Resurgent India puts the spice into British funds: Investors are lining up to take advantage of economic transformation. Paul Durman reports

INDIA will be the focus of a flurry of activity from the UK financial community over the next few months.

Despite continuing repercussions from the Bombay stock market scandal, 1994 is already shaping up to be India's year.

Kleinwort Benson has this week announced plans to launch the Indian equivalent of an investment trust as part of a joint venture with Tata, the Indian industrial giant whose activities span steel, chemicals, energy and hotels. Meanwhile, Flemings hopes to solve a tax problem that will allow it to launch the first UK authorised trust specifically to invest in India.

Martin Currie, the Scottish investment manager, is seeking to raise a further dollars 150m for its Indian Opportunities Fund, heavily oversubscribed when it raised its first dollars 100m last summer. And James Capel, the stockbroker, expects to handle many of the host of capital-raising issues planned by Indian quoted companies.

'Investment banks are swarming around India like there's no tomorrow,' said Shaun Browne, a director of James Capel's international equity issues division.

Foreign & Colonial, another fund manager that recently put together a dollars 150m investment fund for India, forecasts that Indian stock markets will grow by a remarkable 55 per cent in 1994 - and it may revise this prediction upwards.

Like China, India's economic potential starts with its huge population of about 900 million. Its other merits embrace a middle class variously estimated at anything between 100 and 250 million; well-established stock markets with 7,000 quoted companies and 15 million shareholders; low(ish) inflation; and, most important, a government committed to economic reform.

All the recent Western enthusiasm stems from July 1991 when P V Narasimha Rao, who had become prime minister in the wake of Rajiv Gandhi's assassination, embarked on wide-ranging reforms in response to a financial crisis brought on by communism's collapse and the Gulf war.

The Indian government began to dismantle the country's bureaucratic licensing system. Foreign companies, previously restricted to 40 per cent, were given the right to take majority control of Indian businesses. Foreign financial institutions were allowed to invest directly in Indian quoted companies. Last March's budget continued the reform process and allowed the rupee to float.

At first, the tightening of fiscal and monetary policy pushed the economy into recession - growth falling to 1.2 per cent in 1991/92 from the 5 per cent normal in the 1980s. But, helped by a good monsoon, gross domestic product is expected to rise by 5 or 6 per cent this year.

India's determination to be self-reliant had limited foreign investment to a trivial dollars 100m a year. But it has grown rapidly and could run to several billion dollars in 1994.

This still looks modest beside the dollars 100bn that China is attracting, but India does not present the same degree of political risk. Indian democracy has proved robust in the face of assassinations, the sacking of the Muslim temple at Ayodhya, and the bombings of Bombay and Calcutta last March. The setbacks suffered by the Hindu nationalists, the Bharatiya Janata Party, in last November's elections give foreign investors further grounds for confidence.

Lord Desai, who heads the Development Studies Institute at the London School of Economics, shares this optimism: 'India does offer the most amazing opportunities, because although it looks chaotic, it's much more stable than many other countries. I think there are very, very good returns to be made.'

Lord Desai wants India's economic reforms to become much more thorough and whole-hearted, but thinks this is only a matter of time. He said Mr Rao assured him in November that he intends to press ahead with reform.

One doubt hanging over the economic transformation is the fall-out from the 1992 stock market scandal, in which 40bn rupees ( pounds 850m) were illegally diverted from the banks into shares. A damning report by Indian MPs published just before Christmas attributed much of the blame to foreign banks such as Standard Chartered and Citibank.

Crucially, however, Manmohan Singh, India's widely respected Finance Minister, seems to have emerged largely unscathed; he offered his resignation but Mr Rao refused to accept it. Few British observers believe the report will check the reform process or reverse the concessions to foreign financial institutions.

Lord Desai said there was little prospect of the Indian authorities cancelling Citibank's licence or taking other similar actions 'because more than anything, India needs foreign capital'.

Most foreign institutions are investing via Mauritius to take advantage of a treaty that greatly reduces liability to Indian taxes. Flemings is trying to combine this shelter with its planned trust. Lord Mark Fitzalan Howard, chairman of Fleming Investment Trust Management, said: 'We think the concept of an onshore approved investment trust, with all the back-up that Flemings can offer, would be an enormously exciting vehicle. We're hopeful.'

Foreign & Colonial's Indian Investment Company is an open-end fund based in Luxembourg that invests through a Mauritius subsidiary. F&C was inundated with calls when the fund was opened to further money on Tuesday. The dollars 150m subscribed in October has grown to nearly dollars 200m. As well as attracting money from the UK, Switzerland and the Far East, F&C has had a lot of interest from non-resident Indians.

Arnab Banerji, chief investment officer of F&C Emerging Markets, expects corporate earnings to rise by 30-40 per cent in 1994, after a 30 per cent increase in 1993. He hopes to see interest rates cut from their present 15 per cent now that inflation is under control.

India still has much to do to make it easy for foreign investors to gain licences and approvals. Lord Desai complains that 'there does not seem to be a simple and transparent system. There are too many agents and authorities that you have to go to to get permission. A foreign investor has to get very good local agents to look after them.'

But India has made much progress in the past two and a half years. 'In terms of potential, it's hardly been scratched,' said Lord Desai.

(Photograph omitted)