conclusion
During the years of development, the Russian corporate bond market proved itself as highly profitable, moderately risky and very dynamic. Financial engineering offers very different classes of Russian bonds establishing many ways and opportunities to take into account special interests and tastes of investors. Market expansion due to entrance of new

38

issuers, diversification of their industrial structure followed by active development of debt instruments of already known borrowers, on the one hand, strengthening of securities regulator in Russia in its attempts to establish necessary legal infrastructure adequate to the level of the market development and to provide an efficient supervision on the other hand, alongside with influence of fundamental factors predetermining the debt dominant of the Russian capital market, allow positive forecast regarding investment opportunities and adventurous activities of foreigners inside the Russian corporate bonds universe.

Chapter 6 CAPITAL MARKETS IN INDIA

6.1 INDIAN CAPITAL MARKETS UNLOCKING THE DOORS OF FUTURE GROWTH
Capital Markets Development Supported by Steady Infrastructure Reforms India's financial market began its transformation path in the early 1990s. The banking sector witnessed sweeping changes, including the elimination of interest rate controls reductions in reserve and liquidity requirements and an overhaul in priority sector lending. Persistent effort by the Reserve Bank of India (RBI) to put in place effective supervision and prudential norms since then have lifted the country closer to global standards. Around the same times India's capital markets also began to stage extensive changes. The Securities and Exchange Board of India (SEBI) was established in 1992 with a mandate to protect investors. India's financial markets also began to embrace technology Competition in the markets increased with the establishment of the National Stock Exchange (NSE) in 1994, leading to a significant rise in the volume of transactions and to the emergence of new important instruments in financial intermediation.

AND THE STORY CONTINUES TILL SENSEX REACHES 21078 ON 8TH JAN 2008

Innovations have strengthened Market infrastructure

Market infrastructure has strengthened markedly heralded by steady reforms. The government bond and equity marked have moved to T+1 and T+2 robbing settlement cycle in recent years which significantly compressed the transfer of cash and securities to the relevant counterparties, thereby reducing settlement risks. Tip seamless move toward shorter settlement periods has been enabled by a number of innovations the introduction of electronic transfer of securities brought down settlement costs markedly and ushered in greater transparency while dematerializations instituted a paper-free securities market Together, these mechanism eliminated forgery of square certificates. Straight-through processing automated the complete workflow (i.e., front, middle and back office and general ledger involved in the financial transaction thus doing away with multiple data reentry and avoiding delay and error. On the initiative of 'the Reserve Bank of India and the cooperation of public and private institutions the Clearing corporation of India limited CCIL was established in 2001 to facilitate the clearing of trades and transactions in the foreign exchange and fixed income markets, catalyzed by the extensive use of information technology. 39

Good Corporate Governance, but Overall Legal Framework Needs Improvement.

Continuing efforts by the SEBI to upgrade the corporate governance framework have positioned India at an above-average level against other emerging market economies, according to the Institute of International Finance (IIF), the global association of financial institutions. Since March 2006, listed companies have been required to submit quarterly compliance reports to the SEBI, facilitating the valuation of companies and bringing it in line with the Sarbanes-Oxley Act. Not with standing, enforcement remains a challenge due to a still limited number of adequately trained staff to implement the rules. Nor are companies

subject to substantial fines or legal sanctions, which reduce their incentives to comply. In turn this reflects the ongoing gaps in Indias legal system and somewhat undermines the steps to promise Indias capital markets further.

6.2 DEBT MARKET SHAPED BY PUBLIC SECTOR

Indias debt markets are divided into two segments. The government bond segment is the larger and more active of the two, with issuers comprising the central government accounting for 90% of the total and state governments. The Reserve Bank of India (RBl) has maintained its role as the government's debt manager and regulator of government-issued papers. The corporate bond market represents the other segments with Public Sector Undertakings (PSU), corporate, financial institutions and bank being the primary players. PSU bonds by far outweigh the size of private corporate bonds reflecting a number of factors, foremost of which are the lists of regulatory requirements for private issues. Regulatory oversight of the segment falls under the purview of the Securities and Exchange Board of India (SEBI). Each issuer has a range of instruments available in the market since institutional investors, especially banks, have remained the primary participants in fixed income securities; Indian bond markets have predominantly been wholesale.

40

Higher Volatility Improving Performance

41

Benchmarking the risk/return characteristics of India's equity markets against the world average shows that Indias stock market has historically been more volatile while its returns have, until recently, underperformed. This should not come as a surprise as the past decade witnessed several political and economic uncertainties, undermining business and investor confidence. Only from 2006 has Indian stock market begun to outperform the world's index as momentum to liberalism the economy gathered pace and investors began to take notice reflecting the recent sharp run-up in equity prices, Indias stock markets today tank among the most expensive in the world raising concerns over a correction, especially if earnings disappoint. However Sustained economic growth combined with continued marketfriendly capital market reforms should prove to be supportive factors for superior returns in the medium run. In terms of sect oral composition in benchmark indices, India's stock market is broad-based, putting it roughly in line with the world index The higher weight of the IT sector today reflects the countrys increasing turn toward a knowledge based economy But this may changed with consumer discretionary and Incomes and as household preferences become more discerning The shares of- financials and healthcare sectors are also expected to Increase markedly as Industry consolidation picks up and the door to foreign direct Investment is widened.

6.3 FOREIGN INVESTORS SEIZE LOCAL MARKET OPPURTUNITIES Reflecting Indias Improving macroeconomic fundamentally Increasing corporate

42 43

profitability and competitiveness, and greater Integration with the world economy Foreign Institutional investors' (Flls) participation grew steadily over the past 3 years True, FIl Invest In local bonds and equate but their interest has largely been on the latter The Inflow of portfolio capital continues to rest new highs and in recent years has outpaced the Inflow of Foreign direct investment (FDI) India's accounting standards, although stall not in full convergence with International practices, combined with the quarterly reporting frequency mandated by the SEBI on listed companies offer guidance in corporate valuation Greater inflows are stall to be expected, arising from international investors quest for higher returns and Improved portfolio diversification, buttressed the ongoing structural changes in Indias economy and its financial markets sustained Inflow of capital will not only bring greater liquidity in the market, the foreign presence will encourage further market transparency overseas listing Inching Up domestic companies, both large-and small-cap, have been allowed to list abroad way of American Depository Receipts and Global Depository Receipts (ADR, , GDR)

