104

CHAPTER – 04

Impact of FDI Reforms in Indian

Capital Market

Contents:

� Impact on Foreign Investment in India

� Impact on Stock Market Regulations

� Impact on FII

� Impact on Indian Banking Sector

� Impact on Indian Insurance Sector

� Conclusion

� References

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4.1 FOREIGN INVESTMENT IN INDIA

Liberalizing foreign direct investment regulations was important part of India’s

reforms, driven by the belief that this will increase the total volume of investment in

the economy, improve production technology, and increase access to world markets.

The policy now allows 100 percent foreign ownership in a large number of industries

and majority ownership in all except banks, insurance companies,

telecommunications and airlines. Procedures for obtaining permission were greatly

simplified by listing industries that are eligible for automatic approval up to specified

levels of foreign equity (100 percent, 74 percent and 51 percent). Potential foreign

investors investing within these limits only need to register with the Reserve Bank of

India, for investments in other industries, or for a higher share of equity than is

automatically permitted in listed industries, applications are considered by a Foreign

Investment Promotion Board that has established a track record of speedy decisions.

In 1993, foreign institutional investors were allowed to purchase shares of listed

Indian companies in the stock market, opening a window for portfolio investment in

existing companies.

Reforms in Indian economy have created a very different competitive environment for

India’s industry than existed in 1991, which has led to significant changes. Indian

companies have upgraded their technology and expanded to more efficient scales of

production. They have also restructured through mergers and acquisitions and

refocused their activities to concentrate on areas of competence. New dynamic firms

have displaced older and less dynamic ones: of the top 100 companies ranked by

market capitalization in 1991, about half are no longer in this group. Foreign

investment inflows increased from virtually nothing in 1991 to about 0.5 percent of

GDP. Although this figure remains much below the levels of foreign direct

investment in many emerging market countries (not to mention 4 percent of GDP in

China), the change from the pre-reform situation is impressive. The presence of

foreign-owned firms and their products in the domestic market is evident and has

added greatly to the pressure to improve quality.

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4.1.1 Regulatory Framework for Foreign Investment in India:

Foreign Investment in India is governed by the FDI policy announced by the

Government of India and the provision of the Foreign Exchange Management Act

(FEMA) 1999. The Reserve Bank of India (‘RBI’) in this regard had issued a

notification, which contains the Foreign Exchange Management (Transfer or issue of

security by a person resident outside India) Regulations, 2000. This notification has

been amended from time to time.

The Ministry of Commerce and Industry, Government of India is the nodal agency for

monitoring and reviewing the FDI policy on continued basis and changes in sectoral

policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the

Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and

Promotion (DIPP).

The foreign investors are free to invest in India, except few sectors/activities, where

prior approval from the RBI or Foreign Investment Promotion Board (‘FIPB’) would

be required.

4.1.2 FDI v/s FII after liberalization

There are two main routes foreign direct investment (FDI) and foreign institutional

investment (FII) for inflow of foreign capital in a country. FDI is considering as

economically viable and strategic foreign investment, because it is mobilizing the

economic resources of the country and it is a long lasting investment. FII consider as

an opportunistic investment because it based on the state of capital market, it is lees

consistent as compare to FDI.

As shown in (Table – 4.1), the foreign investment through FDI start growing from

1992, it was grown by positive growth rate up to 1997-98, but suddenly it was decline

again pick the growth up to 2007-08, this was the year when world economy face

financial crisis. India economy have shown the straight impact on foreign capital

invested in India, this year FDI dropped by more then 50 percent. Foreign Portfolio

investors have shown the same behavior for investment in India this year but it was

found by correlating FDI and FII investment in India, that investment in terms of FDI

was declined but not stopped but institutional investors have shown the opportunistic

behavior resulted FII sale more securities and purchases from Indian capital market.

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Table – 4.1

Foreign capital in India after liberalization

(Rs. Crore )

Year FDI FII

1990-91 144 11

1991-92 264 10

1992-93 608 748

1993-94 992 11188

1994-95 2065 12007

1995-96 2545 9192

1996-97 3621 11758

1997-98 3359 6794

1998-99 2205 -257

1999-00 2428 13112

2000-01 3571 12609

2001-02 3361 9639

2002-03 2079 4738

2003-04 3213 52279

2004-05 4355 41854

2005-06 11120 55307

2006-07 15921 31713

2007-08 33029 109741

2008-09 6155 -63618

Source: RBI Bulletin 2009 Note: (Table-01)

1. Data for 2007-08 and 2008-09 are provisional. 2. Data from 1995-96 onwards include acquisition of shares of Indian companies by

non-residents under Section 6 of FEMA, 1999. Data on such acquisitions are included as part of FDI since January 1996.

3. Data on FDI have been revised since 2000-01 with expanded coverage to approach international best practices. Data from 2000-01onwards are not comparable with FDI data for earlier years.

4. Negative (-) sign indicates outflow. 5. Direct Investment data for 2006-07 include swap of shares of 3.1 billion.

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Figure – 4.1

FDI and FII Flow in India

-100000

-50000

0

50000

100000

150000

200000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

Years

FD

I &

FII

FDI

FII

It has been observe by the study that, FDI increased in India with a constant growth

rate (Figure - 01), with small downtrend in 2003-04 then sharp upturn in 2005-06,

again declining movement in comparison to previous year but not declined more then

previous. Foreign Institutional Investors (FII) behavior just appositive in comparison

to strategic investor behavior, portfolio investment followed fluctuate pattern and at

the time of global crisis these investors were in hurry for pull back their money.

4.1.3 Route-wise FDI Inflows

Components of FDI inflows are studied over a period of time, this research found that

the value of equity inflows of incorporated bodies declined between 2001-02 and

2003-04, but have been on an uptrend thereafter .Inflows through reinvested earnings

increased continuously through this period, with only 2003-04 as an exceptional year.

Annual fluctuations were observed for the inflows under equity capital of

unincorporated bodies. However, the value of inflows through other capital stagnated

during this period. (Table- 4.2) indicating that there are two main channels for the

entry of FDI into India: the SIA/FIPB Route and the RBI Automatic Approval Route.

From the inception of economic reforms in India in 1991 until the year 2000, most of

the FDI came through the government route as there was strict monitoring of the

approvals; therefore, FDI coming through the SIA/FIPB route was greater than the

FDI coming through the RBI rout

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Table – 4.2

Route-wise FDI Inflows (In Million USD)

Source: SIA Newsletter April, 2009.

Note: 1. Inflows through ADRs/GDRs/FCCBs against FDI approvals have not been included. 2. # Data prior to 1996 not provided by the RBI. 3. From 2003, RBI’s various NRI schemes inflows included under the heading RBI’s Automatic Route.

However, there has been a dilution of this trend in the past five years. With the

investment boom in India and different states competing for FDI, the government has

eased foreign investment regulations leading to a spurt in FDI coming through the

RBI route, which is a positive sign. During 1991, as much as 54.1 per cent of total

FDI was channeled through the FIPB route in contrast to 45.9 per cent through the

Year

FIPB

Route

RBI

Automatic

Route

Inflow

through

acquisition

of existing

share

RBI

Various

NRI

schemes

Total

1991 (Aug-Dec) 78 NA NA 66 144

1992 188 18 NA 59 264

1993 340 79 NA 189 608

1994 511 116 NA 365 992

1995 1264 169 NA 633 2065

1996 1677 180 88 600 2545

1997 2824 242 266 290 3621

1998 2086 155 1028 91 3359

1999 1474 181 467 83 2205

2000 1474 395 479 81 2428

2001 2142 720 658 51 3571

2002 1450 813 1096 2 3361

2003 934 509 637 NA 2079

2004 1055 1179 980 NA 3213

2005 1136 1558 1661 NA 4355

2006 1534 7121 2465 NA 11120

2007 2586 8889 4447 NA 15921

2008 3209 23651 6169 NA 33029

2009 (Jan-Mar) 1992 3528 635 NA 6155

Total 27867 48343 21012 2509 99732 Estelar

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RBI route. No inflows on account of acquisition of existing shares were recorded for

this year. The route-wise FDI inflows fluctuated till 1998. During 1998, the FDI

inflows through the SIA/ FIPB route accounted for 62.1 per cent of the total FDI

inflows, while those through the RBI’s automatic route touched an all-time low of

only 7.3 per cent. However, by this year, inflows through acquisition had gained a

significant share of 3.06 per cent in total FDI inflows. The following period until

2007, for which the latest figures are available, recorded an increase in share of

inflows through the RBI’s automatic route, a decrease in the shares of inflows through

the SIA/FIPB, while the share of inflows through acquisitions remained banded

between 30 to 20 per cent.

