The Flow of Funds in a Working ETF – Dissecting the Cube for Expanding the Indian Equities Market Through ETFs

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Prepared for the National Stock Exchange by students of Georgetown University’s International Executive MBA Program

Jen McDonaldMavis MotherwayPablo PezzimentiDan PolkAmish ShethGlenn Zirbser

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Prologue

The year is 2005. The Indian Subcontinent is a booming megalopolis of economic growth and youthfulambition. Economic liberalization in India has created a 6-7% real GDP growth and optimists arepredicting a growth pattern that could reach the 7-8%. By 2020, India, the world’s largest democracy,will become the fastest growing economy out of 34 developed and emerging markets. Moreover, its GDPper capita will double, from roughly USD$2,500 to almost USD$5,000.

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The effects of such rapid growthcan be felt from the fields of Kolkata to the venture capital offices on Sand Hill Road. The opportunitiesfor domestic and foreign direct investment in India will create a return like no other, where vested capitalwill see an immediate and generous return.The financial markets are not exempt from this tremendous prospect for growth. The over-subscription of IPOs, the potential for long-term returns on equity owned by India's citizens and the influx of foreigncapital all represent a significant opportunities in this new market. The ability to harness the investmentsthat are contributing to this growth is crucial to the success of the financial markets. As the reins areloosened on privatization, the monies coming into India will need a stable, regulated and liquidenvironment in which investments can reside.

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First, these investments should measure appropriately against other holdings.

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Second, the investments should be actively traded, as evidenced by the liquidity in other globalfinancial capitals.

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Third, the investment should be subject to a market velocity and flexibility that creates thefreedom to buy freely and divest at a moment’s notice.We are convinced that the avenues of a fortuitous investment in India are about to expand. Theseinvestments will be comprised of India's domestic community as well as foreigners seeking to increasetheir exposure to India’s prospect of long-term growth. We believe that the optimal place for thesemonetary interests is in equity positions of the private companies that are leading the way for India. Stock exchanges around the world have been in search of a financial instrument that invites massive quantitiesof investment; yet is self-sufficient in its ability to index and regulate its pricing. They have found thosecharacteristics in Exchange Traded Funds. ETFs are rapidly becoming a staple investment tool for a widespectrum of investors, both individual and institutional alike.

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Therefore, as India opens its arms to amore abundant investment in its equities, the following dissertation proclaims that the procurement,utilization and efficient use of ETFs on India's National Stock Exchange represent the ideal financialvehicle to harbor the inevitable influx of capital and help speed India’s transition into an economicsuperpower.Jennifer McDonaldMavis MotherwayPablo PezzimentiDaniel Polk Amish ShethGlenn Zirbser

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