MAXIMUM INVESTMENTS IN FIXED AND SECURED INCOME AVENUES

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6.4 IMPACT OF ASIAN FINANCIAL CRISIS

The Asian Financial Crisis of 1997-98, badly affected the emerging economies by toppling their currencies against the US$, apart from the drastic sink in their stock

45

prices. This dramatic fall in the smelt prices has adversely affected the core sector, the ramifications of which percolated down to the grassroots level thereby affecting the economic independence of the common people. Analysts examining financial debacle pinpointed that the plummeting stock prices of the companies was mainly due to the deficient cross-border movement of funds, which constituted their main source of revenue. The aforesaid slump also affected the Indian stock market substantially. Hence, a growing body of research focused on the various perspective and dynamics of market, which, in turn, influenced the economies of stock market with special reference to India. Studies showed that though FII has helped to increase the stock prices of selected shares with a chasing tendency, the effect of mutual funds seems to be very positive on the movement of BSE and NSE. But it is evident that any disturbance or fluctuation in global politics, economy or business deals-decision for a long time, hugely affects the financial scenario both at national and international levels. This point can be further explained by the shock that our sensex experienced on 17th May, 2006.

Unbelievable shock to the Indian Stock Market

On March 27, 2006, the BSE Sensex registered a height of 12,219, an all times record. For the first time, Sensex overtook the Dow Jones index. In fact within five months interval, the rise was more than 37 percent. Such a magical hike resulted from an unsustainable and unwarranted corporate performance. Sensex continued to ascend over a period of six months, without any major correction. The scenario was changed dramatically when tile market crashed all of a sudden, but finally it faced a massive correction on May 17, 2006. The BSE30 sensex went down by 826.38 points 6.76 percent lower than the previous close of 11,391.43 points. In the month of June it fell below 9,000 the most significant reason behind such a massive downturn was a huge outflow of foreign capital from the Indian capital market. On May 11, rs3, 700 cores of foreign investment was drained out of the Indian market. The outflow of the foreign funds did not stop at that point and continued for more than a month. This major outflow of these funds was caused mainly due to the increase in the federal interest rate. A considerable rise in the US interest rates was felt to be obvious by the US government in order to sterilize the economy from inflationary shocks, in a situation of uncontrolled oil price rise. Here one should note that, not only in India, during the same period, the downturn was experienced by other emerging capital markets also. Within a short span of few days India witnessed a net fund outflow of around $3000 million

6.5 INDIAN PRIMARY MARKET

The aggregate annual growth rate of number and amount of capital issues recorded a posture trend except during the periods of Harshad Mehta (1992) and Kethan parekh (2001) scams. But the IPOs Scam (2005) has not caused any adverse impact on the primary capital issues. The average growth rate of amount of capital issues of the public sector was at 55.3% and that of the private sector was at 43.6%. Thus, the public sector is raising more funds from the market than the private sector. But in the last two years of the study, we observed that the private sectors' share is more than that of the public sector. The second half of the post liberalization period was dominated by the services sector to mobilize highest amount of capital from the public issues. In the first half of the post-liberalization period, the public and rights issues contributed a major share in the total number and amount of capital issues. But in the second half of the study period only private placements were dominating the capital issues. With regard to number of capital issues, the size group below Rs.10cr with 64.0% claimed major share, whereas, the mega size group of rs.100cr and above has mobilized 83.0% of the total amount of capital issues. The average number and amount of capital issues show the varying proportion of contribution from the four regions, the Western Region contributes more than 50% of the tall capital issues.

6.6 PRIVATE EQUITY CREATING WEALTH FOR INDIA Factors driving growth of PE in India
Major factors driving PE investments in are summarized as follows. India been the largest with the highest population in the world has a huge pool of intellectual talent and varied skill. India also has the second-largest English speaking population in the world Thus, be ample human resource base is the most competitive factor which drives the growth of industry Indian capital market is one the most developed markets in the world. The Indian capital markets are valuations and have stringent regulatory norms the 4000 and 14000 levels respectively and could march forward creating all time peaks in quick succession the booming capital markets are creating an opportunity for PE funds exists at higher valuators. IPO norms are stringent and SEBI is bringing in further reforms like IPO grading and coupled with attractive valuations of companies. The Nifty and Sensex have surpassed 46

easier delisting norms to make the investments climate attractive .Growing entrepreneurship and growth in M&A activities with India inc's of PE investment in the country Large M&As deals are possible with sophisticated financial options available in India .Gross domestic Product (GDP) growth rate in the first half of April September 2006-07 registered 9.3% the highest GDP growth rate ever. The consumer class is driving the demand in key industries like realty, infrastructure, retail, telecom, bioscience among others which require huge funds and is attracting global PE funds Liberalized FDI and FII investment norms

Conclusion
With the growing PE market, funds may Increase the significant demand for reliable Investors and professionals to Join them As such these developments may force professional minutes to revisit their agenda to meet the growing demand of PE professionals As there are multi-layer authorities like the Finance Ministry, Foreign moment Promotion Board (FIPB) SEBI, RBI and the Department of Industrial - policy and Promotion (DIPP) for the effective monitoring of PE funds, It is advisable to have minimum bureaucratic hurdles and then set up a separate story authority subsequent to exit by Warburg Pincus from Bharti is very encouraging to the validating news about hefty returns made by the top 15 PE funds in this year when market was booming and the valuations were higher Thus shows the maturity of Indian capital market and the growth of PE space. 47

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Chapter 7 CAPITAL MARKET IN CHINA

7.1 CHINAS BOOMING IPO MARKET
As rightly said by Nicole Yuen head of china equities at USB in Hong Kong and member of the china securities regulatory committees CSRC listing committee, china bourses stock market or casios? The IPOs market is not really market driven its more regulation driven let us now take a closer look at the market. The Chinese economy, by its nature, is a socialist economy, wherein large chunks of IPOs are made for privatization of public enterprises, fully or partially IPO under-pricing is a recurring phenomenon in the Chinese primary market. The Chinese governments opines that the forgone revenues of under-priced IPOs are the cost paid for achieving the objectives like increase in the private ownership of shares, sustenance of the credibility of the government enterprises as issuers and achieving effective control over the economy. The stock market in China is in the nascent

