A Study of Growth of Financial Services in India1

7/30/2019 A Study of Growth of Financial Services in India1

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INTRODUCTION

According to Shakespeare out of this nettle, danger, we pluck this flower, safety'. The

economic development model adopted by India in the post-independence era has been

characterized by mixed economy with the public sector playing a dominating role and the

activities in private industrial sector control measures emaciated from time to time. The

industrial policy resolution was introduced by the government in the 1948, immediately

after the independence. This outlined the approach to industrial growth and development.

The industrial policy statement of 1980 focussed attention on the need for promoting

competition in the domestic market, technological upgradation and modernisation. A

number of policy and procedural changes were introduced in 1985 and 1986, aimed at

increasing productivity, reducing costs, improving quality, opening domestic market to

increase competition and making free the public sector from constraints. Overall, in the

seventh plan period (1985-86 to 1989-90), Indian industries grew by an impressive

average annual rate of 8.5 percent. The last two decades have seen a phenomenal

expansion in the geographical coverage and financial spread of our financial system. The

spread of the banking system has been a major factor in promoting financial

intermediation in the economy and in the growth of financial services.

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FINANCIAL SERVICES

Financial services is a term used to refer to the services provided by the finance

industry. Financial services is also the term used to describe organizations that deal

with the management of money. Banks, investment banks, insurance companies,

credit card companies and stock brokerages, are examples of the types of firms

comprising the industry, which provides a variety of money and investment related

services.

Financial services organisations are striving to achieve increasingly ambitious profit

and growth targets against a background of heightened risk, regulation and market

pressures.

Customer needs and expectations are evolving in the face of increasing personal

wealth, more private funding of pensions and healthcare and the desire for ever more

accessible and personalised financial products and services. In turn, intense

competition has squeezed industry margins and forced organisations to cut costs while

still seeking to enhance the quality of client choice and service. The battle for talent is

also heating up as companies seek to enhance innovation, customer loyalty and

investment returns.

In this environment, the winners will be companies that can turn the challenges into

opportunities to build stronger and more enduring customer relationships; sharpen

process efficiency; unlock talent and creativity; use improved risk management

processes to deliver more sustainable returns; and use new regulatory demands as a

catalyst for strengthening the business and enhancing market confidence.

In the WORLD almost every company now which previously described themselves as

a bank, insurance company, or brokerage house, now describes themselves in some

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way as a financial services institution.

Financial services is the largest industry (or industry category) in the world, in terms

of earnings; as of 2004, the industry represents 20% of the market capitalization of the

S&P 500.

The industry is also becoming more vibrant, with new types of products and services

being offered to meet the needs of the booming economy. For example, in the

derivatives market, the notional principal amount outstanding has more than trebled

between March 2005 and June 2007 to US$ 24.09 billion from US$ 6.836 billion.

With sustained deregulatory measures, exposure to international financial markets and

the introduction of new products and services, the Indian financial sector is charting

an impressive growth path.

According to global research data from Macquarie, India is the most preferred stock

market in terms of portfolio allocation owing to current lucrative valuations and the

government fiscal measures taken to boost liquidity in the economy.

The market is also expected to undergo a structural transformation with organised

players increasing their market share. As a measure to ease the present liquidity

situation and boost market volumes, the Securities and Exchange Board of India

(SEBI) will be allowing cross-margining norms to all the participants in the market.

In a previous move in May 2008, SEBI had permitted institutional investors to avail

this facility. According to SEBI, "In order to improve the efficiency of the use of the

margin capital by market participants, it has now been decided to revise the existing

facility of cross-margining and to extend it across cash and derivatives segments to all

categories of market participants."

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In a recent move, the government has permitted liquidity support for non-banking

finance companies (NBFCs) through a subsidiary of state-run lender Industrial

Development Bank of India (IDBI). The liquidity support would be worth approx.

US$ 3.94 billionUS$ 4.93 billion and can be utilised by the NBFCs only to repay

active liabilities. The measure is expected to look after the liquidity needs of the

NBFCs for around the first six months of 2009.

According to a MasterCard survey, Mumbai leads the pack of strategically important

commercial centres in emerging nations, ahead of Shanghai and Kuala Lumpur.

"In terms of financial services environment, Mumbai ranks one among all 65 cities

covered by the index. It received the top score in the dimension of banking services

and currency exchange regulations, and ranked highly on the volume of financial

services traded," said the report. In all, eight cities from India found a place in the list.

Furthermore, foreign pension funds are bullish on India, with over 40 such funds

(endowments and university and family foundations) getting registered with the SEBI,

during the last few months. One of the reasons for this was the simplification of

regulations by SEBI.

INSURANCE

The insurance sector is one of the most promising sectors in India today.

In an ASSOCHAM report 'Insurance Sector Futuristic Growth' stated that India's

insurance sector is likely to reach US$ 46.25 billion by 2010. The report said, "The

total insurance business will reach a level of US$ 46.25 billion in the next two years

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from the current level of US$ 1.15 billion." Private insurance business is likely to see

a 140 per cent growth rate due to the aggressive marketing techniques used by them.

Conversely, state-owned insurance companies would see a 3540 per cent growth

rate.

India is the fifth largest life insurance market in the emerging insurance economies

globally and the segment is growing at a healthy 3234 per cent annually. According

to a report by research firm RNCOS'Booming Insurance Market in India (2008

2011)'the total life insurance premium in India is projected to grow to US$ 259.72

billion by 201011. The general insurance sector is likely to grow at a rate of 18 per

cent in 2008, compared to 13 per cent in 2007. The 17 major non-life insurers

collected a total of US$ 840.27 million as premium in April 2008.

Life Insurance Corporation (LIC) is bullish on growth and is targetting business in

excess of US$ 59.14 billion by 201112.

The government is planning to ease restrictions on foreign investments in insurance,

banking and pensions, and allow foreign direct investment (FDI) of 49 per cent from

the present 26 per cent.

BANCASSURANCE SEGMENT

With the growing keenness of banks to augment their other income (fee-based

income), the bancassurance segment has seen consistent growth over the years,

offering tough competition to the conventional sale of insurance by agents.

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Bankers and insurers are both upbeat about the future of the bancassurance segment

which is expected to contribute about 50 per cent or more to the life insurance

segment by the year 2010. It has also contributed significantly to the business of

major insurance companies like Life Insurance Corporation (LIC) and SBI Life.

In August 2008, bancassurance accounted for 35 per cent of the premium collected by

private players. In 200607, that figure was about 17 per cent. The growth in

bancassurance for insurance companies wholly depends on the number of bank

branches that actively dispense these products.

STOCK MARKETS

Fund raising by India Inc through initial public offers (IPOs) rose by a whopping 62

per cent since the beginning of 2008 to 29 May, 2008 to US$ 4.2 billion, against US$

2.6 billion during the same period in 2006, according to global deal data provider,

Dealogic. Significantly, fund mobilisation during the first quarter of 2008 was the

second highest for a quarter in the Indian capital's history.

In recent months, the Indian stock market has slowed down due to the global

economic turmoil. However, expectations of it rebounding soon are also high.

Further, according to global consultancy firm, Deloitte Haskins & Sells, the Indian

economy and capital markets are expected to witness a turnaround within six to nine

months.

According to the initial public offering (IPO) estimates for 2009, by Thomson Reuters

study, India Inc is likely to raise four times the proceeds it garnered from the primary

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market in 2008. As per the study, India Inc is targetting to raise a massive US$ 15.28

billion through public issues.

