RBI wants local FIs as counterweight to FIIs

MUMBAI: The Reserve Bank of India has called for the development of strong domestic financial institution in the equity markets, which are presently dominated by foreign institutional investors (FIIs).

RBI has said that prospective reforms in the equity market need to focus on developing strong domestic institutional investors, adherence to international best practices in corporate governance and reduction in time and cost for floating public issues.

The central bank has also highlighted the fact that promoters continue to hold a large portion of equity in their companies which have implications for corporate governance and protection of rights of minority shareholders.

RBI’s concern over the absence of domestic institutional investor base appears to be in the context of the destabilising impact of global capital flows. “The East Asian crisis of the 90s as well as the developments in Turkey and Iceland during 2006 indicate that global financial markets can exacerbate domestic vulnerabilities,” RBI said.

In India, the Unit Trust of India, which used to be largest institutional investor is shadow of its earlier self after the state-owned mutual fund was truncated following a crisis a few years ago. The largest institutional investor in the stock market at present is Life Insurance Corporation with annual equity investments of over Rs 25,000 crore.

LIC is a conservative investors and takes buy and hold positions. Mutual funds, despite their strong numbers, invest far less in equity. According to RBI, growing integration of domestic financial markets with international financial markets across the globe also poses the threat of contagion.

“The search for yield has resulted in large external flows into emerging market economies over the past few years leading, inter alia, to the problem of monetary management,” RBI said. Risk spreads and measures of volatility have also declined to quite low levels,” RBI said.