49

stages; hence, in order to manage risks and avoid market crashes, the government monitors the market and the issuers very closely The government determines the quota of issue for the firms thats are permitted to go public sets the IPO prices for the issuers based on the market feedback and time the IPOs after analyzing the performance of the market. The stocks traded in China are classified into eight categories on the basis of their ownership. They are-nonnegotiable stocks including state-owned stocks, founder stocks local founder stocks (foreign), legal-entity stocks, employee stocks and negotiable stocks inducing A shares, B shares and H shares. H shares are basically the shares of Chinese firms which are traded on Hong Kong Stock Exchange, whereas both a shares and B shares are traded on the Chinese stock exchanges. 'A' shares are exclusively for the domestic Chinese citizens and are traded in domestic currency while 'B' shares are solely for foreign investors and are traded in US dollars at shanghai Stock exchange and Hong Kong dollars at Shenzhen stock exchange Since February 2001, the government gave permission to domestic investors to invest in 'b' shares but mandated that the investments have to be made in foreign currencies. Both the stock exchanges in China, the shanghai Stock Exchange and the Shenzhen Stock Exchange are not-for-profit membership organizations that are run under the supervision of Chinese Securities Regulatory Committee. The issuers have a choice of listing their IPOs in any of these exchanges soon after receiving the permission to go public. Time initial returns generated form IPOs listed in these exchanges similar. In an attempt to improve the standards of listed companies on the domestic bourses permission has been granted to the foreign institution since may 2003 To make investments in the 'a' shares at Shanghai and Shenzhen exchanges up to a limit of $500 ban, which was earlier not permissible.

IPO Trends in China

With the rising craze among companies for going public to meet capital requirements, several firms in China have expanded their wings towards national and international markets. Since the cost of raising capital in Hong Kong is low compared to the US market. It provides an ideal marker for small Chinese firms to float their shares, while the bigger organizations try their luck in the US market, meeting all the costs and market restrictions. Though Chinese companies have been contributing to the Asian market for several years, the recent IPO activity in China has been extremely encouraging. Of the total IPO activity in Asia last year, China contributed. A lion's share with 94 IPOs, raising a total of $12,357 man, leaving countries like Japan, South Korea, Thailand, Hong Kong, far behind. The capital thus rise, accounted for almost half the total capital raised worldwide. Continuing with the trend of

50

2003, the Asian market is expected to raise $58 ban through shares this year, with China alone set to account for $30 bn. The target itself is enormous and .the country is ready to achieve it. Last year, China Life insurance the country's largest insurer, floating on NYSE emerged as the largest IPO in the world. It was accompanied by five other Chinese firms, floating in domestic and Hong Kong exchanges in the club of those that rose more than $500 man in a year. The other Chinese firms floating in the US include the internet business, tom Online and link tone a firm selling mobile phone ring tones. The IPO trend in the year 2003 depicts that the firms, China Life and Fujian Ziti Mining Industry, have witnessed over 50% hike in share prices since their debut on December 18 and 23 (in 2003) respectively and this is a common s feature for all other firms coming up with their IPOs in tile Chinese market. To join the existing list of IPOs in the country this year are companies like. Ping Insurance, China's second-largest insurer after China Life china Nexcom Corp., a telecom firm; and probably China Construction bank one of the four largest banks of the country which is otherwise scheduled for launching its IPO in 2005 along with Bank of China.

Future of IPO Market in China

Investors confidence in the Chinese market is on the rise and the country is really working hard to make the most of this opportunity. Due to the prevalence of downward slopes and low interest rates in the Western markets, the IPO prices are expected to become more favorable for Chinese companies.

7.2 DEMUTUALIZATION & LISTING AS A MEAN TO IMPROVE THE MANAGEMENT OF CHINESE STOCK EXCHANGES Developing the Capital Market as a Strategic Aspect
China is not only one of the largest economic forces in the world, but also has the potential to become 'one of the largest capital markets in terms of numbers of shareholders and public traded companies and public issuance of securities. Developing the capital market is an important strategic aspect that China must fulfill in its transition towards a market

51

economy In consideration of the current situation and by drawing upon practices of by. Overseas mature markets, China is actively putting forward a series of measures to enforce infrastructure construction of the capital market, establish and improve various systems for development of the capital market, and create a favorable environment for stable and healthy development of the capital market. China will need to continue to dramatically improve the structure and transparency of its capital markets, and corporate governance throughout the ranks of management and their boards of directors it is our contention that the demutualization and listing of the Chinese stock exchanges is a crucial step in searching its full potential.

Lack of Corporate Governance and Financial Transparency

The China Securities Regulatory Commission (CSRC) has worked to impose strict standards on listed companies, working to prosecute perpetrators of fraud and requiring companies to follow international accounting standards when disclosing financial performance. The CSRC now requires listed companies to publish unedited quarterly reports, which CSRC inspectors regularly check for accuracy. The CSRC has also stiffened the penalties for companies that fail to comply with disclosure regulations. China's courts have also begun to hear cases brought against listed companies by aggrieved shareholders, an important development in the protection of minority shareholders. The shortage of financial transparency and the lack of a market-driven listing process are crippling China's equity markets. In his sobering assessment of the domestic stock markets, Lardy pointed out that although China's equity markets now have greater market capitalization than Hong Kongs, this is not a helpful indication of the real investment in China's market. China has also reached out to the international capital markets to fund its growth. Private and stateowned Chinese companies raised nearly $75 billion in debt and equity issues in the international markets during 1991-2000. Of this total, a robust $48.3 billion in equity capital was raised with nearly 88 percent raised in internationally targeted offerings. About seven percent was raised in targeted US offerings and about five percent in Asia. The large disparity in international - versus Us-targeted equity issues may be a result of the more stringent, if not better, disclosure and accounting requirements for US listings that Chinese issuers currently find difficult to meet. In 2000, Chinese issuers raised $20.1 billion in equity capital, 17 times the $1.16 billion they raised only nine years earlier. Chinese issuers also made use of the international debt markets, raising $26.6 billion during 1991-2000. Of this total, about $10.2

52

billion was raised in international placements, while nearly $9.7 was raised through access to the US markets'. The remaining $6.7 billion was raised in Hong Kong and other Asian markets. China's capital markets have grown significantly over the post decade and helped finance the country domestic growth.