Furthermore, SEBI will be making it easier for companies to raise money from the

stock market, by relaxing eligibility rules to facilitate faster raising of funds from

existing shareholders.

Presently, only companies having had a market capitalisation of above US$ 1.97

billion in the last one year are entitled to this route. SEBI plans to bring down this

figure.

ONLINE TRADING

Online trading India is the internet based investment activity that involves no direct

involvement of the broker. There are many leading online trading portals in India

along with the online trading platforms of the biggest stock houses like the National

stock exchange and the Bombay stock exchange. The total portion of online share

trading India has been found to have grown from just 3 per cent of the total turnover

in 2003-04 to 16 per cent in 2006-07.

FACILITIES OF THE ONLINE TRADING INDIA:

The investor has to register with an online trading portal and get into an agreement

with the firm to trade in different securities following the terms and conditions listed

down on the agreement. The order processing is done in correct timings as the servers

of the online trading portal are connected to the stock exchanges and designated banks

all round the clock. They can also get updates on the trading and check the current

status of their orders either through e-mail or through the interface. Brokerages also

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provides research content on their websites, such that the clients can take their own

decisions on stocks before investing.

PRODUCTS AND SERVICES OF THE ONLINE TRADING INDIA:

the major financial products and services of the online trading India are like equities,

mutual funds, life insurance, general insurance, loans, share trading, commodities

trading, portfolio management and financial planning.

NATIONAL STOCK EXCHANGE AND BOMBAY STOCK EXCHANGE:

In spite of many private stock houses at present involved in online trading in India,

the NSE and BSE are among the largest exchanges. They handle huge daily trading

volumes, supporting large amounts of data traffic, and possessing a countrywide

network. The automated online systems used for trading by the national stock

exchange and the Bombay stock exchange are the NIBIS or NSE's Internet Based

Information System and NEAT for the national stock exchange and the BSE OnLine

Trading system or BOLT for the Bombay stock exchange.

PRIVATE EQUITY

According to a report by global research firm Preqin, private equity investments are

likely to perk up in the second-half of 2009 and fuel the global economic recovery.

"With approximately US$ 1 trillion of dry powder (term used to denote capital

available for deals) available, private equity is poised to play a major role in the

coming economic recovery," the report revealed.

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Private equity (PE) players see are bullish on investing in India as a profitable

destination, expecting the inflows to be around US$ 5 billion-US$ 8 billion in the

coming year.

Industry experts feel that long-term investing in India is a profitable option.

According to a survey by Deloitte during the last six months, sectors driven by

domestic consumption and infrastructure are expected to witness a lot of activity.

Sandeep Gill, managing director of Deloitte corporate finance, said, "We have

observed two key points, the competitive environment for investment opportunities

for PE houses is expected to ease during 2009, as smaller PE firms and hedge funds

exit the market. Second, the volume of PE deals in the market will be dependent on

how quickly promoters are willing to accept lower valuations."

The total number of PE deals during the first five months of 2008 stood at 170, with

an announced value of US$ 6.39 billion as against 159 deals amounting to US$ 4.97

billion during the corresponding period in 2007. India is among the top 10 countries

in terms of value of private equity deals across the world, according to the global deal

tracking firm, Zephyr.

The sector is going to see a flurry of activity and investments in the coming months.

Many companies have ambitious plans to enter the private equity (PE) business and

raise funds.

Indivision India Partners is planning to raise another fund-Indivision II, with a

corpus in excess of US$ 425 million raised through Indivision I.

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Other bigwigs planning fund raisings are the Tata and Aditya Birla groups

with plans to raise US$ 350 million and US$ 250 million, respectively. In

August 2008, Reliance Capital had announced setting up a US$ 1 billion PE

fund.

Private equity firm, Actis has raised a US$ 2.9 billion private equity fund

Actis Emerging Markets 3 (AEM3) for the emerging markets of China,

India, Africa, Latin America and South-east Asia. The fund will be pumping

in US$ 1 billion as investments in India over the next 3-4 years.

US-based Apollo Management, with an asset base of more than US$ 20

billion, will be soon setting up shop in India. The PE firm has plans to spend

around US$ 800 million in investments in Indian and the US markets.

Tata Capital Ltd is planning to float a US$ 350 million private equity (PE)

fund.

Online trading definition is a basic understanding of online trading processes.

Since the invention of Internet people have beena able to do practically everything

virtually. Due to the Internet online trading has become one of the most popular

ways to trade as far as stock trading turned out to be as available to independent

investors as possible. Online trading gives both beginners who've just had a single

day trading course and advanced traders an opportunity to trade stocks, options,

forex and futures all over the world without physical presence of a broker and

with much lower commissions, because everything is done online.

Stock online trading is based on buying and selling stocks. Today stock online

trading is the most popular method to trade owing to computers, because

information on stocks was available only to brokers and you had to call a broker

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and pay brokerages for buying or selling stocks and now this information is

widely available. Since this modifications occurred traders can control their

investments with the help of Internet.

Stock option online trading is based on buying and selling options and very

perspective financial products. This system gives traders a perfect chance to

control and protect their stocks and generate their investment benefits as far as an

option is an agreement to buy or to sell certain financial product. The main idea of

stock optiononline trading is that an option you buy has its fixed price and time

limitation.

Forex online trading is another speculative online business based on buying and

selling foreign exchange, gaining profits due to rise and fall of currency rate,

namely on the difference between the currency pairs price.

Futures online trading is another kind of online trading which is based on buying

and selling financial products (commodities, labour, currency) by means of futures

contracts. Such contract specifies a particular date (delivery date or final

settlement date) in the future when a certain financial product should be bought or

sold and this product's price.

Speaking about online trading it's necessary to say about safe online trading. It's

obvious that in order to trade online you'll have to open your online account and

choose online trading software. When you choose a certain website for your

future account, you should search for information about a company you are going

to fix upon and make sure that it has a trustworthy reputation. The same refers to

choosing online trading software, platform and online trading portal.

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In conclusion it's necessary to say that online trading is a perfect opportunity to

trade and earn money but still it's obvious that online trading is not for everyone.

That's why before you start trading, you should find out more about online

trading pros and cons,online trading concepts and of course about online

trading tips. Knowledge is a main key for yoursuccessful online trading, don't

ever identify online trading with gambling because the results of such approach

can be disastrous.

MUTUAL FUNDS

According to a report by research firm RNCOS, the Indian mutual funds retail market

is presently growing at a CAGR of around 30 per cent, and is likely to touch US$ 300

billion by 2015.

The growth momentum of the mutual fund industry continues in the new fiscal year

(200809). Fund mobilisation has increased by a whopping 77.4 per cent to US$

327.93 billion during AprilJune 2008, compared to US$ 184.81 billion in AprilJune

2007. Consequently, average Assets Under Management (AUM) of the mutual fund

industry has increased to US$ 132.33 billion for June 2008, against US$ 99.86 billion

in the corresponding period in 2007.

Further, at approx. US$ 96 billionUS$ 98 billion in assets for February 2009, the

mutual funds (MF) industry has seen a sharp increase of about 8.7 per cent in AUM

since the previous month. This is also the third consecutive monthly rise in assets for

the industry as a whole.

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As per SEBI, the mutual fund industry made an overall investment of US$ 2.14

billion in equities between January-September 2008. According to market sources, the

mutual funds industry has mustered an estimated US$ 1.24 billion during the same

period. In September 2008, the AUM totalled to US$ 1.10 trillion.