4.1. 4 FDI in India by Automatic Route

FDI in sectors/activities to the extent permitted under automatic route does not require

any prior approval either by the Government or RBI. The investors are only required

to notify the Regional Office concerned of RBI within 30 days of receipt of inward

remittances and file the required documents with that office within 30 days of issue of

shares of foreign investors.

In this research it has been found that automatic approval route of FDI is the most

preferred route adopted by foreign investor for investment in India, up to 2009 this is

the rote which attracted largest shares of foreign capital 48343 million US $ in

comparison to other route (Table-4.2). It was star growing by year 1992 up to year

1997 then decline, again shown the growth by year 2000, and after 2000 it’s shown

continuous growth.

Figure – 4.2 Foreign Capital through Automatic Route

-

0

5000

10000

15000

20000

25000

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

200

9 (Jan

-Mar)

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4.1.5 FDI in India by Government Approval

FDI in all activities not covered under the automatic route require prior government

approval. Approvals of all such proposals including composite proposals involving

foreign investment/foreign technical collaboration are granted on the

recommendations of Foreign Investment Promotion Board (FIPB).Prior government

approval route for foreign investment, in the following circumstances, needs approval:

a. Activities which require prior government license

b. Proposal exceeding the sectoral caps or where provisions of Press Note 1

(2005 Series) issued by the Government of India are attracted;

c. Where more than 24 per cent foreign equity is proposed to be inducted for

manufacture of items reserved for the Small Scale sector

d. Proposal for acquisition of shares of an Indian company in Financial Sector

and where the transactions attract the provisions of SEBI (Substantial

Acquisition of Shares and Takeovers) Regulations, 1997.

This research studies indicate that FDI under government’s route has shown the

fluctuation but it was always then a certain level. In between 1990 – 2000 it was

highest in 1997-98 by this route and from 2000-10 it was highest in 2008-09. This

type of movement in government approval routes is because of changing

government policy year by year.

Figure – 4.3 Foreign Capital through FIPB Route

0

500

1000

1500

2000

2500

3000

3500

1991

(Aug

-Dec

)

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

(Ja

n-Mar)

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4.1.6 FDI in India by Merger and Acquisition Route:

Merger & Acquisitions are increasingly been recognized as a business tool. The most

widely practiced business strategy i.e. organic growth story - involving steps that a

company would take to augment its human resource, clients, infrastructure resources

etc thus resulting in organic growth of its revenues and profits. The M&A route

interchangeably used as inorganic growth story would provide immediate extension of

company’s human resource, clientele, infrastructure thus catalyzing the growth. Given

the fact that the economies are globalizing, more and more M&A are happening.

M&A are now driven more with business consideration rather than dominated by

regulations. Yet the local legislations do play in role in shaping the M&A.

With the FDI policies becoming more liberalized since the last many years, Mergers,

Acquisitions deals are growing at a good rate. The list of past and anticipated mergers

and acquisitions in India covers every size and variety of business providing platforms

for the small companies being acquired by bigger ones. India companies merge with

some big foreign companies as ell as the some big foreign companies merge with

India companies for getting the advantage of large Indian market. The merger and

acquisition deals in India after liberalization followed continuous growth (Figure –

4.4), this growth get accelerated after 2003 – 04 and it was highest in year 2008-09,

then face global crisis and declined by a substantial share. These routes are preferred

by strategic investors who are utilizing the economic resource of a country.

Figure – 4.4

Foreign Capital through Merger and Acquisitions Route

0

1000

2000

3000

4000

5000

6000

7000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

(Ja

n-Mar)

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4.1.7 FDI in India by NRI schemes

Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are allowed to

invest in the primary and secondary capital markets in India through the portfolio

investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire

shares/debentures of Indian companies through the stock exchanges in India.

� The ceiling for overall investment for FIIs is 24 per cent of the paid up capital

of the Indian company and 10 per cent for NRIs/PIOs. The limit is 20 per cent

of the paid up capital in the case of public sector banks, including the State

Bank of India.

� The ceiling of 24 per cent for FII investment can be raised up to sectoral

cap/statutory ceiling, subject to the approval of the board and the general body

of the company passing a special resolution to that effect. And the ceiling of

10 per cent for NRIs/PIOs can be raised to 24 per cent subject to the approval

of the general body of the company passing a resolution to that effect.

Figure – 4.5

Foreign Capital through Various NRI schemes

0

500

1000

1500

2000

2500

1 2 3 4 5 6 7 8 9 10 11 12

Investment in India by this route not generate any substantial share after liberalizing

India economy, this was one of the low considered route for foreign inflow in India. It

start picked growth in 1994-95 (Figure – 4.5), maintained that for 1996 0nly, it was

633 million US $ in 1995 (maximum), then 600 million US $ in 1996, then it start

declining and dropped up to 290 million US $ in 1997. After 2003 onwards foreign

investors reject that route of investment in India.

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4.2 IMPACT OF LIBERALIZATION IN STOCK MARKET

REGULATIONS

4.2.1 SEBI and Capital Market

The securities and Exchange Board of India was incorporated as an investor

protection body in 1992 by virtue of special enactment, namely by SEBI Act 1992.

The act came into force on from Jan30, 1992. It made provision for the establishment

of board to protect the interest of investors in securities and to promote the

development of, and to regulate securities market and for matter connected therewith.

The primary duty of board, as provided in Sec.11, is to protect the interest of investor

in securities and to promote the development and of to regulate the securities market

by such measures, as it think fit.

4.2.2 Landmark Policy Initiative by SEBI

The prominent policy initiative adopted by SEBI during 1998 include, among other

things, popularizing dematerialization, formulating regulations for derivatives, buy –

back, Collective Investment Schemes(CIS), credit rating agencies and also

amendments to the take over regulation of 1992. The efforts in nudging the market in

to electronic form of trading have been successful, with over 30 to 40 percent of

delivery in the demat mode at times, even greater then 50 percent of BSE. The

regulators expect at least 70 percent of trading to be delivered in the paperless mode

and 99 percent by 2000.SEBI has allowed exchange to set up terminal abroad and

extent their reach within India too. BSE and NSE have a presence in

approximately200 cities each. While Koakata , Delhi and Ludhiyana are exploring the

possibilities of expanding their terminals in and around these cities. Regulation on

Derivatives trading, Buy-back, credit rating, roles of mutual fund trustees and

amendments to takeover regulations wee finalizes during 1998. The derivatives

trading committee suggest a phase’s introduction to derivatives trading beginning of

with stock index future. Complex types may be introduces after market participants

gain comfort and familiarities with the products.

� The L C Gupta Committee laid down the ground rule for a derivative

exchange to operate as effective self regulatory organizations and suggest a

more stringent governance mechanism. The regulator permit buy back of share

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through a tender offer to existing shareholders, a book building process, open

market purchases and barred negotiating deals, spot transaction and private

placement.

� The Bagwati Committee also clears the deck with regarded to the impact of

buy back on takeover rules. The CIS bought under the purview of SEBI.

� The Dev Committee in its interim recommendations made credit rating

mandatory for any such scheme that wish to raise money from public and

directed that and their meaning be incorporated in offer documents,

advertisement and all publicity material.

