CHAPTER 1 1.1EXECUTIVE SUMMERY India embarked on reintegration with the world economy in the early 1990s.

At first, a certain limited opening took place emphasising equity flows by certain kinds of foreign investors. his opening has had myriad interesting implications in terms of both

microeconomics and macroeconomics. A dynamic process of change in the economy and in economic policy then came about, with a co!evolution between the system of capital controls, macroeconomic policy, and the internationalisation of firms including the emergence of Indian multinationals. hrough this process, de facto openness has risen

sharply. "e facto openness has implied a loss of monetary policy autonomy when e#change rate pegging was attempted. greater e#ibility. he e#change rate regime has evolved towards

1.2OBJECTIVES OF THE STUDY

o study the impact of $lobali%ation of &inancial 'arket in India o know whether the globali%ation of &inancial 'arket is really good for India or not.

o study the concept of $lobali%ation of &inancial 'arket.

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1.3 RESEARCH METHODOLOGY his report is based on primary as well as secondary data, however the secondary data collection was given more importance since it has e#tracted from the reliable sources. (rimary data is collected for the purpose of obtaining investor)s views and opinions as stated above in the ob*ectives. Data Sources: +econdary data is used only for the reference and information. ,esearch has been done by primary data collection and primary data has been collected by interacting with various people. he secondary data has been collected through various books and websites. Statistical Tech i!ues Use": +tatistical calculations have been made, making general use of 'icrosoft -#cel on the computer. he +tatistics and $raphs . ables are based on +econdary / primary data e#tracted from various resource

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CHAPTER 2

2.1 I tro"uctio

&inancial system refers to the set of institutions, instruments and markets which foster savings and channels them to their most efficient use. In every economy, we find some system to mobili%e the surplus monetary resources from various sectors of the economy and allocate the same to the needy sectors. he system consists of individuals,

intermediaries, markets and users of savings. -conomic activity and growth are greatly facilitated by the e#istence of a financial system developed in terms of efficiency of the market in mobili%ing savings and allocating them among competing users. he group of different entities that are engaged in the task of garnering the money resources available
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in an economy will constitute the financial system. "epending upon the structure and ob*ective of each entity, the role of the particular entity will address to certain defined sectors or confine its functions within specified contours. he transformation of +avings into Investments and 0onsumption is thus facilitated by the active role played by the financial system. he process of transformation is aided by various types of financial assets suiting the individual needs and demands of both the investors and spenders. he offering of these diverse types of financial assets is supported by the role of financial intermediaries who invariably intermediate between these two segments of investors and spenders. -#amples of intermediaries are banks, financial institutions, mutual funds etc. he place where these activities take place could be taken to connote financial market. 1ell developed financial markets are required for creating a balanced financial system in which both financial markets and financial institutions play important role. "eep and liquid markets provide liquidity to meet any surge in demand for liquidity in times of financial assets. +uch markets are also necessary to derive appropriate reference rates for pricing financial assets.

2.2 Structure o# the $i a cial S%ste& &inancial system consists of markets, individuals or savers, intermediaries and users of savings. In the present global conte#t economic activity and growth are facilitated by the e#istence of financial system developed in term of efficiency of the markets in mobili%ing savings.
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&inancial Institutions2 In financial economics, a #i a cial i stitutio is an institution that provides financial services for its clients or members. (robably the most important financial service provided by financial institutions is acting as financial intermediaries. 'ost financial institutions are regulated by the government. &inancial institutions can be classified as banking and non! banking financial institutions. 3anking institutions are creators of credit while non! banking financial institutions are purveyors of credit. 1hile the liabilities of banks are part of the money supply, this may not be true of non banking financial institutions. &inancial 'arket2 &inancial markets are a mechanism enabling participants to deal in financial claims. he markets also provide a facility in which their demands and requirements interact to set a price for such claims. he main organi%ed financial markets in India are the money market and capital market. he first is a market for short!term securities while the second is a market for long term securities, that is, securities having a maturity period of one year or more.