To improve the capital market, the government is likely to remove the restriction on

profit-making Navratna and mini-Ratna public sector undertakings (PSUs) from

investing in mutual funds.

Life Insurance Corporation of India (LIC) has put in over US$ 2.75 billion into liquid

funds of different fund houses. The amount was more than three times its similar

investments made in 2007.

Looking ahead, the Indian mutual funds market is estimated to grow at a CAGR of 18

per cent in the next five years, with the country's mutual funds assets expected to

more than double to US$ 298.73 billion by 2012, according to a report by US-based

financial services research and consulting firm, Cerulli Associates.

Importance of Mutual Fund

Small investors face a lot of problems in the share market, limited resources, lack of

professional advice, lack of information etc. Mutual funds have come as a much

needed help to these investors. It is a special type of institutional device or an

investment vehicle through which the investors pool their savings which are to be

invested under the guidance of a team of experts in wide variety of portfolios of

Corporate securities in such a way ,so as to minimise risk, while ensuring safety and

steady return on investment. It forms an important part of the capital market,

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providing the benefits of a diversified portfolio and expert fund management to a

large number, particularly small investors. Now a days, mutual fund is gaining its

popularity due to the following reasons :

l. With the emphasis on increase in domestic savings and improvement indeployment

of investment through markets, the need and scope for mutual fund operation has

increased tremendously. The basic purpose of reforms in the financial sector was to

enhance the generation of domestic resources by reducing the dependence on outside

funds. This calls for a market based institution which can tap the vast potential of

domestic savings and chanalise them for profitable investments. Mutual funds are not

only best suited for the purpose but also capable of meeting this challenge.

2. An ordinary investor who applies for share in a public issue of any company is not

assured of any firm allotment. But mutual funds who subscribe to the capital issue

made by companies get firm allotment of shares. Mutual fund latter sell these shares

in the same market and to he Promoters of the company at a much higher price.

Hence, mutual fund creates the investors confidence.

3. The phyche of the typical Indian investor has been summed up by Mr.S.A. Dave,

Chairman of UTI, in three words; Yield, Liquidity and Security. The mutual funds,

being set up in the public sector, have given the impression of being as safe a conduit

for investment as bank deposits. Besides, the assured returns promised by them have

investors had great appeal for the typical Indian investor.

4. As mutual funds are managed by professionals, they are considered to have a better

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knowledge of market behaviours. Besides, they bring a certain competence to their

job. They also maximise gains by proper selection and timing of investment.

5. Another important thing is that the dividends and capital gains are reinvested

automatically in mutual funds and hence are not fritted away. The automatic

reinvestment feature of a mutual fund is a form of forced saving and can make a big

difference in the long run.

6. The mutual fund operation provides a reasonable protection to investors. Besides,

presently all Schemes of mutual funds provide tax relief under Section 80 L of the

Income Tax Act and in addition, some schemes provide tax relief under Section 88 of

the Income Tax Act lead to the growth of importance of mutual fund in the minds of

the investors.

7. As mutual funds creates awareness among urban and rural middle class people

about the benefits of investment in capital market, through profitable and safe

avenues, mutual fund could be able to make up a large amount of the surplus funds

available with these people.

8. The mutual fund attracts foreign capital flow in the country and secure

profitable investment avenues abroad for domestic savings through the opening of off

shore funds in various foreign investors. Lastly another notable thing is that mutual

funds are controlled and regulated byS E B I and hence are considered safe. Due to all

these benefits the importance of mutual fund has been increasing.

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DEBT MARKET

Due to the high volatility in the equity markets, Indian investors are choosing debt

market and mutual funds over equities.

According to an ASSOCHAM report, around US$ 333.27 million was invested in the

debt market against US$ 249.89 million in equities, as on the third week of June 2008.

The report revealed that investors favoured corporate bonds, particularly debentures

issued by leading companies. The debt market in India included segments like

government securities, corporate bond market, PSU (public sector undertaking)

bonds, and fixed deposits among others.

According to a report by Goldman Sachs, with insurance, mutual funds and pension

sector experiencing rapid growth, India's debt market is estimated to grow four-fold,

from about US$ 400 billion (45 per cent of GDP) in 2006 to about US$ 1.5 trillion

(about 55 per cent of GDP) by 2016.

Significantly, the non-government sector is expected to grow from US$ 100 billion in

2006 to US$ 575 billion in 2016, increasing its share in GDP from 10 per cent to 22

per cent.

LOOKING AHEAD

There is huge potential in the Indian financial services segment. The buoyancy in the

economy is estimated to lead to a four-fold increase in India's investable wealth from

US$ 250 billion in 2007 to US$ 1 trillion by 2012.

Wealth management revenues are expected to account for 3237 per cent of the total

full-service financial institutions by 2012.

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According to a report by Celent, India is slated to become a US$ 1 trillion market (in

assets under management) for wealth management providers by 2012, with a target

market size of 42 million households.

Exchange rate used: 1 US$ = 50.6721 INR

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OBJECTIVE OF THE STUDY

To discuss the challenges that the insurance sector is facing in India.

To focus the opportunities that the insurance sector in India is having

to know the performance mutual fund in India

To know the hike in the stock market for overall development in the economy.

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SCOPE AND IMPORTANCE

The project report open with the discussion of growth of financial services in India

.after analysis the prons and cons of the project, it is reflecting that the growth of

financial sector in India is having the wider scope.

The study focuses on various financial services in India has some following

significance:

i) Making goods and service markets more competitive;

ii) Enhancing employment in the formal sector through broad ranging labour market

reforms;

iii) further liberalising the banking sector;

iv) Improving public finances to achieve more rapid growth through a more ambitious

fiscal consolidation, reducing subsidies and further reducing tax distortions;

v) Improving infrastructure and facilitating urbanisation by involving private players

more intensely; and

vi) Upgrading the quality of educational outcomes through institutional reforms.



pressures.

Customer needs and expectations are evolving in the face of increasing personal

wealth, more private funding of pensions and healthcare and the desire for ever more

accessible and personalised financial products and services. In turn, intense

competition has squeezed industry margins and forced organisations to cut costs while

still seeking to enhance the quality of client choice and service. The battle for talent is

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also heating up as companies seek to enhance innovation, customer loyalty and

investment returns. The importance for emerging economies of developing strong,

broad, and deep financial markets. At first sight, this may seem like a strange time to

be emphasizing the importance of financial market development. Across the world

there is heightened concern about the recent turbulence in credit markets. Indeed, the

Fund warned of these risks in recent months, including those associated with carry

trades, mergers, and complacency about credit risk

The project of mine, "The Growth of Financial Services in India" is important as it

helps to know about various fiancial services and its growing trend in india.

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LITERATURE REVIEW

The review of literature is very essential for a researcher in any field of human

knowledge. This acquaint one with knowledge and techniques relevant to the work for,

thus the researcher needs an adequate familiarity with the number of books, journals,

bulletins, year books, thesis and encyclopedias. Going through these resources,

effective search for specialized knowledge will be possible in the support of this view.

We can be put forth the statement of JOHN W. BEST, Practically all human

knowledge can be found in books & libraries. Unlike other animals that must at art a

new with each generation man builds upon the accumulated and recorded knowledge of

the post. His constant adding to the vast store of knowledge makes possible progress in

all area of endeavourer.