4.2.3 Report of Informal Group on Primary Market

The group headed by Dr S N Acharya, Chief Economic Advisor Ministry of Finance

deliberate on the following issue – reasons for the slow down in primary market,

measure to improve the market and creation of a database for the private placement,

and regulatory issue relating to private placement. In order to look for possible

explanation for the poor performance of market, the group looked in to following

aspects:

� Demand/Supply Issue: Lack of demand for capital fund, lack of supply of

funds.

� Regulatory Issue: Stringent entry norms / disclosure requirement: over

regulation of market.

� Liquidity Aspect: Illiquid secondary market – lack of exit routes for majority

of shares, absences of market after an issue, overpricing of an issue which

leaves no premium to the investor in the post issue market.

The SEBI Board accepted most of the recommendations of the informal group on the

primary market and the following may be mentioned in this regard:

� Primary to be made compulsory trough the depository mode after a specific

date.

� 100 percent book building in respect of issue of Rs 25 crore and above.

� Reduction in number of mandatory collection center in respect of issue above

Rs 10 crore to four metropolitan cities.

� Measures taken to revive the secondary market include:

a. The Companies (Amendment) Ordinance 1998 dated 31 October 1998,

empowering companies to purchase their own shares subject to SEBI

regulation.

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b. Amendments of SEBI takeover regulations permitting easier

consolidations by promoters.

c. Publishing of unaudited result by listed companies on quarterly bases.

d. Rolling settlement in respect of dematerialization securities and

stringent margin requirement to curb excess volatility in share price.

To facilitate the flow of fund to the infrastructure sector, SEBI decided to grant

specific relaxation to public issue by infrastructure companies that are defined under

Section 10(23G) of the Income Tax Act, 1961.

4.2.4 Promoting OTC exchange:

� On the line of highly successful NASDAQ, the OTC exchange needs to be

seriously promoted. It can become an effective vehicle for the valuation of

technology stock and provide an efficient trading mechanism to investors.

4.2.4 Disinvestment PSE shares:

� The importance of correct price of PSE share is undisputable. This can be

done only by issuing the shares in domestic market rather then opting as GDR

route, according the expert observation of the capital market. Assuming that

about five million shareholders are created in the current financial year due to

PSE investment within the country.

4.2.6 According to prime database

� The central government should ease the “stringent and impractical” entry

norms for new public issue to help good companies taped to the market. The

agency preferred that entry barrier should be reasonable and focus should be

on quality, quantity and delivery format of pre – issue and post – issue

information disclosure.

4.2.7 Task Force to Track Vanishing Companies

SEBI joined force with the Department of Economic Affairs and Department of

Company Affairs to crackdown on promoter of companies that disappeared after

going public. The joint committee will comprise the SEBI chairman and also director

from DEA and DCA.

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The committee comprises the official of DCA and SEBI reviewed in its meeting held

on July 19, 1999, the various action initiated by task force against unscrupulous

promoters. Based on the study and physical verification undertaken by the stock

exchange for companies that come out with initial public offering after 1992, SEBI

had at present identified 80 companies that were not traced at their registered office

address as mention in the offer document. SEBI follow the following criteria, to term

a company as vanishing company:

1. Companies that did not comply with listing requirement such as submission of

annual report, schedule of distribution, communication of the record date, ect ,

for the period of two years.

2. Where no correspondent has been received by the exchange for a long time

and.

3. No office of the company is located at the mention registered office address.

4.2.8 Regulating the Debt Market:

The RBI at present meeting the high – level committee has sought to take complete

power to regulate debt market is it private or government debt. It felt that this would

lead to parity and less confusion in the market. It also wanted to regulate the private

placement which account for a huge chunk of debt issue. The RBI feels that since

most of the market includes interest rate, is under its control it would be best

institution to regulate debt market. The RBI at present, regulate all government

securities. This in itself is a market worth over several thousand crore. Listed

securities are covered by the SEBI while private placement goes unchecked. The later

segment would be moved under the SEBI. The RBI it may noted act as both the issuer

of government debt and regulator thereof.

4.2.9 Market capitalization in BSE after liberalization

The annual turnover, market capitalization and BSE Sensex increased sharply by 99

per cent in 1991-92 Share markets were un-precedentedly buoyant due to the

liberalization measures announced by the government to attract investments. Some

important proposals announced in the Union Budget of 1992-93, such as the abolition

of wealth tax on financial assets, abolition of the office of the CCI, free pricing era,

permission for Indian companies to raise funds abroad and so on triggered volumes on

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BSE. Irregularities in the securities transactions of banks and financial institutions

also added to the speculative pressure in the stock markets. These irregularities were

detected in 1992-93, when the scam broke out which led to the streamlining of stock

market operations by BSE authorities, sharply reducing the turnover. In 1996-97, the

turnover at BSE rose by 148 per cent. Badla was revived, which led to massive rise in

the turnover in the specified group of shares. Moreover, the extension of trading

terminals outside Mumbai in September 1997 and rapid progress in trading in demat

paperless form were some of the reasons for increase in turnover witnessed from

1996-97 to 1998-99.

During 1999-2000, the BSE turnover witnessed a sharp increase of 119 per cent. The

market was driven by large FII inflows, improved corporate performance, sound

macro-economic fundamentals, and upgrading of India’s international credit ratings

stable to positive by international credit rating agencies. In 2000-01, the increase in

turnover was 46 per cent. This was due to a slow down in FII inflows, large sell offs

of new economy stocks on Nasdaq, increase in international oil prices, payment crisis

at some stock exchanges, and liquidity problems with some cooperative banks.

During 2000-2010 the BSE turnover was grown by good rate in comparison to the

period 1991-2000. It was because of large number of IPO’s and introduction of ADR

and GDR. The growth was maximum in 2008-09 because of maximum FDI this year

as well as large merger and acquisitions.

The number of listed companies rose from 2,471 in 1990-91 to 5,782 in 2001-02. The

market capitalization is an indicator of the addition to the wealth of share owners. Its

increase is a function of price change and supply change coming from new issues. In

the first year of economic reforms, market capitalization increased by 256 per cent. It

was the result of an increase in shares prices due to an announcement of liberalization

measures and the listing of six PSU stocks for the first time on the stock exchange. In

the subsequent year, 1992-93, market capitalization declined due to irregularities in

securities transactions. Shares prices firmed up again in 1993-94 due to increased

flow of foreign funds, increased investor interest, and speculative trading.

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Table: 4.3: MARKET CAPITALISATION – BSE

(Rs Crore)

Year/ Month (End-

period)

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Total

1993-94 175093 180904 183775 192080 217291 223549 220587 266738 305000 364139 390696 368071 3087923

1994-95 364868 372977 398044 408230 446884 416966 415381 401692 400000 352443 348516 435481 4761824

1995-96 455315 456781 462238 465145 503630 530819 518623 435107 447297 436396 499705 526476 5737532

1996-97 585919 518640 530815 501538 497113 476805 455805 416750 439231 458261 484624 463915 5829416

1997-98 502082 506391 588496 595346 550883 547728 526142 493573 503716 469513 526357 560325 6370552

1998-99 580238 561849 485461 483420 464887 479711 452779 446728 477010 502451 504233 545361 5984128

1999-00 488229 560965 584788 648932 710956 704568 673462 709613 803353 927383 1029257 912842 8754348

2000-01 755914 702777 793230 720884 766642 692657 653437 699230 691162 736631 716173 571553 8500290

2001-02 567729 595938 553230 531576 523036 456263 481851 535724 532328 544397 596716 612224 6531012

2002-03 625587 605065 637753 584042 605303 570273 563750 601289 628197 611472 619873 572198 7224802

2003-04 572526 660982 734389 775996 905193 933087 1000494 1065853 1273361 1206854 1196221 1201207 11526163

2004-05 1255347 1023129 1047258 1135589 1216567 1309318 1337190 1539595 1685989 1661532 1730940 1698428 16640882

2005-06 1635766 1783221 1850377 1987170 2123901 2254378 2065612 2323065 2489386 2616194 2695543 3022191 26846804

2006-07 3255565 2842050 2721678 2712144 2993780 3185680 3370676 3577308 3624357 3779742 3489214 3545041 39097235

2007-08 3828337 4074552 4168272 4529772 4538006 5202955 6332093 6385475 7169985 5796079 5888448 5138015 63051988

2008-09 5794293 5428879 4375022 4732545 4778865 4165388 2997261 2818965 3144768 2997261 2862873 3086076 47182196

2009-10 3586979 4865046 4749935 NA NA NA NA NA NA NA NA NA 13201960

Note: Compilation of all-India market capitalization has been discontinued by Bombay Stock Exchange Limited (BSE) since August 1999.