&inancial Instruments2
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A #i a cial i stru&e t is a tradable asset of any kind4 either cash, evidence of an ownership interest in an entity, or a contractual right to receive or deliver cash or another financial instrument. According to IA+ 56 and 59, it is defined as 7any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. &inancial Instruments may be primary or secondary securities. (rimary securities are also termed as direct securities as they are directly issued by the ultimate borrowers of funds to the ultimate savers. -#amples of primary or direct securities include equity shares and debentures. +econdary securities are also referred to as indirect securities as they are issued by the financial intermediaries to the ultimate savers. 3ank deposits, mutual fund units, and insurance policies are secondary securities. &inancial instruments differ in terms of marketability, liquidity, reversibility, type of option, return, risk and transaction costs. &inancial instruments help the financial markets and the financial intermediaries to perform the important role of canali%ing funds from leaders. &inancial +ervices2 $i a cial ser'ices are the economic services provided by the finance industry, which encompasses a broad range of organi%ations that manage money, including credit unions, banks, credit card companies, insurance companies, accountancy companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises.
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As of 6008, the financial services industry represented 609 of the market capitali%ation of the +/( :00 in the ;nited +tates. he ;.+. finance industry comprised only 109 of total non!farm business profits in 198<, but it grew to :09 by 6010. =6> ?ver the same period, finance industry income as a proportion of $"( rose from 6.:9 to <.:9, and the finance industry@s proportion of all corporate income rose from 109 to 609. 6.5 ,ole of &inancial 'arket

Sa'i ( &o)ili*atio 2 ?btaining funds from the savers or surplus units such as household individuals, business firms, public sector units, central government, state governments etc. is an important role played by financial markets. I 'est&e t2 &inancial markets play a crucial role in arranging to invest funds thus collected in those units which are in need of the same.

+atio al ,ro-th2

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An important role played by financial market is that, they contributed to a nations growth by ensuring unfettered flow of surplus funds to deficit units. &low of funds for productive purposes is also made possible. E tre.re eurshi. (ro-th2 &inancial market contributes to the development of the entrepreneurial claw by making available the necessary financial resources. I "ustrial "e'elo.&e t2 he different components of financial markets help an accelerated growth of industrial and economic development of a country, thus contributing to raising the standard of living and the society of well!being.

6.8 &unctions of &inancial 'arket

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I ter&e"iar% $u ctio s2 he intermediary functions of a financial markets include the following2 Tra s#er o# Resources2 &inancial markets facilitate the transfer of real economic resources from lenders to ultimate borrowers. E ha ci ( i co&e2 &inancial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income. Pro"ucti'e usa(e2 &inancial markets allow for the productive use of the funds borrowed. he enhancing the income and the gross national production. Ca.ital $or&atio 2 &inancial markets provide a channel through which new savings flow to aid capital formation of a country. Price "eter&i atio 2 &inancial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers. hey provide a sign for the allocation of funds in the economy based on the demand and supply through the mechanism called price discovery process. Sale Mecha is&2 &inancial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets. I #or&atio 2 he activities of the participants in the financial market result in the

generation and the consequent dissemination of information to the various segments of the market. +o as to reduce the cost of transaction of financial assets.
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$i a cial $u ctio (roviding the borrower with funds so as to enable them to carry out their investment plans. (roviding the lenders with earning assets so as to enable them to earn wealth by deploying the assets in production debentures. (roviding liquidity in the market so as to facilitate trading of funds. it provides liquidity to commercial bank it facilitate credit creation it promotes savings it promotes investment it facilitates balance economic growth it improves trading floors

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CHAPTER / 5.1 Indian &inancial 'arket &inancial system refers to the set of institutions, instruments and markets which foster savings and channels them to their most efficient use. In every economy, we find some system to mobili%e the surplus monetary resources from various sectors of the economy and allocate the same to the needy sectors. he system consists of individuals,

intermediaries, markets and users of savings. -conomic activity and growth are greatly facilitated by the e#istence of a financial system developed in terms of efficiency of the market in mobili%ing savings and allocating them among competing users. he group of different entities that are engaged in the task of garnering the money resources available in an economy will constitute the financial system. "epending upon the structure and ob*ective of each entity, the role of the particular entity will address to certain defined sectors or confine its functions within specified contours. he transformation of +avings into Investments and 0onsumption is thus facilitated by the active role played by the financial system. he process of transformation is aided by various types of financial assets suiting the individual needs and demands of both the investors and spenders. he offering of these diverse types of financial assets is supported by the role of financial intermediaries who invariably intermediate between these two segments of investors and spenders. -#amples of intermediaries are banks, financial institutions, mutual funds etc. he place where these activities take place could be taken to connote financial market.

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1ell developed financial markets are required for creating a balanced financial system in which both financial markets and financial institutions play important role. "eep and liquid markets provide liquidity to meet any surge in demand for liquidity in times of financial assets. +uch markets are also necessary to derive appropriate reference rates for pricing financial assets. 5.6 +tructure of Indian &inancial 'arket India has a financial system that is regulated by independent regulators in the sectors of banking, insurance, capital markets, competition and various services sectors. In a number of sectors $overnment plays the role of regulators. 'inistry of &inance, $overnment of India looks after financial sector in India. &inance 'inistry every year presents annual budget on &ebruary 6A in the (arliament. he annual budget proposes changes in ta#es, changes in government policy in almost all the sectors and budgetary and other allocations for all the 'inistries of $overnment of India. he annual budget is passed by the (arliament after debate and takes the shape of law.