After the selected of the problem the researcher started to study. The work already

done in the related field of this present study. The previous workers finding statement,

comments, criticism, suggestion according to the study design bases was collected. In

the following pages an attempt has been made to present briefly a few these

researchers studies which may have bearing on the present problems. The related

literature is of importance having relevance or deviating with the presents study in a

specified direction with relation to time, place and other confounding factors.

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REVIEW OF FINANCIAL MARKET

The financial markets, especially the stock markets, for developing and developed

markets have now become more closely interlinked despite the uniqueness of the

specific markets or the country profile. Literature has shown strong interest on the

linkages among international stock markets and the interest has increased

considerably after the loose of financial regulations in both mature and emerging

markets, the technological developments in communications and trading systems, and

the introduction of innovative financial products, creating more opportunities for

international portfolio investments. The interest can also be attributed to the

globalization which gives another impetus to the higher intertwinement of

international economies and financial markets. In recent years, the new remunerative

emerging equity markets have attracted the attention of international fund managers

as an opportunity for portfolio diversification. This intensifies the curiosity of

academics in exploring international market linkages. Earlier studies by Ripley

(1973), Lessard (1976), and Hilliard (1979) generally find low correlations between

national stock markets, supporting the benefits of international diversification. The

links between national stock markets have been of heightened interest in the wake of

the October 1987 international market crash globally. The crash has made people

realize that various national equity markets are so closely connected as the developed

markets like the US stock market exert a strong influence on other markets. Applying

the vector autoregression models, Eun and Shim (1989) find evidence of co-

movements between the US stock market and other world equity markets. Cheung

and Ng (1992) investigate the dynamic properties of stock returns in Tokyo and New

York and find that the US market is an important global factor from January 1985 to

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December 1989. Lee and Kim (1994) examine the effect of the October 1987 crash

and conclude that national stock markets became more interrelated after the crash and

find that the co-movements among national stock markets were stronger when the US

stock market is more volatile. Applying the VAR approach and the impulse response

function analysis, Jeon and Von-Furstenberg (1990) show that the degree of

international co-movement in stock price indices has increased significantly since the

1987 crash. On the other hand, Koop (1994) uses Bayesian methods to conclude that

there are no common trends in stock prices across countries. Also, Corhay, et al

(1995) study the stock markets of Australia, Japan, Hong Kong, New Zealand and

Singapore and find no evidence of a single stochastic trend for these countries. Only a

few studies have examined the co-movement of Indian stock market with

international markets. For example, Sharma and Kennedy (1977) examine the price

behavior of Indian market with the US and UK markets and conclude that the

behavior of the Indian market is statistically indistinguishable from that of the US and

UK markets and find no evidence of systematic cyclical component or periodicity for

these markets.

Rao and Naik (1990) apply the Cross-Spectral analysis and find that for the Indian

stock index, the gains estimates from either the US or the Japan indices are

independent and hence they conclude that the relationship of Indian market with

international markets is poor reflecting the institutional fact that the Indian economy

has been characterized by heavy controls throughout the entire seventies with

liberalization measures initiated only in the late eighties.

Above studies were carried out over decade ago. As the Indian stock market becomes

more open to the rest of the world since early 1990s, the relationship between the

Indian market and the developed stock markets may change and hence our paper

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reexamine the nature of co-movement between Indian market and the others main

stock indices.

FINANCIAL SERVICES WILL BE INDIA'S NEXT GROWTH

ENGINE:

India Post News Service

NEW YORK: India will make financial services its next growth engine, and to that

extent, the government intends to make Mumbai an International Financial Center,

said India's Finance Minister P. Chidambaram while addressing the ICICI Securities

Annual Investor Conference in New York City on Oct 18.

The minister informed the elite gathering that a recent report has estimated the value

of the financial services currently being purchased by India at $13 billion a year and

has concluded that this will rise to $48 billion by the year 2015. "While India will

continue to be a purchaser of financial services, we believe that there is an

opportunity for India to become a provider of financial services as well," he said,

adding in that context, his government intends to make financial services the next

growth engine for India.

The stock market movement in India, Chidambaram said, is comparable to the

movement in most emerging markets and has been doing significantly better than

Dow Jones or the NASDAQ."Market capitalization (December 2006) was at $820

billion, making the Indian securities market the 6th largest in the Asia Pacific region

after Japan, China, Hong Kong, Australia and Korea," Chidambaram said.

"In fact, the market capitalization of listed securities exceeds the aggregate deposits

with the banking system in India. The current market capitalization is $1450 billion

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on the Bombay Stock Exchange. The Indian financial markets have played a vital role

in consolidating and accelerating the growth momentum, the minister said. "There is

still a belief in some sections of society - especially in developing countries like India

- that capital markets are tools of the rich often used to enhance their wealth at the

cost of the poor," he explained.

"If capital markets are not organized on sound principles and are not well regulated,

there is indeed the danger that gullible investors could fall prey to manipulation and

scams. Every country in the world has had its share of scandals - we had ours in 1992

and 2001 -- and our experience only underscores the need for a well regulated capital

market.

"The securities markets in India have made enormous progress in developing

sophisticated instruments and modern market mechanisms. However, the real strength

of the Indian securities market lies in the quality of regulation, Chidambaram

observed. "We believe that the Indian securities market is among the best regulated in

the world today," he said.While the India growth story is broad based, not every

business in India has been a gainer in the country's growth story, Chidambaram said.

"Nevertheless, I can say with confidence that the gainers in India's growth story have

outnumbered the losers. Who has lost and who has gained? Family owned businesses

that opposed the policies of liberalization have lost; businesses that embraced

liberalization and globalization have gained. Industries that were sheltered behind

licenses and tariff walls have lost; industries that were prepared for competition and

raised their efficiencies have gained."

"Entrepreneurs who relied on their own capital and skills and were content to remain

small have lost; entrepreneurs, who brought in professional managers, boldly accessed

the capital market and introduced new products and services have gained. Above all,

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sectors of the economy that were thrown open to the private sector and to real

competition - such as banking, insurance, information technology, telecommunication

and aviation - have gained tremendously; sectors that are still closed or only partially

open - such as mining and distribution of power - have lagged behind and huge wealth

is locked in a few companies."

The Finance Minister said that India recognizes that it is one among a hundred

destinations where a foreign company can make an investment. "The investor will

naturally weigh the opportunities and the risks. It is now widely accepted that India is

a vibrant democracy, that its economy is increasingly open, and that it is a country

governed by the rule of law. I can assure you that none of this will change - not now,

not in the near term, and in fact, never.

If there are any changes, they will be changes for the better and towards a more open

and competitive economy," he said to much applause. Chidambaram further said

growth was imperative for India. "Without growth, we cannot address the age old

problems of poverty, ignorance and disease.

It is growth that has thrown up the resources to spend more on education and health;

to build a huge network of roads; to provide telephone connectivity; to take electricity

and clean drinking water to the villages of India; and to make the capital investments

that will sustain the high rate of growth," he said.. "Every day we add a new line to

our growth story.

Undoubtedly, it will take us some more years to write the full story but, when that

story is fully written, India will be the fourth largest economy in the world. I welcome

you to share the challenge and opportunity that is India today," he concluded.

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FINANCIAL SERVICES IN INDIA



pressures.

The corollary of this market evolution is increasing risk as products become more

complex, organisations more diffuse and the business environment ever more

uncertain. Regulation is also tightening in the wake of public and government

pressure for improved governance, transparency and accountability.