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4.2.10 Market capitalization in NSE after liberalization

With the liberalization of the Indian economy, it was found inevitable to lift the

Indian stock market trading system on par with the international standards. On the

basis of the recommendations of high powered Pherwani Committee, the National

Stock Exchange was incorporated in 1992 by Industrial Development Bank of India,

Industrial Credit and Investment Corporation of India, Industrial Finance Corporation

of India, all Insurance Corporations, selected commercial banks and others.

The Trading on the NSE’s capital market commenced on November 4, 1995 and has

been witnessing a substantial growth over the years. The growth of NSE turnover

figures shows a substantial rise from Rs. 1,805 crore (US $ 574.29 million) in the year

1994-95 to Rs. 2,752,023 crore (US $ 540,141.59 million) in 2008-09. With the

increase in volumes, efficient and transparent trading platform, a wide range of

securities like equity, preference shares, debt warrants, exchange traded funds as well

as retail government securities, NSE upholds its position as the largest stock exchange

in the country. The CM segment of NSE provides an efficient and transparent

platform for trading of equity, preference shares, debentures, warrants, exchange

traded funds as well as retail Government securities.

Riding on superior technology and FII preference, the National Stock Exchange is

expected to surpass its older counterpart, the Bombay Stock Exchange, in market

capitalization for the first time in history. In terms of the relative size of the two main

Indian equity markets, NSE has become the exchange of choice, According to Celent

estimates; the market turnover of NSE for 2009 would be more than two times the

turnover of BSE. On 7 August, NSE turnover in value dominated by NSE, which has

the leading position among derivatives exchanges in the world as well. “Superior use

of technology from its inception and better strategy has meant that NSE towers over

its local counterpart in BSE. Also, it is expected to break into the global top five by

volume in the near future,” the report added. In 2008, NSE had a trade volume of 590

million contracts which grew by 55.4% over previous year, making it the eighth

largest derivatives exchange in the world.

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TABLE: 4.4 MARKET CAPITALISATION – NSE

(Rupees crore)

Year/

Month Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Total

1994-95 NA NA NA NA NA NA NA 292637 327560 350530 376538 363350 1710615

1995-96 NA 361000 340139 355738 395965 403920 403265 357695 369403 346073 396059 401459 4130716

1996-97 487488 472842 486072 445536 445670 400860 390562 337546 391130 416907 436198 419367 5130178

1997-98 483173 521818 574933 590482 550937 509919 491761 462339 471148 427517 457166 481503 6022696

1998-99 516805 502014 424697 425006 406291 425100 394316 389442 419865 449221 452081 491175 5296013

1999-00 445380 503911 529468 593651 668187 686740 670062 726419 852985 951712 1069770 1020426 8718711

2000-01 846391 790478 852554 746402 794516 730350 707121 764177 760391 807641 789600 657847 9247468

2001-02 653720 592437 569797 574260 575242 509105 535846 581386 552908 563683 621523 636861 6966768

2002-03 649551 631609 659991 608643 632618 599603 606788 645388 672862 572277 581985 537133 7398448

2003-04 530630 612030 678550 719145 836651 863481 926748 979541 1167029 1116150 1110954 1120976 10661885

2004-05 1171828 950494 979700 1066087 1143075 1227550 1253825 1446292 1579161 1557444 1614597 1585585 15575638

2005-06 1517908 1654995 1727502 1848740 1957491 2098263 1927645 2166823 2322392 2434395 2512083 2813201 24981438

2006-07 2990200 2612639 2524659 2514261 2777401 2994132 3138319 3373652 3426236 3571487 3296931 3367350 36587267

2007-08 3650368 3898078 3978381 4317571 4296994 4886561 5722227 5876742 6543272 5295387 5419942 4858122 58743645

2008-09 5442780 5098873 4103651 4432427 4472461 3900185 2820388 2653281 2916768 2798707 2675622 2896194 44211337

2009-10 3375025 4564572 4432596 NA NA NA NA NA NA NA NA NA 12372193

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4.2.11 Comparison of Market Capitalization in BSE and NSE

Capital that comes in India by any means or routes or market that is important for the

development of country economy. In this study has been found that the market capital

growth that is studies from 1994 (because NSE established in 1994) till 2010 is follow

same growth rate in NSE nad BSE. It was start picking growth from 2004-05 and in

maximum in 2008-09 then declined very sharply. This decline is because of global crisis

in 2007 – 08 due to this crisis FII decline sharply.

Figure – 4.6

Comparison of Market Capitalization in BSE and NSE

Market Capitalization in BSE & NSE after Libralization

0

10000000

20000000

30000000

40000000

50000000

60000000

70000000

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

Year

Am

ou

n (

Rs

in C

r)

BSE

NSE

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123

4.3 IMPACT OF LIBERALIZATION ON FII

A well-developed stock market has its impact on the demand side also. It provides

investors with an array of assets with varying degree of risk, return and liquidity. This

increased choice of assets and the existence of a vibrant stock market provide savers with

more liquidity and options, thereby inducing more savings. Increased competition from

foreign financial institutions also paves the way for the derivatives’ market.

Link Model: Portfolio Investment and Economic Development

Above model indicating that portfolio investment is also a stimulus of economic

development because, its is main source of fund of corporate. The demand of portfolio

investment is created by companies and their routes are decided by government. It is

considered as less reliable source of fund for economic development because, its

fluctuate on some minor trends of economy.

FII Share Price Up

� Cheaper Capital

� More Stock Issue

� New Listing

Cost of Issue Down

Market

Liquidity

Increased

More Equity Issued

More Supply

Liquidity

Demand

More Players & Efficiency Encouraged.

Intermediaries

,Broker and

Underwriter

Mutual Funds,

Insurance

Companies and

Individuals.

Issuers

Effect

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124

4.3.1 FII in India (2000 – 2009)

Foreign institutional investors have gained a significant role in Indian capital markets.

Availability of foreign capital depends on many firm specific factors other than

economic development of the country. In this context this paper examines the

contribution of foreign institutional investment particularly among companies included

in sensitivity index (Sensex) of Bombay Stock Exchange. Also examined is the

relationship between foreign institutional investment and firm specific characteristics in

terms of ownership structure, financial performance and stock performance. It is

observed that foreign investors invested more in companies with a higher volume of

shares owned by the general public. The promoters’ holdings and the foreign investments

are inversely related. Foreign investors choose the companies where family shareholding

of promoters is not substantial. Among the financial performance variables the share

returns and earnings per share are significant factors influencing their investment

decision.

Foreign portfolio inflows through FIIs, in India, are important from the policy

perspective, especially when the country has emerged as one of the most attractive

investment destinations in Asia. In this paper an effort has been made to develop an

understanding of the investment decisions in different group of shares in BSE, and

behavior of the FIIs in the Indian equity market of last ten years. This study show that the

FII in India was maximum in 2004 then it starts declining (Table -4.5), then it faced the

challenged of global crisis, in 2007 the net sale of shares by foreign investors is mare

then net purchases.