Increase in Foreign Direct Investments

It is the financial reform and opening up that has enabled the Chinese financial institutions to improve its business performance and management level amid market completion, especially in competition with the foreign institutions. At the same time, the foreign financial institutions has also benefited from the opening up of the Chinese financial industry The foreign financial institutions have brought competition incentives for their Chinese counterparts to improve and transform business strategies and management by setting good examples in the conduct of intermediary business patent application of certain banking products, changing fees on account services, disintegrating the customer market and introducing the concept of check and balance in building up the internal control system etc. The opening up of China's financials market has provided good opportunities for foreign investment, enabling investors from various countries to capitalize on China's rapid development. The demutualization and listing of the Chinese stock exchange will result in improved corporate governance, transparency and liquidity which will increase confidence in Chinese capital markets and boost FDI.

Development of Capital Markets

As its economy matures and financial reforms gather steam, China is gradually introducing more sophisticated financial mechanisms and instruments. In recent years several commodities futures markets have opened and others will almost certainly follow in the next few years. The slow development of financial markets in China has meant limited availability of credits so that households generally have to save in order to purchase big-ticket items, like houses and cars, rather than being able to borrow against future income it also has meant that there are low returns on households financials assets and limited opportunities for portfolio diversification, since there are few alternatives to depositing savings in state-owned banks. Enterprises might be less compelled to rely on internally generated funds if they could count on a broader set of financial markets to generate capital. Increased access to credit for

53

households, the availability of a wider range of saving instruments that would help them to diversify risk, and higher returns on their assets also could contribute to a reduction in household savings In additions efforts are made on the basis of strict risk control to actively push forward the bond market, steadily enhance operation quality of the futures market and set up a mechanism for market-oriented innovation of new varieties.

Innovation in Financial Products

Innovation in financial products has offered more choices for investors. Drawing on the international experience, commercial banks in China issued subordinated bonds and financial bonds. Financial transaction instruments and modes have been innovated to deepen the functions of financial market. Transaction instruments for risk management have been developed. On June 15, 2005, the first derivative financial instrument, bond forward transactions, was launched. In order to further promote the corporate bond market, inter-bank bond market access has been granted to many corporate bonds.

Chinese Capital Markets as a Source of funds for the Chinese Corporate Sector
The amount of money actually being raised domestically through the stock markets is quite small, and pales in comparison to new loans coming out of the commercial banking system every year. This is bemuse the domestic market is not functioning properly and most of the largest issuances have recently been going to more sophisticated international markets like New York and Hong Kong. China's equity markets are effectively open only to SOEs To help private companies and small businesses choose equity capital as a source of finance, the regulations should be changed so that more private companies that qualify for IPOs can list on China's stock exchanges, in Hong Kong Shanghai, and shenzhen And to further the common progress of all the exchanges and improve the operation of the mainland's equity markets, regulators should work out dear roles for each of the exchanges. Since financial markets are inextricably linked to increased investment arid economic growth, strengthening China's domestic capital markets will help to alleviate the significant financing constraints that Chinese firms currency face.

Further Improve Quality of Listed Companies

Quality of listed companies is the source of value for investment in the securities market. China is adopting a step-by-step approach to reform and improve the stock issuance regulatory system. A good example in this regard is the implementation of the advisory system for floating of securities so as to support listing efforts of companies that enjoy strong competitiveness, standard operation and sound profitability and thereby enhance quality of listed companies from origin. At the same time, China encourages listed companies to carry out merger and reengineering activities that are market oriented and conducive to sustainable corporate development. China also supports premium listed companies to accelerate their development and further improve their competitiveness by use of the capital market.

Development and Prospect of the Chinese Accounting Profession

The developments in the capital market calls for a re-look at the existing accounting techniques and methodologies used to process accounting data. As such "developing the accounting profession has become an inherent element for ensuring truthfulness reliability of accounting information, protecting interest of investors and creditors and safeguarding market fairness and equitability The outbreak of scandals concerning quality of accounting information at the capital market a couple of years ago has exerted serious impacts on the global capital market. Consequently, credibility and independence of the accounting profession has attracted extensive attention from all walks of life. Domestic accounting firms face increasing competition from international accounting firms that are widely recognized for their professionalism and high quality work. The demutualization and listing of the Chinese stock exchanges will exert even greater pressure on domestic accounting firms to produce specific standards of professional ethics and reinforce restraint on and guidance for CPAs in terms of how to maintain professional independence. 54

Development of Domestic Investment banks

The recent flurry of massive IPO deals involving the China's large state-owned enterprises such as Bank of China, China Construction bank clearly shows that underwriting deals is big business. The underwriters fee for the Bank of China IPO alone is worth about US$250 million. While majority of the deals are handled by multinational corporations such as Goldman Sachs, Credit Suisse, Deutsche Bank etc there are currently no domestic

55

investment banks that can compete in this lucrative business. It will not be an easy task to build a domestic investment bank that can offer equivalent services. However, the stakes are too high to not try. With the demutualization and listing of the Chinese stock exchanges, it is foreseeable that the amount of IPO launches on the domestic Chinese stock exchanges will increase. Indeed with Chinese state backed banks, insurers telecommunication and energy companies all listed on exchanges in Hong Kong, New York and London, investment banks have already been hunting through chinas private sectors for new pool of IPO candidates.

New Business Models

The automation of trading and proliferation of electronic information have had a massive impact on the brokerage business. Trading volumes have soared, cash has flooded into the market and investors have an enormous amount of information available to them. Business have unbundled and re-bundled services partially in response to unfixing of commissions. Trading commissions may no longer subsidize advisory or research activities, for example, and dealers have had to market such services separately new intermediaries, including balks have also entered the market, increasing competition and forcing innovation.

More Open, Fair and Transparent Markets

The capital market is a market of information where timely and accurate information is vital. As such, China is exerting efforts in accordance with requirements of the modern enterprise system to improve corporate governance structure, develop an effective check-andbalance mechanism between power organs, decision-malting bodies, regulatory authorities and corporate leadership, reinforce responsibilities of listed companies and others that have the obligation to disclose information, effectively ensure truthfulness, accuracy completeness and timeliness of information disclosure and protect interests of investors.