Organisations will also need to identify and concentrate on core competencies where

they can exert maximum competitive advantage, be this a particular product, service,

process or geographical territory. For some this will require a strategic re-orientation

towards becoming a specialist niche provider. Even larger groups will need to

differentiate their offering and by implication the associated brand.

Global financial institutions face an increasingly complex market one where

profitability of existing products is eroding. Market events including globalization, a

final wave of consolidation, regulatory changes and technology breakthroughs are

forcing financial institutions to shed the transactional orientation of the past and focus

on improving the efficiency and customer orientation of their operations.

In this environment, the strategy for achieving organic growth will differ for each

institution; however, the following best practices are prerequisites for optimizing

growth:s

Create global economies of scale As companies grow larger and become

more global, leveraging technology can lower costs. Creating centralized

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retaining customers.

Embed compliance into modernized processes New regulations, such as

Sarbanes-Oxley and Basel II, are consuming technology budgets. Compliance

requires process automation with embedded controls, globally integrated

views of business activity by customer and product, and transparency in

reporting to support supervisory reviews. Establishing controls during process

redesign is essential to meeting regulatory mandates.

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MUTUAL FUND IN INDIA: A FINANCIAL

SERVICE IN CAPITAL MARKET

With progressive liberalization of economic policies, there has been a rapid growth of

capital market, money market and financial services industry including merchant

banking, leasing and capital market. Consistent with this evolution of the financial

sector, the mutual fund industry has also come to occupy an important place.

Origin

Mutual funds go back to the times of the Egyptians and Phonenicians when they sold

shares in caravans and vessels to spread the risk of these ventures. The foreign and

colonial government Trust of London of 1868 is considered to be the fore-runner of

the modern concept of mutual funds. The USA is, however, considered to be the

mecca of modern mutual funds. By the early - 1930s quite a large number of close -

ended mutual funds were

in operation in the U.S.A. Much latter in 1954, the committee on finance for the

private sector recommended mobilisation of savings of the middle class investors

through unit trusts. Finally in July 1964, the concept took root in India when Unit

Trust of India was set up with the twin objective of mobilizing household savings and

investing the funds in the capital market for industrial growth. Household sector

accounted for about 80 percent of nations savings and only about one third of such

savings was available to the corporate sector, It was felt that UTI could be an effective

vehicle for channelising progressively larger shares of household savings to

productive investments in the corporate sector. The process of economic liberalization

in the eighties not only brought in dramatic changes in the environment for Indian

industries, Corporate sector and the capital market but also led to the emergence of

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demand for newer financial services such as issue management, corporate

counselling, capital restructuring and loan syndication. After two decades of UTI

monopoly, recently some other public sector organisations like LIC (1989), GIC

(1991 ), SBI (1987), Can Bank (1987), Indian Bank (1990), Bank of India (1990),

Punjab National Bank (1990) have been permitted to set up mutual funds. Mr. M.R.

Mayya the Executive Director of Bombay Stock Exchange opined recently that the

decade of nineties will belong to mutual funds because the ordinary investor does not

have the time, experience and patience to take independent investment decisions on

his own.

PHASES OF MUTUAL FUNDS

The mutual fund industry can be broadly put into four phases according to the

development of the sector. Each phase is briefly described as under.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set

up by the Reserve Bank of India and functioned under the Regulatory and

administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from

the RBI and the Industrial Development Bank of India (IDBI) took over the

regulatory and administrative control in place of RBI. The first scheme launched by

UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets

under management.

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Second Phase - 1987-1993 (Entry of Public Sector Funds)

Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank

Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank

Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct

92). LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets under

management.

Third Phase - 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual

fund industry, giving the Indian investors a wider choice of fund families. Also, 1993

was the year in which the first Mutual Fund Regulations came into being, under

which all mutual funds, except UTI were to be registered and governed. The erstwhile

Kothari Pioneer (now merged with Franklin Templeton) was the first private sector

mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were

substituted by a more comprehensive and revised Mutual Fund Regulations in 1996.

The industry now functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual

funds setting up funds in India and also the industry has witnessed several mergers

and acquisitions. As at the end of January 2003, there were 33 mutual funds with total

assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets

under management was way ahead of other mutual funds.

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Fourth Phase - Since February 2003

This phase had bitter experience for UTI. It was bifurcated into two separate entities.

One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835

crores (as on January 2003). The Specified Undertaking of Unit Trust of India,

functioning under an administrator and under the rules framed by Government of

India and does not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is

registered with SEBI and functions under the Mutual Fund Regulations. With the

bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores

of AUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI

Mutual Fund Regulations, and with recent mergers taking place among different

private sector funds, the mutual fund industry has entered its current phase of

consolidation and growth. As at the end of September, 2004, there were 29 funds,

which manage assets of Rs.153108 crores under 421 schemes.

IMPORTANCE OF MUTUAL FUND

Small investors face a lot of problems in the sharemarket, limited resources, lack of

professional advice, lack of information etc. Mutual funds have come as a much

needed help to these investors. It is a special type of institutional device or an

investment vehicle through which the investors pool their savings which are to be

invested under the guidance of a team of experts in wide variety of portfolios of

Corporate securities in such a way, so as to minimise risk, while ensuring safety and

steady return on investment. It forms an important part of the capital market,

providing the benefits of a diversified portfolio and expert fund management to a

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large number, particularly small investors. Now a days, mutual fund is gaining its

popularity due to the following reasons :

1. With the emphasis on increase in domestic savings and improvement in

deployment of investment through markets, the need and scope for mutual

fund operation has increased tremendously. The basic purpose of reforms in

the financial sector was to enhance the generation of domestic resources by

reducing the dependence on outside funds. This calls for a market based

institution which can tap the vast potential of domestic savings and canalize

them for profitable investments. Mutual funds are not only best suited for the

purpose but also capable of meeting this challenge.

2. An ordinary investor who applies for share in a public issue of any company is

not assured of any firm allotment. But mutual funds who subscribe to the

capital issue made by companies get firm allotment of shares. Mutual fund

latter sell these shares in the same market and to the Promoters of the company

at a much higher price. Hence, mutual fund creates the investors confidence.

3. As mutual funds are managed by professionals, they are considered to have a

better knowledge of market behaviors. Besides, they bring a certain

competence to their job. They also maximize gains by proper selection and

timing of investment.

4. Another important thing is that the dividends and capital gains are reinvested

automatically in mutual funds and hence are not fritted away. The automatic

reinvestment feature of a mutual fund is a form of forced saving and can make

a big difference in the long run.

5. The mutual fund operation provides a reasonable protection to investors

.Besides, presently all Schemes of mutual funds provide tax relief under

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Section 80 L of the Income Tax Act and in addition, some schemes provide

tax relief under Section 88 of the Income Tax Act lead to the growth of

importance of mutual fund in the minds of the investors.

6. As mutual funds creates awareness among urban and rural middle class people

about the benefits of investment in capital market, through profitable and safe

avenues, mutual fund could be able to make up a large amount of the surplus

funds available with these people.

7. The mutual fund attracts foreign capital flow in the country and secure

profitable investment avenues abroad for domestic savings through the

opening of off shore funds in various foreign investors. Lastly another notable

thing is that mutual funds are controlled and regulated by S E B I and hence

are considered safe. Due to all these benefits the importance of mutual fund

has been increasing.

SCHEMES OF MUTUAL FUND

Within a short span of four to five years mutual fund operation has become an integral

part of the Indian financial scene and is poised for rapid growth in the near future.