,eserve bank of India B,3IC established in 195: is the 0entral bank. ,3I is regulator for financial and banking system, formulates monetary policy and prescribes e#change control norms. he 3anking ,egulation Act, 1989 and the ,eserve 3ank of India Act, 1958 authori%e the ,3I to regulate the banking sector a. he

India has commercial banks, co!operative banks and regional rural banks.

commercial banking sector comprises of public sector banks, private banks and foreign banks. he public sector banks comprise the D+tate 3ank of India) and its seven associate banks and nineteen other banks owned by the government and account for almost three

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fourth of the banking sector. he $overnment of India has ma*ority shares in these public sector banks. India has a two!tier structure of financial institutions with thirteen all India financial institutions and forty!si# institutions at the state level. All India financial institutions comprise term!lending institutions, speciali%ed institutions and investment institutions, including in insurance. +tate level institutions comprise of +tate &inancial Institutions and +tate Industrial "evelopment 0orporations providing pro*ect finance, equipment leasing, corporate loans, short!term loans and bill discounting facilities to corporate. $overnment holds ma*ority shares in these financial institutions.

Eon!banking &inancial Institutions provide loans and hire!purchase finance, mostly for retail assets and are regulated by ,3I. Insurance sector in India has been traditionally dominated by state owned Fife Insurance 0orporation and $eneral Insurance 0orporation and its four subsidiaries. $overnment of India has now allowed &"I in insurance sector up to 6G9. +ince then, a number of new *oint venture private companies have entered into life and general insurance sectors and their share in the insurance market in rising. Insurance "evelopment and ,egulatory Authority BI,"AC is the regulatory authority in the insurance sector under the Insurance "evelopment and ,egulatory Authority Act, 1999.

,3I also regulates foreign e#change under the &oreign -#change 'anagement Act B&-,AC. India has liberali%ed its foreign e#change controls. ,upee is freely convertible on current account. ,upee is also almost fully convertible on capital account for non! residents. (rofits earned, dividends and proceeds out of the sale of investments are fully repatriable for &"I. here are restrictions on capital account for resident Indians for
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incomes earned in

India.

+ecurities and -#change 3oard of India B+-3IC established under the +ecurities and -#change aboard of India Act, 1996 is the regulatory authority for capital markets in India. India has 65 recogni%ed stock e#changes that operate under government approved rules, bylaws and regulations. hese e#changes constitute an organi%ed market for

securities issued by the central and state governments, public sector companies and public limited companies. he +tock -#change, 'umbai and Eational +tock -#change are the premier stock e#changes. ;nder the process of de!mutuali%ation, these stock e#changes have been converted into companies now, in which brokers only hold minority share holding. In addition to the +-3I Act, the +ecurities 0ontracts B,egulationC Act, 19:G and the 0ompanies Act, 19:G regulates the stock markets. he financial markets

can be classified as 'oney 'arket and 0apital 'arket on the basis of the instruments in which they deal.

5.5 0apital 'arket 0apital 'arket may be defined as a market dealing in medium and long!
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term funds. It is an institutional arrangement for borrowing medium and long!term funds and which provides facilities for marketing and trading of securities. +o it constitutes all long!term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issue various securities such as shares debentures, bonds, etc. In the present chapter let us discuss about the market for trading of securities. he market where securities are traded known as +ecurities market. It consists of two different segments namely primary and secondary market. he primary market deals with new or fresh issue of securities and is, therefore, also known as new issue market4whereas the secondary market provides a place for purchase and sale of e#isting securities and is often termed as stock market or stock e#change. 0apital market can be classified into two types2 (rimary 'arket +econdary 'arket Pri&ar% Mar0et he primary market is where new securities Bstocks and bonds are the most commonC are issued. he corporation or government agency that needs funds Bthe borrowerC issues

securities to purchasers in the primary market. 3ig investment banks assist in this issuing process. he banks underwrite the securities. hat is, they guarantee a minimum price for a business@s securities and sell them to the public. +ince the primary market is limited to issuing new securities only, it is of lesser importance than the secondary market.