Improve corporate Governance Chinese

Issuers will have to improve their disclosure and corporate governance standards to meet the demands of the international investing community. Indeed, the China Securities Regulatory Commission has already promulgated regulations to raise the quality level of disclosure. Stricter of financial information is now required for prospectuses, and companies must ensure they have independent directors. These rules will not only help China access foreign capital,

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but they will also set the foundation for building a more robust retail and institutional investor base in China. For this to happen, China will need to continue to dramatically improve the structure and transparency of its capital markets, and corporate governance throughout the ranks of management and their boards of directors. To this end, demutualization is seen as a next step in achieving this goal. According to a recent report, corporate Governance in China: Recent Developments key Problems and Suggested solutions by Thomas W Lin, China has made substantial progress in numerous areas of corporate governance. The study notes that since the establishment of China's security regulator, tile CSRC in 1992 more than 300 laws concerning the securities and future markets legal been passed. The issuance of these regulations and the adoption of the key legal framework for corporate governance, including the Company law promulgated in December 1993, the Securities Law passed in December 1998. and Capital Code Corporate governance for Listed Companies issued by the China Securities Regulatory Commission and State and Economic Commission, have slowly pulled corporate managers and their directors into the mainstream of modern capital markets as it relates to corporate governance.

Conclusion
The fundamental problem with the Chinese stock exchanges lies with the issue of corporate governance. Moreover the existence of non-tradable shares, accounting for more than 60% of all the shares issued on the exchanges has been the greatest impediment to the development of Chinas equity market. The Chinese authorities have embarked on a series of shares reforms and they have made good progress However, it is our contention that more cart and needs to be done to reform the Chinese capital markets. Demutualizing and listing the Shanghai and Shenzhen stock exchanges on the Hong Kong Stock Exchange is a crucial step in bringing about better corporate governance to the Chineses exchanges. The HKSE is a well established and highly regarded institution that has a strong regulatory framework and legal system, and an adherence to international accounting standards. Through this act, there is further pressure on the Chinese stock exchanges to ensure accountability and transparency in its markets. Moreover, there will be a higher level of scrutiny on the listed companies and companies that are looking to launch their IPOs. The successful act of demutualization and listing will result in many benefits to the Chinese economy and its people. It will spur

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economic growth by increasing the amount of foreign direct investments, increase domestic consumption as the public becomes more confident in the economy and is more willing to spend. There will also be a new wave of job creation as new industries such as the credit rating industry, investment banks, accounting profession will experience a surge in demand for their services. Capital markets will also be increasingly seen as an additional source of funding for mainland enterprises. This is especially important for sustaining the growth of the Chinese economy the improvements in the Chinese stock exchange such as improved regulatory framework streamlined decision-making and operations and new business models will also strengthen the domestic Chinese stock exchanges in the face of strong competition from other exchanges. With the increased confidence in the capital markets, mainland Chinese will also see the benefits in diverting their savings into investments. The benefits are plentiful but most importantly it will create a more even distribution of income, thereby relieving the poverty pressure and increasing the living standards of the majority of Chinese citizens.

Chapter 8 WHY THE BRICS DREAM WONT BE GREEN?

Balancing economic development with environmental protection is already & will remain. A major challenge to our .BRICs Dream. Urbanization, industrialization & intensive agriculture mean that pressures on the environment are unlikely to abate for decades.

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BRICs' Share of Carbon Emissions Is Rising

The global pattern of CO2 emissions is shifting as developing countries industrialize while advanced economies shift towards less energy-intensive sectors. The developing world already emits nearly half of the world total of CO2 emissions, with the BRICs alone responsible for nearly 30% of the global total. This is largely thanks to China, where the share has more than doubled since 1980. The collapse of the Soviet Union led to a sharp decline in Russias industrial base and thus emissions from energy consumption; in 2004 emissions were still just 80% of the 1992 level.

BRICs CO2 Emissions to Exceed G6 Share by 2025

Thanks to strong growth in the energy intensive industrial and transport sectors, China is projected to overtake the US in terms of carbon dioxide emissions by 2015. By 2030, China is expected to account for nearly one-quarter of the world total, compared with 19% in the US At the other end of the scale, Russias emissions are only projected to return to Soviet-era levels in 2030, placing it on a par with India, at 5% of the world total. Brazil will not be a major player; its share of world CO2 emissions is forecast to remain steady at 1.4%

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But Carbon Intensity is expected to fall

Russia and China have the most carbon intensive economies, with the two other BRICs lagging the G6 countries. India and China are expected to make the most progress in reducing carbon intensity over time, nearly halving it by 2030. This is likely to reflect rapid economic growth rather than a switch to less carbon-intensive fuels. By 2030 carbon intensity is projected to Decline across the board, resulting from generally higher investments in improving the efficiency of energy use, and a gradual Switch from oil and coal to natural gas and Renewable.

Renewable Will Play a Bigger Role

High prices of traditional fuels, emissions concerns and rising energy demand will encourage greater reliance on renewable energy sources. Global energy consumption from these sources is projected to nearly double between 2003 and 2030, though their share in total consumption is projected to rise on slightly, from 7.8% to 8.6%. Brazil already uses nearly as much hydroelectricity as China and the US, despite the size and income differentials. Brazil also has the environmental resources to expand capacity further, but it currently lacks the financial resources to do so.

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Urbanization Moving Toward G6 Levels

Urbanization will remain a dominant feature in the BRICs In the decades ahead. 57% of the BRICs population now lives in urban areas, up from 42% in 1975. The urban Population is projected to reach an average 68% in 2030 still lower than the current G6 average of 8%. Urbanization brings environmental issues including water and air Pollution, waste disposal and traffic congestion. These challenges will be especially acute in China and India, where the urban share is projected to jump from 41% to 61% in China and from 29% to 41% in India.

Agricultural Water Usage Is Split

Developing and urbanizing countries face a dual challenge of supporting intensive agriculture while preserving fresh-water supplies. According to the UNs FAO, the 20% of the worlds cropland that is irrigated accounts for 40% of total food production. Worldwide, 70% of total fresh-water withdrawal goes to irrigation.

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One-third of the cropland is irrigated in China and India; in Brazil and Russia, the figure is less than 5%. Chinas agricultural water use is more efficient than Indias: agriculture in China draws only 68% of total water usage, compared with 86% in India.

Along With Fertilizer Usage

The FAO estimates that irrigated crop production will need to increase by 80% by 2030 in order to match demand from the developing world. At the same time, it expects irrigated land water use to rise by Just 12%, increasing the need for fertilizers to boost crop efficiency. Fertilizers usage explains some of the divergence between agricultural efficiency in China and India. China uses 2.8 times as much fertilizer per hectare as India. While this boosts agricultural yields and thus supports urbanization, it raises the risks of water pollution in both the countryside and the city.