Today, there are eight mutual funds operating various schemes tailored to meet the

diversified needs of savers. UTI has been able to register phenomenal growth in the

mid eighties. Now there are 121 mutual fund schemes are launched in India including

UTIs scheme attracting over Rs. 45,000 Crores from more than 3 Crore investors

accounts

Out of this closed-end scheme are offered by mutual fund of India to issue shares for a

limited period which are traded like any other security as the period and target

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amounts are definite under such security as the period and target amounts are definite

under such schemes. Besides open-end schemes are lunched by mutual fund under

which unlimited shares are issued by investors but these shares are not traded by any

stock exchange.

However,liquidity is provided by this scheme to the investors. In addition to

this off shore mutual funds have been launched by foreign banks, some Indian banks,

like SBI, Canara Bank etc, and UTI to facilitate movement of capital from cash-rich

countries to potentially high growth economics. Mutual funds established by leading

public sector banks since 1987-SBIMF, Can Bank, India Bank, PNBMF and BOIMF,

emerged since 1987-SBIMFo, as major players by offering bond like products with

assurance of higher yields. The latest schemes of BOI mutual fund goes to the extent

of allowing each individual investor to choose the date for receiving the income.

Besides the bank mutual funds have also floated a few open-ended schemes, pure

growth schemes and tax saving schemes. The LIC, GIC mutual funds offer insurance

linked product providing various types of life and general insurance benefits to the

investors. Also the income growth oriented schemes are operated by mutual fund to

cater to an investors needs for regular incomes and hence, it distributes dividend at

intervals.

GROWTH TREND OF MUTUAL FUND

Opening of the mutual fund industry to the public sector banks and insurance

companies, led to the launching of more and more of new schemeThe mutual fund

industry in India has grown fast in the recent period. The performance is encouraging

especially because the emphasis in India has been on individual investors rather in

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contrast to advanced countries where mutual funds depend largely on institutional

investors, In general, it appears that the mutual fund in India have given a good

account of themselves so far .UTI's annual sale of units crossed Rs.1000 crores mark

in 1986 to 87, 2000 crores mark in 1987-88 and reached Rs.5500 crores mark in 1989

to 90. During 1990 to 91 on account of decline of corporate interest,, sales declined to

Rs.4100 crores though individual sales increased over its preceeding year. LICMF has

concentrated on funds which includes life and accident cover. GICMF provide home

insurance policy. The bank sponsored mutual fundfloated regular income, growth and

tax incentives schemes. Together the eight mutual fund service more than 15 million

investors with UTI alone holds for 13 million unit holding accounts. Magnum Regular

Income Scheme 1987 assured a return of 12 percent but gave 20 percent dividend in

1993, UTI record 26 percent dividend for 1992 to 93 under the unit 1964 scheme.

Magnum Tax saving scheme 1988 to 89 did not promise any return but declared 14

percent dividend in 1993 and recorded a capital appreciation of 15 percent in the first

year. Equity oriented scheme have earned attractive returns. Especially since early

1991 there has been a steady increase in the number of equity oriented growth funds.

With the boom of June 1990 and then again 1991 due to the implementation of new

economic policies towards structure of change the price of securities in stock market

appreciated considerably. The high rate of growth in equity price led to a high rate of

appreciation in the net asset value of the equity oriented funds for which investors

started changing their preferences from fixed income funds to growth oriented or

unfixed income funds. That is why more equity oriented mutual funds were launched

in 1991. Master share provide a respective dividend of 18 per cent in 1993, Can share

earned a dividend of 15 percent in 1993. In general the Unit Trust of India which

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manages over 28,000 crore under various schemes has for its service an excellent

reputation.

PERFORMANCE OF MUTUAL FUNDS IN INDIA

The performance of mutual funds in India from the day the concept of mutual fund

took birth in India. The year was 1963. Unit Trust of India invited investors or rather

to those who believed in savings, to park their money in UTI Mutual Fund.

For 30 years it goaled without a single second player. Though the 1988 year saw some

new mutual fund companies, but UTI remained in a monopoly position.

The performance of mutual funds in India in the initial phase was not even closer to

satisfactory level. People rarely understood, and of course investing was out of

question. But yes, some 24 million shareholders was accustomed with guaranteed

high returns by the begining of liberalization of the industry in 1992. This good record

of UTI became marketing tool for new entrants. The expectations of investors touched

the sky in profitability factor. However, people were miles away from the

praparedness of risks factor after the liberalization.

The Assets Under Management of UTI was Rs. 67bn. by the end of 1987. Let me

concentrate about the performance of mutual funds in India through figures. From Rs.

67bn. the Assets Under Management rose to Rs. 470 bn. in March 1993 and the figure

had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn.

The net asset value (NAV) of mutual funds in India declined when stock prices started

falling in the year 1992. Those days, the market regulations did not allow portfolio

shifts into alternative investments. There were rather no choice apart from holding the

cash or to further continue investing in shares. One more thing to be noted, since only

closed-end funds were floated in the market, the investors disinvested by selling at a

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loss in the secondary market.

SHORT COMMINGS IN OPERATION OF MUTUAL FUND

The mutual fund has been operating for the last five to six years. Thus, it is too early

to evaluate its operations. However one should not lose sight to the fact that the

formation years of any institution is very important to evaluate as they could be able

to know the good or bad systems get evolved around this time. Following are some of

the shortcomings in operation of mutual fund.

1. The mutual funds are externally managed. They do not have employees of

their own. Also there is no specific law to supervise the mutual funds in India.

There are multiple regulations. While UTI is governed by its own regulations,

the banks are supervised by Reserved Bank of India, the Central Government

and insurance company mutual regulations funds are regulated by Central

Government

2. At present, the investors in India prefer to invest in mutual fund as a substitute

of fixed deposits in Banks, About 75 percent of the investors are not willing to

invest in mutual funds unless there was a promise of a minimum return,

Sponsorship of mutual funds has a bearing on the integrity and efficiency of

fund management which are key to establishing investor's confidence. So far,

only public sector sponsorship or ownership of mutual fund organisations had

taken care of this need.

3. Unrestrained fund rising by schemes without adequate supply of scrips can

create severe imbalance in the market and exacerbate the distortions

4. Many small companies did very well last year, by schemes without adequate

imbalance in the market but mutual funds can not reap their benefits because

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they are not allowed to invest in smaller companies. Not only this, a mutual

fund is allowed to hold only a fixed maximum percentage of shares in a

particular industry.

5. The mutual fund in India are formed as trusts. As there is no distinction made

between sponsors, trustees and fund managers, the trustees play the roll of

fund managers.

6. The increase in the number of mutual funds and various schemes have

increased competition. Hence it has been remarked by Senior Broker mutual

funds are too busy trying to race against each other. As a result they lose their

stabilising factor in the market.

7. While UTI publishes details of accounts their investments but mutual funds

have not published any profit and loss Account and balance sheet even after its

operation.

8. The mutual fund have eroded the financial clout of institution in the stock

market for which cross transaction between mutual funds and financial

institutions are not only allowing speculators to manipulate price but also

providing cash leading to the distortion of balanced growth of market.

9. As the mutual fund is very poor in standard of efficiency in investors service;

such as despatch of certificates, repurchase and attending to inquiries lead to

the detoriation of interest of the investors towards mutual fund.

10. Transparency is another area in mutual fund which was neglected till recently.

Investors have right to know and asset management companies have an

obligation to inform where and how his money has been deployed. But

investors are deprived of getting the information.