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Table – 4.5

FII in India (Rs Cr)

YEAR

PURCHASES

SALES

NET

2000 32913 27028 5885

2001 19325.76 15859.28 3466.48

2002 15535.76 15446.28 89.48

2003 32882 24196 8686

2004 59910.12 47624.19 12285.93

2005 113960 107480 6480

2006 132933 131548 1385

2007 202468 208968 -6500

2008 100077 120491 -20414

2009 89069 82866 6204

TOTAL 799073.64 781506.75 17567.89

Source: RBI Bulletin

4.3.2 FII and BSE Sensex India Sensex is the commonly used name for the Bombay Stock Exchange Sensitive Index –

an index Composed of 30 of the largest and most actively traded stocks on the Bombay

Stock Exchange (BSE). The term FII is used most commonly in India to refer to outside

companies investing in the financial markets of India. FII investment is frequently

referred to as hot money for the reason that it can leave the country at the same speed at

which it comes in. In country like India; statutory agencies like SEBI have prescribed

norms to register FIIs and also to regulate such investments flowing in through FIIs. It

has been found by the study (Table-4.6) that BSE Sensex and foreign institutional

investment has followed a closed relationship, when net sensex was moved up than the

FII was also increased and when net sensex was down the total FII was goes gown.

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126

Table – 4.6

BSE Sensex and FII (Rs Cr)

Year NET SENSEX NET FII’s

2000 -1448.56 59941

2001 -96.91 3466.48

2002 -451.46 89.48

2003 2509.65 8686

2004 751.97 12285.93

2005 4674.92 6480

2006 1507.74 1385

2007 3189.07 -6500

2008 -5918.12 -20414

2009 7625.78 6204

Source: RBI Bulletin

Figure – 4.7 (Based on table: 4.6)

FII and Sensex Relationship

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

1 2 3 4 5 6 7 8 9 10

Year

FII

& B

SE

Tu

rno

ver

NET SENSEX NET FII’s

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127

4.3.3 FII AND INDIVIDUAL GROUP SECURITIES IN BSE:

The Bombay Stock Exchange (BSE), India’s leading stock exchange, has classified

Equity scripts into categories A, B1, B2, S, T, TS, & Z to provide guidance to the

investors. The classification is on the basis of several factors like market capitalization,

trading volumes and numbers, track records, profits, dividends, shareholding patterns,

and some qualitative aspects. On the basis of the study it has been found that some group

of shares attract the attention of FII at larger (Table -4.7), some at very low and some

group of shares are completely unable to attract the attention of foreign investors these

groups are negatively co-related with the total FII in India. This study taking forward by

studying each group of shares with total FII individually, explaining the reasons of low

and high investment by foreign intuitional investors in India.

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128

Table – 4.7 FII in Different Group of Shares

(Rs Cr)

YEAR A

GROUP B1

GROUP B2

GROUP S

GROUP T

GROUP Z

GROUP F

GROUP G

GROUP B

GROUP ST

GROUP NET FII's

2000 908947 70951.6 7323.3 NA NA 45.8 42.96 NA NA NA 59941

2001 281969 22233.1 2111.7 NA NA 17.09 82.69 NA NA NA 3466.48

2002 266651 43340.7 3962.9 NA NA 22.59 94.9 1.45 NA NA 89.48

2003 437851 58641.2 4568.6 NA 418.65 321.21 245.51 1.39 NA NA 8686

2004 398861 97269.7 9272.1 5597.9 6335.89 1158.92 220.17 0.05 NA NA 12285.9

2005 482429 237055 35541 46697 12146.4 1934.71 269.71 NA NA NA 6480

2006 552460 312604 33602 48663 7895.96 791.23 170.39 NA NA NA 1385

2007 859286 551613 96614 53904 15723.4 1480.74 235.7 NA NA NA -6500

2008 897682 NA 158250 20277 1773.1 407.18 753.13 NA 20931.1 NA -20414

2009 963736 NA NA 37821 6138.06 20.76 1588.16 NA 368498 1006 6204

TOTAL 6049872 1393708 351245 212960 50431.4 6200.23 3703.32 2.89 389430 1006 17567.9 Coefficient

of Correlation with Total

FII

0.513

0.992

0.679

0.480

0.734

0.657

0.102

-0.721

-0.877

Source: RBI Bulle

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129

4.3.3.1 FII & GROUP-A Shares:

‘A’ Group is a category where there is a facility for carry forward (Badla) to the next

settlement cycle. These are companies with fairly good growth record in terms of dividend

and capital appreciation. The scrip’s in this group are classified on the basis of equity capital,

market capitalization, number of years of listing on the exchange, public share holding,

floating stock, trading volume etc. As per the finding of this study (Table – 4.8), this group

of shares in the stock market attract the high interest of foreign institutional investors in

India, it has shown the incremental growth year by year after 2000, the FII investment in this

group of shares was maximum in year 2004 in the same years the total FII was maxim in last

decade.

Table -4.8 FII & GROUP-A Share (Rs Cr)

Year

A GROUP TURNOVER FII TURNOVER

2000 908946.85 59941

2001 281968.9 35185.04

2002 266650.7 30982.04

2003 437851 57078

2004 398860.9 107534.31

2005 482429.3 221440

2006 552460.2 264481

2007 859285.6 411436

2008 897682.1 220568

2009 963736.3 171935

Source: RBI Bulletin Figure: 4.8 (Based on table: 4.8)

FII and A Group Shares

0

200000

400000

600000

800000

1000000

1200000

1400000

1 2 3 4 5 6 7 8 9 10

Year

Turn

over

(FII

& A

Gro

up S

hare

s)

A GROUP TURNOVER FII TURNOVER

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130

4.3.3.2 FII & GROUP-B1 & B2: B1, B2’ Group is a subset of the other listed shares that enjoy higher market Capitalization

and liquidity than the rest. It is another group of shares which hold high market capital. As

per the study it has been observed that this group of shares attract the attention of investors

quiet well till 2007-08 (Table – 4.9 & 4.10), but after the global crisis this group of shares

unable to attract the attention of foreign institutional investors.

Table – 4.9 FII & GROUP-B1

(Rs Cr)

Year

B1 Group

Turnover FII Turnover

2000 70951.62 59941

2001 22233.14 35185.04

2002 43340.67 30982.04

2003 58641.2 57078

2004 97269.7 107534.31

2005 237055.4 221440

2006 312603.5 264481

2007 551612.5 411436

2008 NA 220568

2009 NA 171935

Source: RBI Bulletin

Figure: 4.9(Based on table: 4.9)

FII and B1 Group Shares

0

100000

200000

300000

400000

500000

600000

1 2 3 4 5 6 7 8 9 10

Year

Turn

over

(FII &

B1 G

roup S

hare

s)

B1 GROUP TURNOVER FII TURNOVER

Estelar

131

Table -4.10

FII & GROUP-B 2

(Rs Cr)

Year

B2 GROUP

TURNOVER FII TURNOVER

2000 7323.26 59941

2001 2111.74 35185.04

2002 3962.93 30982.04

2003 4568.6 57078

2004 9272.13 107534.31

2005 35541.04 221440

2006 33601.51 264481

2007 96614.14 411436

2008 158250.1 220568

2009 NA 171935

Source: RBI Bulletin Figure: 4.10(Based on table: 4.10)

FII and B2 Group Shares

0

100000

200000

300000

400000

500000

600000

1 2 3 4 5 6 7 8 9 10

Year

Turn

over

(FII

& B

2 S

hare

s)

B2 GROUP TURNOVER FII TURNOVER

4.3.3.3FII & GROUP-S: ‘S’ Group represents scrip’s forming part of the BSE-Indonext segment. “The Exchange has

introduced a new segment named “BSE Indonext” w.e.f. January 7, 2005. The “S” Group

represents scripts forming part of the “BSE-Indonext” segment. “S” group consists of scripts

from “B1” & “B2” group on BSE and companies exclusively listed on regional stock

Estelar

132

exchanges having capital of 3 crores to 30 crores. All trades in this segment are done through

BOLT system under S group. As per the study it has been found that (Table – 4.11) this

group of shares attract the highest attention of investors in 2007 after that it has been

decreased substantially, as far as the correlation of total FII and S – Group share is concern

it has shown substantially correlated.