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 Seco "ar% Mar0et he vast ma*ority of capital transactions take place in the secondary market. he

secondary market includes stock e#changes Blike the Eew Hork +tock -#change and the okyo EikkeiC, bond markets, and futures and options markets, among others. All of these secondary markets deal in the trade of securities. +ecurities2 he term 7securities7 encompasses a broad range of investment instruments. Investors have essentially two broad categories of securities available to them2 1. -quity securities Bwhich represent ownership of a part of a companyC 6. "ebt securities Bwhich represent a loan from the investor to a company or government entityC. E!uit% securities2 +tock is the type of equity security with which most people are familiar. 1hen investors BsaversC buy stock, they become owners of a 7share7 of a company)s assets and earnings. If a company is successful, the price that investors are willing to pay for its stock will often rise and shareholders who bought stock at a lower price than stand to make a profit. If a company does not do well, however, its stock may decrease in value and shareholders can lose money. +tock prices are also sub*ect to both general economic and industry! specific market factors. In our e#ample, if 0arlos and Anna put their money in stocks, they are buying equity in the company that issued the stock. 0onversely, the company
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can issue stock to obtain e#tra funds. It must then share its cash flows with the stock purchasers, known as stockholders. De)t securities: +avers who purchase debt instruments are creditors. 0reditors, or debt holders, receive future income or assets in return for their investment. he most common e#ample of a debt instrument is a bond. 1hen investors buy bonds, they are lending the issuers of the bonds their money. In return, they will receive interest payments Busually at a fi#ed rateC for the life of the bond and receive the principal when the bond e#pires. Eational governments, local governments, water districts, global, national, and local companies, and many other types of institutions sell bonds. +econd way of classifying 0apital 'arket is as follows2 ypes of capital 'arket2 $ilt I -dged 'arket $ilt ! -dged market refers to the market for government and semi!government securities, which carry fi#ed rates of interest. ,3I plays an important role in this market. Industrial +ecurities 'arket It deals with equities and debentures in which shares and debentures of e#isting companies are traded and shares and debentures of new companies are bought and sold. "evelopment &inancial Institutions

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"evelopment financial institutions were set up to meet the medium and long!term requirements of industry, trade and agriculture. hese are I&0I, I0I0I, I"3I, +I"3I,

I,3I, ; I, FI0, $I0 etc. All hese institutions have been called (ublic +ector &inancial Institutions. 5.8 'oney 'arket he money market is a market for short!term funds, which deals in financial assets whose period of maturity is upto one year. It should be noted that money market does not deal in cash or money as such but simply provides a market for credit instruments such as bills of e#change, promissory notes, commercial paper, treasury bills, etc. instruments are close substitute of money. hese financial

hese instruments help the business units,

other organi%ations and the $overnment to borrow the funds to meet their short!term requirement. 'oney market does not imply to any specific market place. ,ather it refers to the whole networks of financial institutions dealing in short!term funds, which provides an outlet to lenders and a source of supply for such funds to borrowers. 'ost of the money market transactions are taken place on telephone, fa# or Internet. he Indian money market consists of ,eserve 3ank of India, 0ommercial banks, 0o!operative banks, and other speciali%ed financial institutions. he ,eserve 3ank of India is the

leader of the money market in India. +ome Eon!3anking &inancial 0ompanies BE3&0sC and financial institutions like FI0, $I0, ; I, etc. also operate in the Indian money market.

&ollowing are some of the important money market instruments or securities.

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BaC 0all 'oney2 0all money is mainly used by the banks to meet their temporary requirement of cash. hey borrow and lend money from each other normally on a daily basis. It is repayable on demand and its maturity period varies in between one day to a fortnight. he rate of interest paid on call money loan is known as call rate. BbC reasury 3ill2 A treasury bill is a promissory note issued by the ,3I to meet the

short!term requirement of funds. reasury bills are highly liquid instruments, that means, at any time the holder of treasury bills can transfer of or get it discounted from ,3I. hese bills are normally issued at a price less than their face value4 and redeemed at face value. +o the difference between the issue price and the face value of the treasury bill represents the interest on the investment. hese bills are secured instruments and are

issued for a period of not e#ceeding 5G8 days. 3anks, &inancial institutions and corporations normally play ma*or role in the reasury bill market. BcC 0ommercial (aper2 0ommercial paper B0(C is a popular instrument for financing working capital requirements of companies. he 0( is an unsecured instrument issued in the form of promissory note. his instrument was introduced in 1990 to enable the

corporate borrowers to raise short!term funds. It can be issued for period ranging from 1: days to one year. 0ommercial papers are transferable by endorsement and delivery. he highly reputed companies B3lue 0hip companiesC are the ma*or player of commercial paper market.

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BdC 0ertificate of "eposit2 0ertificate of "eposit B0"sC is short!term instruments issued by 0ommercial 3anks and +pecial &inancial Institutions B+&IsC, which are freely transferable from one party to another. he maturity period of 0"s ranges from 91 days to one year. hese can be issued to individuals, co!operatives and companies. BeC rade 3ill2 Eormally the traders buy goods from the wholesalers or manufactures on credit. he sellers get payment after the end of the credit period. 3ut if any seller does not want to wait or in immediate need of money he.she can draw a bill of e#change in favour of the buyer. 1hen buyer accepts the bill it becomes a negotiable instrument and is termed as bill of e#change or trade bill. his trade bill can now be discounted with a bank before its maturity. ?n maturity the bank gets the payment from the drawee i.e., the buyer of goods. 1hen trade bills are accepted by 0ommercial 3anks it is known as 0ommercial 3ills. +o trade bill is an instrument, which enables the drawer of the bill to get funds for short period to meet the working capital needs.