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FUTURE OUTLOOK OF MUTUAL FUNDS

As mutual fund has entered into the Indian Capital market, growing profitable enough

to attract competitors into this cherished territory encouraging competition among all

the mutual fund operators, there is need to take some strategy to bring more

confidence among investors for which mutual fund would be able to project the image

successfully. The followings are some of the suggestions. As there is no

comprehensive law to regulate the mutual fund in India, uniform coordinated

regulations by a single agency would be formed which would provide the shelter to

the investors. Secondly, as the investors are not willing to invest in mutual fund unless

a minimum return is assured, it is very essential to create in the mind of the investors

that mutual funds are market instruments and associated with market

risk hence mutual fund could not offer guaranteed income. Thirdly, all the mutual

funds are operated in the public sector. Hence private sector may be allowed to float

mutual funds, intensifying competition in this industry. Fourthly, due to operations of

many mutual fund, there will be need for appropriate guidelines for self-regulation in

respect of publicity/advertisement and interscheme transactions within each mutual

fund. Fifthly, the growth of mutual fund tends to increase the shareholdings in good

companies, give rise thefear of destabilising among industrial group, hence

introduction of non-

voting shares and lowering the debt-equity ratio help to remove these apprehension.

Sixthly, as there is no distinction between trustees, sponsors and fund managers, it is

necessary to regulate frame work for a clear demarcation between the role of

constituents, such as shelter, trustee and fund manager to protect the interest of the

small investors. Seventhly, steps should be taken for funds to make fair and truthful

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disclosures of information to the investors, so that subscribers know what risk they are

taking by investing in fund. Eighthly, infrastructure bottlenecks will have to be

removed and banking and postal systems will have to be taken place for growth of

mutual funds. Ninethly, mutual funds need to take advantage of modern technology

like computer and tele-communications to render service to the investors. Lastly,

mutual funds are made by investors and investors interest ought to be paramount by

setting standard of behaviours and efficiency through selfregularisations and

professionalism.

With the structural liberalisation policies no doubt Indian economy is likely to return

to a high grow path in few years. Hence mutual fund organisations are needed to

upgrade their skills and technology. Success of mutual fund however would bright

depending upon the implementation of suggestions.

INSURANCE SECTOR IN INDIA

The insurance sector in India has come a full circle from being an open competitive

market to nationalisation and back to a liberalised market again. Tracing the

developments in the Indian insurance sector reveals the 360-degree turn witnessed

over a period of almost two centuries.

A brief history of the Insurance sector

The business of life insurance in India in its existing form started in India in the year

1818 with the establishment of the Oriental Life Insurance Company in Calcutta.

Some of the important milestones in the life insurance business in India are:

1912: The Indian Life Assurance Companies Act enacted as the first statute to

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regulate the life insurance business.

1928: The Indian Insurance Companies Act enacted to enable the government

to collect statistical information about both life and non-life insurance

businesses.

1938: Earlier legislation consolidated and amended to by the Insurance Act

with the objective of protecting the interests of the insuring public.

1956: 245 Indian and foreign insurers and provident societies taken over by

the central government and nationalised. LIC formed by an Act of Parliament,

viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the

Government of India.

The General insurance business in India, on the other hand, can trace its roots

to the Triton Insurance Company Ltd., the first general insurance company

established in the year 1850 in Calcutta by the British.

Some of the important milestones in the general insurance business in India

are:

1907: The Indian Mercantile Insurance Ltd. set up, the first company to

transact all classes of general insurance business.

1957: General Insurance Council, a wing of the Insurance Association of

India, frames a code of conduct for ensuring fair conduct and sound business

practices.

1968: The Insurance Act amended to regulate investments and set minimum

solvency margins and the Tariff Advisory Committee set up.

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1972: The General Insurance Business (Nationalisation) Act, 1972

nationalised the general insurance business in India with effect from 1st

January 1973.

107 insurers amalgamated and grouped into four companies viz. the National

Insurance Company Ltd., the New India Assurance Company Ltd., the

Oriental Insurance Company Ltd. and the United India Insurance Company

Ltd. GIC incorporated as a company.

HISTORY OF INSURANCE SECTOR IN INDIA

The origin of life insurance in India can be traced back to 1818 with the establishment

of the Oriental Life Insurance Company in Calcutta. It was conceived as a means to

provide for English Widows. In those days a higher premium was charged for Indian

lives than the non-Indian lives as Indian lives were considered riskier for coverage.

The Bombay Mutual Life Insurance Society that started its business in 1870 was the

first company to charge same premium for both Indian and non-Indian lives. In 1912,

insurance regulation formally began with the passing of Life Insurance Companies

Act and the Provident Fund Act.

By 1938, there were 176 insurance companies in India. But a number of frauds during

1920s and 1930s tainted the image of insurance industry in India. In 1938, the first

comprehensive legislation regarding insurance was introduced with the passing of

Insurance Act of 1938 that provided strict State Control over insurance business.

Insurance sector in India grew at a faster pace after independence. In 1956,

Government of India brought together 245 Indian and foreign insurers and provident

societies under one nationalised monopoly corporation and formed Life Insurance

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Corporation (LIC) by an Act of Parliament, viz. LIC Act, 1956, with a capital

contribution of Rs.5 crore.

The (non-life) insurance business/general insurance remained with the private sector

till 1972. There were 107 private companies involved in the business of general

operations and their operations were restricted to organised trade and industry in large

cities. The General Insurance Business (Nationalisation) Act, 1972 nationalised the

general insurance business in India with effect from January 1, 1973. The 107 private

insurance companies were amalgamated and grouped into four companies: National

Insurance Company, New India Assurance Company, Oriental Insurance Company

and United India Insurance Company. These were subsidiaries of the General

Insurance Company (GIC).

In 1993, the first step towards insurance sector reforms was initiated with the

formation of Malhotra Committee, headed by former Finance Secretary and RBI

Governor R.N. Malhotra. The committee was formed to evaluate the Indian insurance

industry and recommend its future direction with the objective of complementing the

reforms initiated in the financial sector.

INSURANCE SECTOR REFORMS:

In 1993, Malhotra Committee headed by former Finance Secretary and RBI Governor

R.N. Malhotra was formed to evaluate the Indian insurance industry and recommend

its future direction.

The Malhotra committee was set up with the objective of complementing the reforms

initiated in the financial sector. The reforms were aimed at "creating a more efficient

and competitive financial system suitable for the requirements of the economy

keeping in mind the structural changes currently underway and recognizing that

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insurance is an important part of the overall financial system where it was necessary

to address the need for similar reforms"

In 1994, the committee submitted the report and some of the key recommendations

included:

1) STRUCTURE

Government stake in the insurance Companies to be brought down to 50%.

Government should take over the holdings of GIC and its subsidiaries so that

these subsidiaries can act as independent corporations.

All the insurance companies should be given greater freedom to operate.

2) COMPETITION

Private Companies with a minimum paid up capital of Rs.1bn should be

allowed to enter the industry.

No Company should deal in both Life and General Insurance through a single

entity.

Foreign companies may be allowed to enter the industry in collaboration with

the domestic companies.

Postal Life Insurance should be allowed to operate in the rural market.

Only One State Level Life Insurance Company should be allowed to operate

in each state.

3) REGULATORY BODY

The Insurance Act should be changed.

An Insurance Regulatory body should be set up.

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Controller of Insurance (Currently a part from the Finance Ministry) should be

made independent.