Chapter 9 WHY THE BRICS DREAM SHOULD BE GREEN?

Last Fall we discussed why the BRICs dream wont be green, highlighting the challenges ahead as the BRICs seek to balance economic development with environmental protection. This month we argue that the BRICs dream should be green, these countries will need to play a key role in global efforts to combat climate change, and it is in their own interest to do so. Urbanization, industrialization and intensive agriculture mean that environmental pressures in the BRICs are unlikely to abate for decades. In recent months, environmental

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issues have come increasingly to the fore, thanks in large part to the publicity surrounding the Stern Review on climate change. The BRICs will need to play a key role in global efforts to tackle climate change. While it is true that todays industrialized economies are responsible for the vast majority of greenhouse gases (GHG) already in the atmosphere, developing countries are expected to account for 75% of GHG emissions over the next 25 years. With China alone responsible for one-third of the global total, China is already the worlds secondlargest emitter of carbon dioxide, and is expected to overtake the US within a decade. Critically, we think it is in the BRICs Own interest to reduce their emissions and pollution, and to pursue a cleaner path of development. The BRICs already face a host of environmental problems, including air and water pollution, rising strains on water supplies and resource depletion.

Unsustainable Resource Usage in China and India

The World Wildlife Funds ecological footprint. (EF) measures a countrys natural resource consumption using prevailing technology and resource management schemes. Comparing these demands on nature with the countrys incapacity gives a sense of environmental sustainability. On latest estimates, ecological footprints are twice as large as biocapacity in China and India. These are in line with high-income countries and above the world average, indicating that current resource consumption and exploitation are unsustainable. Brazil has one of the highest biocapacity in the world, almost five times its EF, with Russia relatively close behind.

Russia Is By Far the Most Reliant on Energy Depletion

The share of national income tied to natural resource depletion is problematic, given that natural resources are generally nonrenewable and cannot be relied upon for growth indefinitely. Among the BRICs, Russia is the most reliant on energy resource depletion (crude oil, natural gas and coal). In 2004, Russias energy depletion accounted for roughly 30% of its gross national income (GNI), more than 10 times the world average. Brazil is by far the biggest user of minerals, at 1.1% of GNI.

Coastal Cities at Risk, Especially in India and China

Sea levels are expected to rise more rapidly in coming decades. Some 600mn people. Nearly one-quarter of the total BRICs population. Live within 100km of the coast.

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Mumbai and Shanghai, with a combined population of 32mn, are both situated on the coast, while Brazil and Russia also have major coastal cities, including Rio de Janeiro and St. Petersburg. A disproportionate amount of the economic activity in these countries flows through these hubs and could be crippled if sea levels rise to critical levels.

Limited Arable Land Underscores Vulnerability

Agriculture remains an important sector of the BRICs economies, accounting for an average 11% of GDP in 2005. In India (19% of GDP) and China (12% of GDP), where the majority of the population lives in the countryside (roughly 70% in India and 60% in China). Arable land per capita is below the world average in all the BRICs except Russia. Changing weather patterns could be devastating, especially for India, which is already reliant on the annual monsoon season.

Scope for Increases in Energy Taxes

As we have shown previously, the energy intensity (energy units per Dollar of GDP) of the BRICs is high relative to both the G6 and the world average. One reason is the below-average tax rates on energy, shown here as the average pump price of diesel fuel. India, which was one of the first countries to adopt emission regulations, is the only BRICs country with a higher diesel fuel pump price than the US. China has the lowest pump price for diesel fuel among the BRICs; increased fuel regulation there has been hotly contested.

Brazil Leads in Hydroelectric and Renewable

By 2030, the share of hydropower and renewable in total world energy consumption is projected to increase by 1ppt, to 9%. Growth is likely to come from large-scale hydroelectricity power projects, particularly in China and India. At the country level, renewable in China will become slightly less important relative to other sources. Brazils already impressively high share is projected to rise from around 38% now to above 44% by 2030. As hydroelectricity already accounts for more than 80% of Brazils electricity consumption, most of the increase is expected to come from biofuels and other renewable.

Deforestation on the Rise in Brazil and Russia

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Russia and Brazil are the most forest-rich countries in the world, with China and India also among the top ten. Overall, the BRICs account for 40% of the worlds total forest area. China is the only BRIC with rising afforestation; from 2000 to 2005 it made a significant contribution to a net gain of forests in Asia. The net change in the worlds total forest area from 2000 to 2005 was negative, estimated at 7.3mn hectares per year. Brazil reported the highest (and rising) rate of deforestation, at -3.1mnha per year, mainly due to conversion to agricultural land, particularly soy fields. Russia also showed a negative trend, losing forest on a net basis since 2000, having gained ground in the 1990s.

China and Russia Use Forests Mainly for Production

Production remains the primary function of forests in China and Russia, where almost 60% and 77% of total forest area is used for this purpose, respectively. In Brazil, just 5% of forests are used for production, with the majority used for social and multiple purposes. Conservation of biodiversity is relatively important in India, where 22% of total forest area is used for this purpose. This is the highest in the BRICs and slightly higher than in the US. China and Russia report the lowest share of forest designated for conservation, although one-third of Chinese forests are under protection. Infrastructure is a key part of our BRICs story: It is vital to growth and plays an Important role in reducing income inequality. Infrastructure stocks in the BRICs and highlight a related piece that estimates Infrastructure spending over the next five years. Profile the status of women across the BRICs, where Indian women generally fare worst and Russian women best on a range of educational, health, labor and political indicators. In developed and developing countries alike, the Chinese aphorism that women hold up half the sky. Has long been more aspiration than fact. This is particularly true in terms of womens access to education and healthcare, and their participation in the labor force and in political institutions. Thanks to global economic growth and evolving views of womens roles over the past half-century, however, this has changed, and reality has moved closer to