5.: -uro 3ond2

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A -uro 3ond is an international bond which is issued on behalf of a multinational corporation, international agency, or sovereign +tate to investors throughout the world. hey are normally issued as unsecured obligations of the borrowers. he instrument

floated by the Indian companies are commonly referred to as &oreign 0urrency 0onvertible 3onds B&003sC, &030s are basically equity linked debt securities, to be converted into equity or depository receipt after specific period. hus, a holder of &030s has the option of either converting into equity or relating the bond. he &030s carry a fi#ed rate of interest which is lower than the rate on any other similar non!convertible debt instrument, and thus become attractive to the investors due to lower cost involved. hey can be marked conveniently and at the same time the issuer company can avoid any dilution in earnings per share, unless the investors see improved earnings and prices for the shares underlying the bonds. Also they can still be traded on the basis of underlying equity value. he convertible bonds provide an opportunity to the holders to participate in the capital growth of a company. ill the time he holds the bonds he gets a fi#ed return and in case he chooses to convert them into equity, he makes a capital gain. hus the convertible

bonds offer a mi#ture of the characteristics of fi#ed interest and equity investment.

5.G -uro I equity 'arkets2

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A -uro issue is an issue where the securities are issued in a currency of the country of issue and the securities are sold internationally to corporate and private investors in different countries. A euro issue is the securities are being issued, but the securities are denominated in the currency of the country of issue and are aimed at domestic investors in the country where the issue is made. -uro securities are transferable securities which are to be underwritten and distribute by a syndicate. he ma*or benefit that a euro issue provides to the issuer companyis the ability to raise funds at a lower cost. Average coupon rates on convertible bonds of five year maturity in the -uro market are 6 J 9to 89 as against the domestic long term interest rate of 189 or more. Also, a euro issue can e priced at par or even at a sight premium depending on the market conditions. 3esides these benefits, an issuer company can enlarge the market for its shares through greater e#posure and at the same time, enhance its image in the international market. International listing can provide increased liquidity for the securities, thus making them more attractive to buyers. &rom an investor)s angle, a -uro issue provides them a simple means to diversify their portfolio globally, and have access to foreign markets which were closed to foreign investment until now.

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5.< -uro 0urrency 'arket2 -uro 0urrency market is an international financial market speciali%ing in the borrowing and lending of currencies outside their countries of issue. he prefi# D-uro) thus refers to e#ternal indicating that the market is not a constituent of the domestic financial system and is thus free from the domestic banking regulation. he -uro 0urrency market is primarily a post war phenomenon and came to be known as -uro!dollar market. hus the -uro dollar market is more broadly called the -uro currency market as it also includes currencies other than the dollar such as pounds, &rancs, Hen. Kowever, the -uro dollar portion of the euro 0urrency is the dominant one. 0onstituents of -uro 0urrency 'arket2 1. -uro 0urrency 'arkets2 &unds in the euro currency markets are funded by banks in the form of loans and 'erchant 3ankers help in the loan syndication. o play in the international capital market the ma*or things that are important are the choice of currency and the choice of financial instrument and in the selection of these, only the merchant banker)s skilla, e#pertise, e#perience and resource position is reflected. 6. -uro -quity 'arket2 1ith liberali%ation having opened the floodgates of overseas market, more companies are moving towards the mobili%ation of funds from the international market in the form of -uro issues! $",s B$lobal "epository ,eceiptsC. ,eliance was the first company to do so. 'ore and more companies are opting for the euro issue route to mobili%e resources.
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his would inturn lead to 'erchant 3ankers to be fully conversant to deal in -uro issues. Kowever, there are some barriers which are restricting the growth of the -uro equity market. he heavy cost and time involved in the investors, difficulty for investors in

making the decision to invest in a particular currency, standardi%ing of various systems, complications of various regulations in other nations etc. are some of reasons. could be overcome once the 'erchant 3ankers develop e#pertise in these areas. 5. -uro 3ond 'arket2 'erchant banker can enter into the international bond market as lead managers. here are various centers which provide technical facilities and depending upon the borrower)s country of origin, funds requirement, location of stock e#change. -uro 3onds are required to be listed on one or more stock e#change for easy trading. o enter the area of international market, the 'erchant 3anker has to follow the two steps namely to participate in international groupings and association with other 'erchant 3anks operating in International market. hese