4) INVESTMENTS

Mandatory Investments of LIC Life Fund in government securities to be

reduced from 75% to 50%.

GIC and its subsidiaries are not to hold more than 5% in any company (There

current holdings to be brought down to this level over a period of time).

5) CUSTOMER SERVICE

LIC should pay interest on delays in payments beyond 30 days.

Insurance companies must be encouraged to set up unit linked pension plans.

Computerisation of operations and updating of technology to be carried out in

the insurance industry The committee emphasized that in order to improve the

customer services and increase the coverage of the insurance industry should

be opened up to competition.

But at the same time, the committee felt the need to exercise caution as any failure on

the part of new players could ruin the public confidence in the industry. Hence, it was

decided to allow competition in a limited way by stipulating the minimum capital

requirement of Rs.100 crores. The committee felt the need to provide greater

autonomy to insurance companies in order to improve their performance and enable

them to act as independent companies with economic motives. For this purpose, it had

proposed setting up an independent regulatory body.

MAJOR POLICY CHANGES

Insurance sector has been opened up for competition from Indian private insurance

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companies with the enactment of Insurance Regulatory and Development Authority

Act, 1999 (IRDA Act). As per the provisions of IRDA Act, 1999, Insurance

Regulatory and Development Authority (IRDA) was established on 19th April 2000

to protect the interests of holder of insurance policy and to regulate, promote and

ensure orderly growth of the insurance industry. IRDA Act 1999 paved the way for

the entry of private players into the insurance market which was hitherto the exclusive

privilege of public sector insurance companies/ corporations. Under the new

dispensation Indian insurance companies in private sector were permitted to operate

in India with the following conditions:

Company is formed and registered under the Companies Act, 1956;

The aggregate holdings of equity shares by a foreign company, either by itself

or through its subsidiary companies or its nominees, do not exceed 26%, paid

up equity capital of such Indian insurance company;

The company's sole purpose is to carry on life insurance business or general

insurance business or reinsurance business.

The minimum paid up equity capital for life or general insurance business is

Rs.100 crores.

The minimum paid up equity capital for carrying on reinsurance business has

been prescribed as Rs.200 crores.

Insurance sector in India is one of the booming sectors of the economy and is growing

at the rate of 15-20 per cent annum. Together with banking services, it contributes to

about 7 per cent to the country's GDP. Insurance is a federal subject in India and

Insurance industry in India is governed by Insurance Act, 1938, the Life Insurance

Corporation Act, 1956 and General Insurance Business (Nationalisation) Act, 1972,

Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related

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Acts.

INDIAN STOCK MARKET

One of the most profound and far-reaching financial phenomenon in the late twentieth

century and the forepart of this century is the explosive growth in international

financial transactions and capital flows among various financial markets in developed

and developing countries. This phenomenon in international finance is not only a

result of the liberalization of capital markets in developed and developing countries

and the increasing variety and complexity of financial instruments, but also a result of

the increasing relativity of the developing and developed economies as developing

countries become more integrated in international flows of trade and payments. More

freedom in the moving of capital flows improves the allocation of capital globally,

allowing resources to move to areas with higher rates of return. The Indian stock

market is one of the earliest in Asia being in operation since 1875, but remained

largely outside the global integration process until the late 1980s. A number of

developing countries in concert with the International Finance Corporation and the

World Bank took steps in the 1980s to establish and revitalize their stock markets as

an effective way of mobilizing and allocation of finance. In line with the global trend,

reform of the Indian stock market began with the establishment of Securities and

Exchange Board of India in 1988. This paper empirically investigates the long-run

equilibrium relationship and short-run dynamic linkage between the Indian stock

market and the stock markets in major developed countries (United States, United

Kingdom and Japan) after 1990 by examining the Granger causality relationship and

the pairwise, multiple and fractional co integrations between the Indian stock market

and the stock markets from these three developed markets. We conclude that Indian

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stock market is integrated with mature markets and sensitive to the dynamics in these

markets in a long run. In a short run, both US and Japan Granger causes the Indian

stock market but not vice versa. In addition, we find that the Indian stock index and

the mature stock indices form fractionally co integrated relationship in the long run

with a common fractional, nonstationary component and find that the Johansen

method is the best reveal their cointegration relationship.

ONLINE STOCK TRADING

Online stock trading is very old concept for big institutions who trade thru private

networks owned by Reuter's "Instinet" and a system called "Posit" since 1969.

But It become internet based for lay men only in late 90s.

Funny, that actually idea was first time used by a company making Beer

called "WIT beer" to help its shareholders trade its shares. Thats how "WIT

Capital" was born which is considered pioneer of this concept. It was made

mainstream and household name by a offshot of Charles Schwab & Co called

eSchwab which is used by millions of people in USA. Lot of NRI's i know play in US

stock market even when they come to India for holidays via website of eSchwabe.

There are other serious players like E*trade, DATEK online etc. All this

companies ask you to start account with US $5000 and you can buy and sell

stock using this funds. They also issue you a check book which you can use

to make payments from this account. Or use their ATM card to withdraw cash

from your stock trading account.

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Today practically every big name brokerage firm offers online strock trading

as it reduces their costs. Earlier they had army of brokers on phone with

clients executing trade, now that is done by computers accepting orders from

clients directly. This firm now offer human access to high networth accounts

, and to rest at charge per trade. (e.g if web based trade will cost you $10

per 1000 shares, human assisted trade will set you back by $40 or more).

In last 2 year in India we have seen lot of developments in this, good and

bad, successful and not so successful. ICICI webtrade, Sharekhan are

considered biggest brands in this arena. ICICI webtrade is particularly very

attractive to users as it combines 3 segments of transactions , i.e., bank

account , demat account and stock trading account. ICICI being the owner of all the

three services they are all very well integrated.. Other player's have tieups with Banks

and Depository's but its not same as seeing all three in one webpage.

Frauds in this area were non existant in 2000 as it was still new for most of

indians. But in year 2001 and now 2002 we have been seeing perils of web

based stock trading and banking.

One thing which potential client should pay attention to is, agreement with

broker, how it defines risks of hacking and who bears it. In USA for web

banking and online stock trading risks are usually borne by company/bank and

not client. Companies have insurance coverage and that helps consumers move on to

online trade (companies save lot of money by not having human talking to you,

compared to this, fraud insurance cost is almost negligible).

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But in India, because of tendency of consumers of not looking at agreements

carefully and companies also believe in passing all costs/risks to

consumbers and retain profits for themselves. Hence most online bank

accounts and stock trading accounts agreements clearly mention that

bank/broker is not liable for any loss leading from hacking of the account.

In this situation smart person would avoid using this services. Brokers and

Banks benefit tremendously when you use them via web and not call them on

phone, but most people are not aware of this, they try to create impression

as if they re doing "favour" to us when offering us web based bank/brokerage

account access.

In 1997 when ICICI BANK launched web banking they were charging Rs.1000 for

access thru web from their account holders and new accounts, and "waiving" this

charge for select few customers. Common sense would tell you that every time 30

people access web for ICICI banks, ICICI BANK has to employ one less person in its

call centre. Now this kind of charges don't exist but still they make it sound as if its

"free" as favour.

HACKING ON STOCK TRADING ACCOUNT HAPPENS IN TWO WAYS.

1) When server of stock broker is hacked into by outsider or employee and they insert

trades of shares/security on account of clients, there by exposing client to loss of his

balanace in his/her account. To prevent this, broker has to implement state of art

Documents

A Study of Growth of Financial Services in India1