Table – 4.11 FII & GROUP-S:

(Rs Cr)

Year S Group FII Turnover

2000 NA 59941

2001 NA 35185.04

2002 NA 30982.04

2003 NA 57078

2004 5597.87 107534.31

2005 46697.48 221440

2006 48662.72 264481

2007 53904.08 411436

2008 20276.97 220568

2009 37821.28 171935

Source: RBI Bulletin Figure: 4.11(Based on table: 4.11)

FII and S Group Shares

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

500000

1 2 3 4 5 6 7 8 9 10

Year

Turn

over

(FII

& S

Share

s)

S Group FII Turnover

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133

4.3.3.4 FII & T Group Shares

‘T’’ Also termed as the trade to trade group this category comprises of shares which have to

be settled in delivery for all buys and sells and square off of bought and sold positions during

the day is not permitted. This is a part of the surveillance from the BSE to counter any

backward unwarranted movements in such scrip’. In 2007 there is maximum FII in T –

Group shares (Table – 4.12) and lowest in 2008, year 2008 was the year when Indian

economy faced impact of global crises and FII was directly by correlated, but one interesting

fact has been found that, in 2008 the total FII in India Rs 220568 crore and Rs 1773.1 crore

that is minimum after 2005.

Table – 4.12

FII & T Group Shares (Rs Cr)

Year T Group FII Turnover

2000 NA 59941

2001 NA 35185.04

2002 NA 30982.04

2003 418.65 57078

2004 6335.89 107534.31

2005 12146.37 221440

2006 7895.96 264481

2007 15723.35 411436

2008 1773.1 220568

2009 6138.06 171935

Source: RBI Bulletin Figure: 4.12(Based on table: 4.12)

FII and T Group Shares

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

1 2 3 4 5 6 7 8 9 10

Year

Turn

over

(FII

& T

Share

s)

T Group FII Turnover

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134

4.3.3.5 GROUP-Z: ‘Z’ Group category comprises of shares of the companies which does

not comply with the rules and regulations of the Stock Exchange and are at times suspended

from trading. As per the study (Table - 4.13), this group of shares does not shown any co

relation with the total FII in India but it has attract the small attention of foreign portfolio

invest.

Table – 4.13

FII & Z Group Shares

(Rs Cr)

Year Z Group FII Turnover

2000 45.8 59941

2001 17.09 35185.04

2002 22.59 30982.04

2003 321.21 57078

2004 1158.92 107534.31

2005 1934.71 221440

2006 791.23 264481

2007 1480.74 411436

2008 407.18 220568

2009 20.76 171935

Source: RBI Bulletin Figure: 4.13(Based on table: 4.13)

FII and Z Group Shares

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

1 2 3 4 5 6 7 8 9 10

Year

Turn

over

(FII

& Z

Share

s)

Z Group FII Turnover

Estelar

135

4.3.3.6 GROUP-F: ‘F’ Group represents the debt market segment or represents the Fixed

Income Securities. FII are always interested in high return that is the main reasons behind the

slow attention of FII in this group of shares.

Table – 4.14

FII & F Group Shares

(Rs Cr)

Year F Group FII Turnover

2000 42.96 59941

2001 82.69 35185.04

2002 94.9 30982.04

2003 245.51 57078

2004 220.17 107534.31

2005 269.71 221440

2006 170.39 264481

2007 235.7 411436

2008 753.13 220568

2009 1588.16 171935

Source: RBI Bulletin

Figure: 4.14 (Based on table: 4.14)

FII and F Group Shares

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

1 2 3 4 5 6 7 8 9 10

Year

Turn

over

(FII

& F

Share

s)

F Group FII Turnover

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136

4.3.3.7 GROUP-G":

G" group consist Trading in Govt. Securities for retail investors. As per the study this group

of shares unable to attract the attention of foreign institutional investors. Because the

investment in government security is tighten by strong regulations in India.

Table – 4.15

FII & G Group Shares

(Rs Cr)

Year G Group FII Turnover

2000 NA 59941

2001 NA 35185.04

2002 1.45 30982.04

2003 1.39 57078

2004 0.05 107534.31

2005 NA 221440

2006 NA 264481

2007 NA 411436

2008 NA 220568

2009 NA 171935

Source: RBI Bulletin Figure: 4.15(Based on table: 4.15)

FII and G Group Shares

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

1 2 3 4 5 6 7 8 9 10

Year

Turn

over

(FII

& G

Share

s)

G Group FII Turnover

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137

4.3.3.8 GROUP-B: ‘B’ Group is a subset of the other listed shares that enjoy higher market

capitalization and liquidity than the rest. In this study one interesting fact has been found that

this group of shares was unable to find the attention of foreign investors till 2007. In 2008

this group of shares has attract the attention of FII in India.

Table – 4.16

FII & B Group Shares

(Rs Cr)

Year B Group FII Turnover

2000 NA 59941

2001 NA 35185.04

2002 NA 30982.04

2003 NA 57078

2004 NA 107534.31

2005 NA 221440

2006 NA 264481

2007 NA 411436

2008 20931.12 220568

2009 368498.4 171935

Source: RBI Bulletin Figure: 4.16 (Based on table: 4.16)

FII and B Group Shares

0

100000

200000

300000

400000

500000

600000

1 2 3 4 5 6 7 8 9 10

Year

Turn

over

(FII

& B

Share

s)

B Group FII Turnover

Estelar

138

4.4 IMPACT OF LIBERALIZATION IN INDIAN BANKING SECTOR

The Indian financial sector comprises a large network of commercial banks, financial

institutions, stock exchanges and a wide range of financial instruments. It has undergone a

significant structural transformation since the initiation of financial liberalization in

1990s.The third period, mid 1980’s onwards, is characterized by consolidation,

diversification and liberalization. However a more comprehensive liberalization programme

was initiated by the government of India during early 1990’s.The impetus to financial sector

reforms came with the submission of three influential reports by the Chakravarty Committee

in 1985, the Vaghul in 1987 and the Narasimham Committee in 1991. But the

recommendations of the Narasimham Committee provided the blueprint of the reforms,

especially with regard to banks and other financial institutions. In 1991, the government of

India initiated a comprehensive financial sector liberalization programme. The liberalization

programme includes de-controlled interest rates, reduced reserve ratios and slowly reduced

government control of banking operations while establishing a market regulatory framework.

Banks as financial intermediaries play a significant role in economic growth, provide funds

for investments, and keep the cost of capital low. During the last few decades, structure of

banking sector has turned from a controlled system into liberalized one. The efficiency of

banks, which reflects the ability of banks in transforming its resources to output by making

its best allocation, is essential for the growth of an economy. However, due to the major role

played by banks in the development of economy, the banking sector has been one of the

major sectors that have received renewed interest from researchers and economists.

The rapid advances in computer and communication technology have led to the development

of new bank services and financial instruments. Therefore, the economies of world have

experienced a revolutionary change in the environment of banking sector. The competition

among banks at domestic and global level has increased and it has compelled the banking

industry to improve their efficiency and productivity. Moreover, the government and policy

makers have adopted various policies and measures out of which consolidation of banks

emerged as one of the most preferable strategy. There are diverse ways to consolidate the

banking industry the most commonly adopted by banks is merger.

Estelar

139

4.4.1 RBI in Foreign Investment-

RBI works through automatic route and government route in allocating funds in various

sectors of the Indian industry. Its mandatory for all the foreign investors to get approvals

from RBI in order to carry out invest activities in the industrial units in India. FDI is allotted

up to 100 % under automatic route and it does not require approval from FIPB.

The major areas in which the Reserve Bank of India (RBI) plays a significant role in terms of

foreign investment are -

1. Foreign Direct Investment

2. Foreign Venture Capital Investment

3. Foreign Portfolio Investment

4. Investment in Government Securities and Corporate debt

5. Foreign Technical Collaboration

Procedure for opening Branch/Project/Liaison Office

RBI approves foreign investments through two routes - Automatic Route and Government

Route.