CHAPTER 1
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8.1 $lobali%ation of Indian &inancial 'arket India@s integration into the world economy blossomed in &irst $lobalisation. he

trade.$"( ratio rose from 1 to 6 per cent in 1A00 to 60 per cent in 1918. In 1980, when India was under colonial rule, restrictions on international trade and capital mobility were imposed throughout the +terling Area as wartime measures. India gained independence in 198<, but emphasi%ed autarkic policies, with a marked closing of the economy in the 19G0s and 19<0s. 3y 19<0, the trade.$"( ratio had dropped to A per cent. 3y 1991, with e#perience and international comparisons for 88 years in hand, the intellectual and policy consensus shifted against autarky. India then embarked on reintegration into the world economy through trade and capital account liberalisation. 3y the mid 1990s, the trade.$"( ratio had got back to the 60 per cent value seen in 1918. ,eintegration into the world economy took place on both the current account and on the capital account. ideas2 L It was believed that debt in inflows and all out ows were dangerous4 hence strong restrictions against debt in inflows and all out inflows were kept in place. L It was believed that in inflows into the equity market were benecial, but only if they originated from certain kinds of investors. hus investment vehicles such as pension he early initiatives in capital account decontrol werebased on three

funds and university endowment funds were considered good, while hedge funds and individuals were considered bad. Kence, a limited opening was undertaken, where certain kinds of Mforeign institutional investors@ B&IIsC were able to register in India with the
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securities regulator, and then given substantial edibility including the lack of quantitative restrictions. 1hile the official rhetoric was in favors of &"I, the removal of capital controls against &"I was limited in many sectors. "eeper liberali%ation of capital controls against &"I took place later. his opening of the economy was a key element of India@s growth acceleration of the early 1990s. he combination of these reforms of the capital account, and trade

liberalisation, unleashed a comple# dynamic of change in the economy and in economic (olicy. In this setting, the analysis of India@s reintegration into the world economy is usefully organi%ed around the following key questions. 1hat were the microeconomic and macroeconomic consequences of this partial openingN Kow did capital account and current account opening interact with each otherN 1hat dynamic of change was unleashed in the political economy through the map of interests of gainers and losers associated with this mechanism of opening the economyN Kow did de facto openness evolve in the following two decadesN 1hile the bulk of these questions remain unanswered research pu%%les, there is clarity on some sub!components of this larger picture, which is sketched in the following sections

8.6 Internationali%ation of &irms

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&irm internationali%ation lies at the centre of India@s engagement with nancial globali%ation. here is sharp evidence of internationalisation at the rm level. &ive

dimensions of internali%ation can be e#amined2 1. A firm could import, thus buying raw materials and.or capital goods from foreign providers4 6. A firm could e#port4 5. A firm could obtain equity capital from e#ternal sources4 8. A firm could obtain debt capital from e#ternal sources B1hether local!currency denominated or foreign!currency denominatedC4 :. A firm could e#pand overseas, thus placing foreign assets on its balance sheet. In order to describe the e#tent of internationali%ation of Indian firms, we define four categories2 Eone 0 percent Fow 3etween 0 percent and 10 percent 'edium 3etween 10 percent and :0 percent Kigh Above :0 percent ;sing information from the 0'I- database, we classify all large Indian firms into one of these four categories in all the four "imensions.

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able 6 approaches internationali%ation of Indian firms by reporting the fraction of aggregate firm si%e in each category. &or our purposes, si%e is defined as the average of firm sales and total assets. In 6001!06, G8 percent of total firms si%e involved corporations importing in the 'edium or Kigh categories. 3y 600A!09, this had risen to GG per cent, a rise of 6 per cent. 1ith e#ports, in 6001!06, 1: per cent of this mass was in either 'edium or Kigh. 3y 600A!09, the total firm si%e with e#port intensity in the 'edium!Kigh categories had risen to 60 per cent, a rise of : per cent. 1ith both these trade!based measures, the change in international economic integration over this period was small. 1hile the macroeconomic data on trade integration shows a sharp rise over this period, this data for large firms does not show a sharp change. Farge changes are, however, visible across this period with measures of financial internationali%ation. In 6001!06, 80 per cent of the mass of Indian firms had either 'edium or Kigh equity investment. 3y 600A!09, this stood at G6 per cent2 a sharp rise of 66 percentage points.
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1ith foreign borrowing, in 6001!06, firms accounting for 59 per cent of the mass were in either 'edium or Kigh categories. In 600A!09, this had risen to :8 per cent O despite the stated policy of the government in aiming to deter debt in ows. &inally, with overseas assets, less than 1 per cent of Indian firms had either 'edium or Kigh overseas assets in 6001!06. 3y 600A!09, the number of Indian firms with 'edium or Kigh overseas assets had risen sharply to G per cent. ?ver half the mass of firms had non!%ero outbound &"I. A natural area of e#ploration lies in the interplay of internationalisation and financing constraints. An early literature found that the domestic financial system, and particularly the equity market, was sensitive to e#porting status. -#porting firms faced reduced financing constraints. Kowever, this evidence is based on the early 1990s, while the large changes in internationali%ation of firm financing took place after 6000. hese questions, hence, lie largely une#plored.