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aspiration. It is difficult. Its not impossible to generalize about the role and status of women in the BRICs, given the diversity of the countries and the many measures of womens status and experiences. However, it seems clear that sustained investments in womens health and education could be a source of upside potential to our long-term BRICs growth projections, which rest heavily on productivity gains and which assume unchanged levels of labor-force participation. This potential is clearest in India, which posts the worst relative performance on nearly every measure we evaluate. Indian women have the lowest labor-force participation rate, the lowest share of parliamentarians, the lowest life expectancy, the lowest literacy rate, the lowest level of enrolment in tertiary education, and the highest maternal mortality rate. At the other end of the scale is Russia, where women generally fare well in comparison not only to the other BRICs but also to the G6. Labor-force participation is in line with high-income countries, literacy is at virtually 100%, and women are strongly represented in tertiary education. The prevalence of HIV in Russia is the highest among the BRICs, but the share of women affected is the lowest. Parliamentary representation is low by G6 standards but still better than in India or Brazil. Overall, the scope for upside surprise arising from an improvement in womens conditions is limited, although Russian women are significant contributors today. Chinese women largely score well against their BRICs peers, outstripping them in political representation and labor-force participation, but lagging in tertiary education. In health and literacy, Chinese women fare slightly worse than those in Brazil and Russia but better than those in India. Here too, investments in health and education could pay significant benefits. Brazil shows a mix of strengths and weaknesses, pointing to solid upside potential. Female literacy is high, as is access to tertiary education. But maternal mortality is high, and among the BRICs, Brazil has the highest share of women affected by HIV and the highest obesity rate. Political participation is little better than in India.

Chapter 10 2001: A BRIC Odyssey

Looking back to the recent past, the year 2001 symbolizes particularly well the definite end of the American unipolar moment and the rise of a multipolar order. To begin with, the terrorist attacks of 9/11 profoundly shocked a nation that saw itself as untouchable and revealed to the world its vulnerability. Second, China acceded to the WTO in November 2001 celebrating the entry of the biggest Asian economy in the global economic system and initiating the displacement of the economic pivot towards the East, although it is still deeply rooted in the Atlantic basin. Third, 2001 was the first year of the 21st century (and the third

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millennium) which some already dare to call the Asian century. Fourth, the BRIC concept was coined that same year by Goldman Sachs analyst James ONeill in order to encourage investment in emerging economies, without any idea that his concept would turn into a real diplomatic forum almost eight years later. Of course, the choice of the year 2001 is only symbolic, a date that historians might one day consider to be a turning point or not. In reality, most changes that are shaping todays world are long-term trends. On the one hand, comprehensive interdependence has been under way essentially since the end of World War II after an inter-war period of delocalization and todays level of economic interdependence is no more impressive than on the eve of World War I. On the other hand, the Asian continent did not rise overnight but its entrance into the modern world was by any standard astonishingly fast. In China, for instance, the number of mobile phone subscribers rose from less than 5 million in 1995 to approximately 100 million in 2000, to reach well over 500 million today, with about 200,000 new subscribers each day.

Conclusion
The rules of the great game for global power are changing. The US cannot play alone anymore. President Obama has already recognized China as a new major player, notably when he declared that the relationship between the United States and China will shape the 21st century during a visit to Beijing last July. In other words, both countries are likely to become the central powers of the coming order. Russia and Europe are trying to stay in the game, while Brazil and India are trying to step in. They all have the potential to become major or middle powers, provided they avoid being game over. More players in the game also mean that the way of playing is different. The attractiveness of unilateralism is declining because ever less issues can be dealt with unilaterally in the age of interpolarity. More likely,

the coming order will witness a growing share of multilateralism, although under many different aspects. Todays multi-multilateralism is characterized by the coexistence of formal and informal; global and regional; general and issue-specific forums. This complex network of multilateral forums is a natural mirror of the broader trends affecting the system and its flexibility alone allowed it to integrate emerging powers in the global system so rapidly. Multi-multilateralism is nonetheless doomed to be replaced by a reformed global multilateral structure if it is to satisfy the growing aspirations of the emerging players and to tackle global challenges effectively. In other words, multi-multilateralism is a transitory phase towards either reformed multilateralism or the end of multilateralism as we know it. Although the EU arguably favors a multilateral approach to international relations, multilateralism might not always be favorable to the EU. Indeed, the EU advocates systemic and rule-based multilateralism and might therefore rapidly find itself in a relatively uncomfortable position in a multi-multilateral order. To begin with, the failure to negotiate a reform of the global multilateral system could push the emerging powers away from Western-inspired forums and encourage them to create alternative institutions. Conversely, organizing a grand bargain with the emerging powers could offer an unprecedented opportunity to solve major issues. Finally, the formation of bilateral or multilateral alliances excluding the EU could be potentially damaging; a G-2 between China and America e.g. would slowly but inevitably make the US lean towards Asia, away from Europe. For the EU to remain relevant in the 21st century, it will need to promote effective multilateralism at the global and EU levels, to seal real strategic partnerships, and to develop its leadership capacity in order a) to influence the global agenda, and b) to take the lead in issues of particular importance to the EU. Leadership and effective multilateralism are complementary and mutually reinforcing. They are Europes best option to enter interpolarity as a global power. The EU will not rule the 21st century, but it can still become a major pole, and it must certainly avoid to be ruled out. The world is changing. This is an undeniable fact despite all caveats recalled in the previous section. The world is becoming increasingly multipolar with the emergence of China, India, Brazil, and with the resurgence of Russia. The world is also becoming increasingly interdependent, as recently illustrated with the US financial crisis turning into a global economic crisis. The third characteristic of the coming order is the development of a new structure of multilateralism.

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AQLL EXPECTATIONS DONE ON 2004 FOR 2005&06 WERE FULLFILED, AND THUS BARZIL GREW AT 4.2% CHINA AT 8% INDIA AT 6.5% AND RUSSIA AT 5.2% ON YEAR ENDED 31ST MARCH 2007.

NEWS PAPER ARTICLES

DATA FROM 2000-2004 AND PREDICTION DONE FOR THE YEAR 2005 AND 2006

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FDI HIGH IN CHINA BECAUSE OF ITS GROWTH IN SMES AND PROPER UTILAZATION OF RESOURSES. INDIA VERY LOW AT THAT PERIOD MAINLY BECAUSE OF SCAMS AND MORE OF IMPORTS.