� Automatic Route- 100 % Foreign Direct Investment (FDI) is permitted under the

automatic route in many industrial units except those which require prior approval of

the government. Areas which acquire prior approval of the government are as

follows:

� Units which attract provisions of Press Note 1 (2005 Series) issued by the

Government of India

� Small scale sectors which attract more than 24 percent equity in the

manufacturing of products

� The foreign investors are required to inform the Regional Office under RBI

within 30 days of receiving the inward payments and record the necessary

documents along with the FC-GPR form with the regional office within 30

days of handing over the shares to the NRI investors.

� Government Route- Certain activities do not require FDI approval and they are

regulated by the Foreign Investment Promotion Board (FIPB), Ministry of Finance.

No fee is required while filling up the application form which is Form FC-IL.

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140

4.4.2 Structure of Banking Institution in India

During last few decades, the environment under which Indian banking sector has operated

witnessed a remarkable changes. India embarked on a strategy of economic reforms in the

wake of a serious balance of payment crisis in1991. In Indian banking sector, the policy

makers adopted cautious approach for introducing reform measures on the recommendation

of Narishmam Committee I (1991), Narishmam Committee II (1997) and Verma Committee

(1999). The main objective of the banking sector reforms was to improve the efficiency of

banks and to promote a diversified and competitive financial system. One of the outcomes of

such reforms was the consolidation of the banking industry through mergers and

acquisitions. Technological progress and financial deregulation have played an important

role in accelerating the process of merger and acquisition in Indian banking industry. Due to

technological progress, the scale at which financial services and products are produced has

expanded which provide an opportunity for the banks to increase their size and scale of

production. At that, time mergers of banking institutions emerged as an important strategy

for growing the size of banks. Size of the bank plays a significant role to enter the global

financial market.

Estelar

141

Table-4.17

Structure of Indian Banking Sector (As on March 2008)

Numbers Amount in Rs. Cr

Bank group

No. of

Banks Branches

No. of

Employees Investments Advances Assets Deposits

I. Public sector banks

(a +b) 28 55018 715408 799841 179400 3021924 2453867

Market Share (%) 69.90% 78.80% 67.90% 72.60% 69.90% 46.10%

a. State Bank of India

Group 8 15814 249008 263823 593722 1010959 773874

Market Share (%) 20.10% 27.40% 22.4 24.00% 23.4 14.60%

b. Nationalized Banks 20 39204 466400 536018 1203678 2010965 1679993

Market share (%) 49.80% 51.40% 45.5 48.30% 56.5 31.50%

II. Indian private

sector Banks 23 8294 158823 278578 518402 940144 2675033

Market share (%) 10.50% 17.50% 23.7 20.90% 21.7 50.30%

III. Foreign banks in

India 28 279 33969 98910 161133 364099 191161

Market share (%) 0.35% 3.74% 8.4 6.50% 8.41 3.60%

IV. Total Indian

private and foreign

banks(II + III) 51 8573 192792 377488 679535 1304243 2866194

Market share (%) 10.90% 21.20% 32.1 27.40% 30.1 53.90%

V. Total commercial

banks (I + IV) 79 78666 908200 1177330 2476936 4326166 5320062

Market share (%) 100% 100% 100% 100% 100.00% 100%

Notes: Excludes Regional Rural Banks Source: Calculated from the statistical tables relating to banks in India, 2007-08

Estelar

142

4.4.3 Merger of Banks in India

Merger can be defined as a mean of unification of two players into single entity. Merger is a

process of combining two business entities under the common ownership. According to

Oxford Dictionary the expression, “Merger means combining two commercial companies

into one.” Bank merger is an event when previously distinct banks are consolidated into one

institution. A merger occurs when an independent bank loses its charter and becomes a part

of an existing bank with one headquarter and a unified branch networ. Mergers occurs by

adding the active (bidder ) banks assets and liabilities to the target (Passive) bank’s balance

sheet and acquiring the bidder ‘s bank name through a series of legal and administrative

measures Mergers and acquisitions in Indian banking sector have initiated through the

recommendations of Narasimham committee II. The committee recommended that merger

between strong banks/ financial institutions would make for greater economic and

commercial sense and would be a case where the whole is greater than the sum of its parts

and have a “force multiplier effect”. (Narasimham committee II, chapter, para 5.13 -5.15)

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Table – 4.18

Merger and acquisitions Indian Banking Sector

Source: Compiled from Report on Trend and Progress of Banking in India, RBI, various issues.

Since 1990’s, there has been spectacular growth of the Indian banking sector. Several variables are studies in this dissertation.

Merger Year

Acquirer Bank Target Bank Motive of merger Type of Merger

1993 Punjab National Bank New Bank of India Restructuring of Weak Bank

Forced Merger

1993 Bank of India Bank of Karad Ltd Restructuring of weak bank Forced Merger

1995 State Bank of India Kashinath Seth Bank Restructuring of weak bank Forced Merger

1997 Oriental Bank of Commerce

Punjab Co-operative Bank Ltd

Restructuring of weak bank Forced Merger

1997 Oriental Bank of Commerce

Bari Doab Bank Ltd. Restructuring of weak bank Forced Merger

1999 Union Bank of India Sikkim Bank Ltd Restructuring of weak bank Forced Merger

2000 HDFC Bank Ltd. Times Bank To achieve scale and scope economies

Voluntary Merger

2001 ICICI Bank Bank of Madura To achieve scale and scope economies

Voluntary Merger

2002 ICICI Bank ICICI Limited To achieve scale and scope economies

Voluntary Merger

2002 Bank of Baroda Benaras State Bank Ltd.

Restructuring of Weak Bank

Forced Merger

2003 Punjab National Bank Nedungadi Bank Ltd. Restructuring of Weak Bank

Forced Merger

2004 Bank of Baroda South Gujarat Local Area Bank

Restructuring of Weak Bank

Forced Merger

2004 Oriental Bank of Commerce

Global Trust Bank Restructuring of Weak Bank

Forced Merger

2005 Centurion Bank Bank of Punjab To achieve scale and scope economies

Voluntary merger

2006 Federal Bank Ganesh Bank of Kurandwad

Restructuring of weak bank Forced merger

2006 IDBI Bank United western Bank Restructuring of weak bank Forced merger

2006 Centurion Bank of Punjab

Lord Krishna Bank Expansion of size Voluntary merger

2007 ICICI Bank Sangli Bank Expansion of size Voluntary merger

2007 Indian Overseas Bank Bharat overseas Bank

Restructuring of weak bank Voluntary merger

2008 HDFC Bank Centurion Bank of Punjab

Expansion of size and benefits of scope

economics

Voluntary merger

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4.4.4 Selective Indicators of Banking Sector (impact of reforms)

4.4.4.1 Total Assets

Total asset, total deposit, total credit and net profit have been analyzed to study the relative

progress of the Indian banking sector. In terms of asset, all bank groups have recorded higher

asset growth after the financial reforms. It can be seen (Table- 4.19 & Figure:03) that,

during financial reforms the total asset of the Indian banking sector recorded higher growth

and since 1999 total asset of the banking sector has grown significantly. During 1999, the

total commercial bank asset was Rs. 6531.37 billion, which increased to Rs. 17854.76 billion

in 2007

Table – 4.19 Total Asset, in Rs. billion (1993-94 prices)

Year PSBs Private Banks

Foreign Banks RRBs All Banks

1991 3633.15 146.69 254.59 92.25 4126.68

1992 3372.84 159.24 281.69 96.51 3910.28

1993 3434.64 181.96 323.54 100.7 4040.83

1994 3526.59 212.06 311.16 111.66 4161.46

1995 3744.54 326.75 322.83 127.02 4521.13

1996 4010.82 361.92 378.03 150.4 4901.18

1997 4153.99 452.27 417.53 182.03 5205.83

1998 4478.07 558.96 450.35 203.27 5690.66

1999 5100.79 686.03 507.37 237.19 6531.37

2000 5638.22 864.24 524.3 267.28 7294.04

2001 6329.25 1004.18 625.84 304.83 8264.11

2002 6850.84 1586.72 664.47 336.7 9438.74

2003 7345.46 1686.73 665.16 357.2 10054.56

2004 8089.21 2019.11 749.4 385.9 11243.62

2005 9452.16 2279.9 818.61 414.91 12965.58

2006 10361.91 2939.73 1025.24 461.08 14787.97

2007 12206 3728.88 1390.77 529.1 17854.76

Source: RBI Manual

In terms of asset growth the public sector banks are far ahead then other banks specially after

liberalization (figure: 4.17), but private banks in India are performing well. The situation of

RRB is very poor in terms of assets base, foreign banks are struggling with the banks of

other segment but they are having a positive directional growth.