8.5 ,ole of &oreign "irect Investment India opened up slowly to &"I in the 1990s. he limits on the share of foreign ownership was slowly increased in every sector. 3y 6000, while most sectors were open upto 100 percent, sectors where &"I was restricted include retail trading Be#cept single brand
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product retailingC, atomic energy, and betting. able 8 shows the areas where &"I caps e#ist. 1hile inbound &"I investors have the ability to repatriate capital, so far, in the Indian e#perience, this reverse flow of capital

has been tiny. As an e#ample, in 600G!0<, it was 0.019 of $"(. Kence, for all practical purposes, inbound &"I has been a one!way process of capital coming into the country. 1hen compared with other emerging markets, India has attracted relatively little &"I. he first phase of financial globali%ation primarily involved Indian firms obtaining equity and debt capital from abroad, thus achieving a reduction in the cost of capital. his

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bolstered the competitive position of Indian firms competing against foreign companies producing in India through &"I and competing in global markets by e#porting. he easing of capital controls, coupled with strong investment opportunities in India, gave a strong rise in &"I flows into India from 0.189 of $"( in 1996!95 to 0.:59 in 1999!6000 and then to 6.589 of $"( in 600G!0< &rom April 6000 to August 600<, P88 billion came into India through &"I. In terms of the country composition, the bulk of

0ountry composition of &"I BApril 6000 ! August 600<C &"I into India came in from 'auritius2 the reason for this is that India has a preferential ta# treaty with 'auritius. +ervices, financial and non!financial, attracted the highest amount of &"I. 3etween April 6000 to August 600< ;+" A billion, or 60.G percent of all &"I flows, came into the services sector. Ee#t was computer software and hardware which attracted 1G percent of flows. elecom BA.<9C, automobile industryBA.<9C ,

construction B:.69C and power B5.89C came ne#t. 1hen &"I into India did rise
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significantly from 6006 onwards, as much as two!thirds of this &"I took the form of foreign private equity funds buying large stakes in Indian unlisted compa! nies. his

phenomenon can also be interpreted as foreign capital bolstering the competitive position of Indian firms competing against foreign companies producing in India through &"I. his e#perience can be located in the debates about M&"I as bad cholesterol@ literature, where foreign portfolio investment is seen as a bigger accomplishment by an emerging market. &"I requires little institutional capability, while foreign portfolio investment requires high quality firms, domestic financial development, and capabilities in the legal and regulatory system.

8.8 &oreign (ortfolio Investment in the -quity 'arket In the early 1990s, India opened investment into listed equities through the M&II framework@. his involved the following key elements. +ome, but not all, foreign

investors were eligible to register with the Indian securities regulator B+-3IC. ?nce registered, &IIs could buy shares in India without quantitative restrictions, or constraints

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on repatriation. Eo one &II was permitted to own more than : per cent of a firm, and there were weak restrictions on the ownership by all &IIs taken together. ?ne response of global financial firms to the Indian &II framework has been the rise of a market for Mparticipatory notes which are ? 0 derivatives on Indian underlyings which are traded offshore. A handful of global firms are book!runners on this market. A foreigner who is not a registered &II with the Indian authorities is able to transact on the (E market. he book!runners then hedge their net e#posures of the book using the