CHINA NEARLY 8% OF TOTAL OIL DEMANDS BECAUSE OF GROWTH IN POPULATION AND INCREASE IN FOREX INFRASTRUTURE. RESERVES BECAUSE OF HEAVY EXPORTS FROM RUSSIA AT VERY LOW CHINA IT HAD ENUF BECAUSEIN TERMS OF OFMANUFACTURED TO OIL PRODUCTION PRODUCTS, AND SATISFY THE OIL RUSSIA IN TERMS ITS PEOPLE. DEMAND OF OF OIL. LESS EXPORT SEEN FROM INDIA AND BRAZIL IN THIS PERIOD HENCE LESS FOREX RESERVES 69

APPENDIX -2 (NEWSPAPER ARTICLES) Why BRIC markets are underperforming emerging market peers in 2010 2 Sep, 2010, 04.01PM IST, REUTERS

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LONDON: Shares of companies from the world's biggest developing economies are increasingly featuring in global fund portfolios, a possible reason why BRIC markets are underperforming in 2010 compared to emerging market peers. With many conglomerates from Brazil, Russia, India and China no longer limited just too emerging equity portfolios, stocks from the so-called BRIC group are starting to move in lock-step with developed market indices. The BRICs are also more highly leveraged to the global economy, with Brazil and Russia two of the world's biggest commodity exporters. Those factors, many believe, help to explain why the MSCI BRIC index is down 4 percent this year, similar to developed markets' 5 percent losses. Emerging stocks on the other hand are up half a percent. "The BRIC countries have a group of large-caps which compare in size quite favorably with developed market firms...if you are a global investor you need these BRIC large-caps in your portfolio," says Martial Godet, head of emerging markets at BNP Paribas Investment Partners, which manages 60 billion Euros in emerging markets. "So when there is a downside correction globally, it reflects on the BRICs." Godet names Chinese CNOOC, Brazil's Petrobras and Banco do Brazil, India's Reliance, and Russia's VTB and Gazprom as the kind of large cap BRIC stocks global investors tend to buy. Thomson Reuters data shows BRIC beta to developed stocks -- the measure of volatility relative to the broader market -- at 1.1, having declined steadily from 2.0 in 2006. That indicates they will likely move in line with developed markets. As the largest, most liquid emerging markets, BRIC stocks benefited first in the 2009 rally, with 90 percent-plus gains, notes Robert Ruttman, equities strategist at Credit Suisse. But they also suffered the biggest redemptions this year as the euro zone crisis and growing fears of a double-dip recession force investors to pare equity allocations in favour of bonds. "BRICs' size clearly matters for asset allocation especially in terms of institutional portfolio positioning," Ruttman said. "We will not see a sustained rally in BRIC stocks before the end of the current bull market in bonds." Obviously local factors are also an issue tending to depress BRIC shares -- Brazil's October elections for instance and capitalraising plans by bellwether stock Petro bras. Chinese shares are down 20 percent as Beijing tries to slow the economy and housing market. All this has forced investors to seek value in smaller, less correlated, more domestically-focused markets such as Thailand or Turkey which are up 15-20 percent in 2010.

BRIC, IBSA boost India's drive for UN seat 18 Apr, 2010, 04.24PM IST, IANS

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NEW DELHI: The stalled drive for expansion of the UN Security Council has gathered momentum with the IBSA and BRIC summits and South Africa backing the G4 initiative, say Indian officials who feel that it will be "a matter of time before it's taken to its logical conclusion". "The initiative to expand the Security Council in both permanent and nonpermanent categories has gathered momentum. It's a matter of time before it's taken to its logical conclusion," said senior officials at the end of the India-Brazil-South Africa (IBSA) and Brazil-Russia-India-China (BRIC) summits held in Brasilia Thursday. Officials cited the endorsement of South Africa for a non-permanent seat for 2011-2012 in the UN Security Council by the 53-nation African Union at its February summit in Addis Ababa as a major step forward in the evolution of the AU consensus on UN reforms. They also cited South Africa's support to a letter to the UN chair for inter-governmental negotiations for expanding the Security Council, backed by 140 nations, as an indication that the long-stalled drive for the UN reforms is finally moving. There is no conflict between the AU and G4 nations - of India, Brazil, Germany and Japan - on UN reforms, Commerce and Industry Minister Anand Sharma told journalists aboard the prime minister's special aircraft Saturday while returning from Brasilia. The G4 has now been joined by South Africa, albeit not formally as a group, said Sharma. According to India's Permanent Representative to the United Nations Hardeep Singh Puri, "there is clear and discernible momentum but it has to be progressed." "Things are likely to come to fruition in 2011-2012," he said. Five years ago, the G4 drive for the expansion of the council petered out after the AU failed to evolve a consensus on nominating its candidates for the UN seat from Africa. There were also some differences over the quantum of new additions to the UN Security Council in both permanent and non-permanent categories. "That's why South Africa's backing is so significant," an official said. Putting their collective economic weight behind the BRIC initiative, Chinese President Hu Jintao and Russian President Dmitry Medvedev joined in at the BRIC summit to back a greater role for India and Brazil in having a permanent seat in the UN Security Council. "We reiterate the importance we attach to the status of India and Brazil in international affairs, and understand and support their aspirations to play a greater role in the United Nations," said the joint statement. Similarly, the IBSA summit held on the same day in Brasilia backed Prime Minister Manmohan Singh's call for democratisation of international decision-making bodies, including the UN. "There is an urgent need for reform of the UN, including the Security Council, by making it more democratic and representative," Manmohan Singh had told Brazilian President Lula da Silva and South African President Jacob Zuma. During bilateral talks with Manmohan Singh, President Lula reiterated the support of Brazil to India's

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candidature for a non-permanent seat of the UNSC for 2011-12. Manmohan Singh underlined this new mood of optimism about expansion of the Security Council and India's place in a restructured world order when he told journalists at the end of his eight-day trip to the US and Brazil that "the world has taken a benign view of India and wants it to succeed."

BIBLIOGRAPHY
Books, Magazines & research reports
Name Capital markets in BRIC economies BRIC capital market monitor chartbook S&P BRIC 40 Dreaming With BRICs: The Path to 2050 THE BRIC COUNTRIES BRICS and BEYOND Building Better Global Economic BRICs Paper no. 66 How Solid are the BRICs? Paper no. 134 The BRICs Author Arindam banerjee Deutsche bank research S&P Dominic Wilson Roopa Purushothaman Tomas hult Goldman sachs Goldman sachs Goldman sachs FORBES

Websites
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www2.goldmansachs.com www.bric.com www.ft.com www.dbresearch.com www.advisoranalyst.com www.bloomberg.com www.businessweek.com www.chinadaily.com www.focuscapital.co.uk www.voltancapital.com www.epaper.timesofindia.com www.moneycontrol.com

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