onshore market, to which they have access by virtue of being registered &IIs in India. ?ne factor which has encouraged the use of (Es is the presence of transaction ta#es on the onshore market, while (E transactions avoid these. As the home bias literature has emphasised, there are many sources of home bias, and capital controls is only one element of these. In the event, when India embarked on a limited easing of capital controls against equity inflows, the home bias of foreign investors did not strongly change in response. 'any other sources of home bias remained in place, including asymmetric information, capability of the domestic financial system, a limited number of listed firms of adequate si%e from the viewpoint of international investors, etc. he desire of policy makers to encourage foreign investors in the Indian equity market, in the early 1990s, helped in reopening long!standing policy questions about the equity market. &oreign investors faced many difficulties in accomplishing transactions in the Indian equity market. As an e#ample, in August and +eptember 1995, the settlement
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system Bwhich was based on physical paper share certicatesC found it difficult to handle the settlement volume of foreign investors. +imilarly, foreign investors who sent orders to the open outcry trading floor of the 3ombay +tock -#change found an array of problems including high transactions costs and low probability of order e#ecution. A first response of many Indian firms was to issue in Eew Hork or Fondon through $",s and A",s, thus using the institutional capability of these financial systems, and bypassing the infirmities of the domestic financial system. In the early 1990s, there was a sharp increase in this issuance. 1hen faced with similar conditions, many other developing countries have e#perienced a hollowing out of domestic financial intermediation. 1hen a weak domestic financial system is difficult to reform for political reasons, domestic firms tend to interact with foreign investors in international financial centers like Eew Hork or Fondon, leading to a shift in financial intermediation to offshore venues. In the Indian case, from 1995 to 6001, the 'inistry of &inance and +-3I led a strong reforms effort aiming at a fundamental transformation of the equity market. he changes on the equity market from "ecember 1995 to Qune 6001 helped to increase liquidity, reduce risk, improve disclosure and increase the number of investors and trades in the market. hese reforms led to a shift in the focus of foreign investors away from Indian securities traded in Fondon or Eew Hork, and the primary markets for India!related equities trading became the E+- and 3+- in 3ombay.

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hese changes addressed one important source of home bias the deficiencies of financial development in emerging markets and were associated with a decline in home bias by foreign investors against investing in India. In 1991, the weight of Indian equities in the portfolio of international investors was %ero. In the first decade of India@s opening, this share rose to only 0.08 per cent, reacting a largely unchanged e#tent of home bias against India. 3y 600<, there was a si#!fold rise in this weight to 0.68 per cent, suggesting an easing Bthough not eliminationC of home bias.1hile India obtained significant financial development and capital account decontrol on the equity market, neither of these changes took place with the bond market and banks. In the same period, firms undertook strong deleveraging through emphasis on equity financing2 the debt!equity ratio of large non! financial firms dropped sharply from 1.< in 1991 to 0.< in 600<. here may be a causal relationship here2 when firms faced greater financing constraints on bond! or bank! financing alongside reduced financing constraints for equity financing, they may have shifted in favour of greater equity financing. 0onsequently, while the share of foreign investors in equity rose sharply, in the bond markets it remained limited. &urther there were regulatory caps on the stock of holdings of government bond by foreign investors. 0orporate bonds were allowed to be held by foreign institutional investors only after 6008.

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8.8 &oreign 3orrowings In the international literature and in policy thinking amongst emerging markets, the question of currency e#posure has come to prominence. 1hen the e#change rate regime gives out e#pectations of low currency risk, firms and governments are encouraged to borrow in foreign currency. ?nce currency mismatches are present, when large depreciations take place, this generates considerable distress. Indian capital controls have been biased against foreign borrowing and particularly against short!dated foreign borrowing. his policy framework does not reflect an

appreciation of issues of currency e#posure. +trong restrictions are in place against &II investment in rupee!denominated bonds, while a much larger scale of offshore borrowing in foreign currency takes place. his policy framework has encouraged unhedged

currency by firms, particularly in periods when the e#change rate regime involved greater pegging. hese issues came to prominence in 600A, when e#change rate volatility rose, a sharp depreciation took place, and the global credit market e#perienced turbulence. his had an adverse impact on the balance sheets of many Indian firms, particularly those which had borrowed abroad. he e#periences of this period emphasi%ed the weaknesses of India@s policy positions on the three issues of original sin, the lack of development of the domestic bond market and the lack of development of a domestic banking system.
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0KA( -, : :.1 0onclusion

he implications of globali%ation for a national economy are many. $lobali%ation has intensified interdependence and competition between economies in the world market. his is reflected in Interdependence in regard to trading in goods and services and in movement of capital. As a result domestic economic developments are not determined entirely by domestic policies and market conditions. ,ather, they are influenced by both domestic and international policies and economic conditions. It is thus clear that a globalising economy, while formulating and evaluating its domestic policy cannot afford to ignore the possible actions and reactions of policies and developments in the rest of the world. his constrained the policy option available to the government which implies loss of policy autonomy to some e#tent, in decision!making at the national level.

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0KA( -, G G.13ibliography 3ooks and (eriodicals2 &inancial 'arket In IndiaRRRRR +. (arveen &inancial 'arketsRRRRR.. $orden Eatra*an 1ebsites2 http2..www.webcrawler.com.info.wbcrwl.50:.05.search.webN qSroleTofTfinancialTmarkets/cid http2..www.investopedia.com.walkthrough.corporate!finance.1.financial! markets.asp#

http2..en.wikipedia.org.wiki.&inancialUservices

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