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Figure: 4.17 (based on table-4.19)

Total Assets of Bank

0

2000

4000

6000

8000

10000

12000

14000

1 3 5 7 9 11 13 15 17

Year (1991 - 2007)

Tota

l Assets ( Rs Cr)

PSBs

Private Banks

Fore ignBanks

RRBs

4.4.4.2 Total Deposits

Total deposits of the commercial banks have gone up significantly since 1999 (Table –

4.20). All bank groups recorded higher deposit especially after 1999. Total deposit of all

banks increased to Rs. 13907.54 billion in 2007, which was Rs. 5283.27 billion in 1999.

Table – 4.20 Total Deposit, in Rs. billion (1993-94 prices)

Year PSBs Private Banks

Foreign Banks RRBs All Banks

1991 2590.46 115.91 144.19 61.79 2912.34

1992 2634.14 137.35 192.91 65.91 3030.32

1993 2713.49 157.02 217.29 71.08 3158.88

1994 2823.89 187.13 241.13 82.49 3334.64

1995 2977.28 248.71 239.18 95.06 3560.23

1996 3098.8 286.92 242.93 112.36 3741.01

1997 3355.46 381.14 279.26 134.24 4150.1

1998 3667.85 479.52 295.74 153.08 4596.18

1999 4217.06 572.81 314.22 179.18 5283.27

2000 4665.95 719.34 312.14 203.94 5901.36

2001 5281.97 839.99 363.8 235.36 6721.13

2002 5742.44 1004.38 382.4 264.01 7393.23

2003 6169.02 1182.58 396.14 283.37 8031.12

2004 6744.57 1476.36 440.59 309.48 8971

2005 7654.2 1676.42 460.3 331.1 10122.01

2006 8343.95 2203.42 584.96 367.01 11499.34

2007 9975.96 2761.31 754.34 415.92 13907.54

Source: RBI Manual Calculated

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As per this study the total deposits of public sector banks in compression other sector

improve after liberalization (figure: 4.18), there is some improvement in total deposit of

private banks also, this improvement is also significant in terms of their size.

Figure: 4.18 (based on table-4.20)

Total Depositis of Banks

0

2000

4000

6000

8000

10000

12000

1 3 5 7 9 11 13 15 17

Year (1991 - 2007)

Dep

osi

tis

(Rs

Cr)

PSBs

Private

Banks

Foreign

Banks

RRBs

4.4.4.3 Total Advances

The total advances of all commercial banks have gone up significantly over last five years

(Table– 4.21& Figure: 4.19). Since 2003, the total advances of all commercial banks have

been more than double. In 2003 total advances were Rs. 4344.56 billion and increased to Rs.

10147.76 billion. This increments in the advancement is because of growth in consumer and

housing loans, in twenty century this is one product in the product basket of Indian

commercial banks which attract the substantial interest of customer of banks.

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Table– 4.21

Total Advances (Credit), in Rs. billion (1993-94 prices

Year PSBs Private Banks Foreign Banks RRBs All Banks

1991 1617.38 60.81 87.49 43.16 1808.84

1992 1608.3 71.99 104.27 44.74 1829.3

1993 1582.05 81.54 108.69 45.69 1817.97

1994 1367.92 91.37 108.1 46.85 1614.25

1995 1516.77 135.01 129.94 51.08 1832.81

1996 1645.57 177.39 178.61 55.96 2057.53

1997 1644.77 213.81 199.78 59.06 2117.41

1998 1792.61 244.33 202.04 62.23 2301.21

1999 1968.95 282.83 195.38 69.92 2517.08

2000 2228.26 352.75 225.4 78.64 2885.05

2001 2548.42 418.31 264.27 92.5 3323.5

2002 2849.32 690.16 288.28 104.98 3932.74

2004 3478.5 936.69 332.64 137.65 4885.48

2005 4551.44 1179.15 401.31 169.39 6301.3

2006 5689.32 1609.47 501.73 198.16 7998.68

2007 7204.2 2074.81 632.01 236.75 10147.76

Source: RBI Manual

Figure: 4.19 (based on table-4.21)

Total Advances

0

1000

2000

3000

4000

5000

6000

7000

8000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Year (1991 - 2007)

Adva

nce

s (R

s B

illi

on

)

PSBs

Private Banks

ForeignBanks

RRBs

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4.4.4.4The Net Profit

The net profit of the Indian commercial banks has gone up significantly over last 7 years. It

has gone up from Rs. 43.64 billion in 2001 to Rs. 158.51 billion in 2007. The public sector

banks and the domestic private banks witnessed manifold rise in net profit

Table – 4.22 & Figure: 4.20 (based on table-4.22) Net Profit, in Rs. billion (1993-94 prices)

Year PSBs Private Banks Foreign Banks RRBs All Banks

1991 5.71 0.47 1.45 0.24 9.11

1992 8.98 0.92 1.6 -2.75 11.54

1993 -34.41 0.63 -3.01 -3.17 -45.56

1994 -40.49 1.22 1.61 -3.43 -37.36

1995 9.52 3.49 0.82 -3.4 15.57

1996 -2.94 4.33 0.94 -3.58 3.72

1997 23.26 5.14 0.4 -5.99 27.38

1998 34.34 5.81 0.26 0.49 44.98

1999 21.57 4.69 0.47 1.45 32.31

2000 32.36 7.75 0.39 2.71 49.37

2001 26.53 7.14 0.46 3.69 43.64

2002 49.23 10.55 0.43 3.62 72.23

2003 70.27 16.65 0.4 3.32 100.63

2004 90.96 19.14 0.4 4.15 126.58

2005 82.22 18.83 0.35 4 115.61

2006 85.05 25.58 0.52 2.51 128.93

2007 100.81 32.34 0.7 2.42 158.51

Net Profits of Banks in India

-60

-40

-20

0

20

40

60

80

100

120

1 3 5 7 9 11 13 15 17

Year (1991 - 2007)

Net

Pro

fit

(Rs

Bil

lio

ns) PSBs

Private Banks

Foreign Banks

RRBs

Source: RBI Manual

The net profit of PSB especially after liberalization goes down, it was an sudden effect of

liberalization in year 1993 – 94, but after this it was goes up with a very good rate (figure:

06). In case of private banks the net profit goes upwards but its was far less then the profit of

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PSB. The foreign banks and RRB again in trebles in this parameter also, because their size

(foreign banks) and area of operation (RRB).

4.4.4.5 Credit Deposit Ratio

The credit deposit ratio reflects the management performance of the banks. It can be seen

after financial liberalization, most of the banks reported higher C-D ratio. The C-D ratio is

the highest in case of the foreign banks and lowest in case of the public sector banks. The

over commercial banking sector witnessed an increase in the credit-deposit ratio. In 1980,

the C-D ratio for all commercial banks was 63.32 percent (Table: 4.24 & Figure: 4.22), and

increased to 73.46 percent in 2007. The investment deposit ratio has also increased, but

marginally, the C-D ratio of public sector banks increase epically after 2005 onwards

Table – 4.23 & Credit-Deposit Ratio (in percent)

Year PSBs Private Banks Foreign Banks All Bank

1990 65.29 54.13 62.31 61.64

1995 52.56 54.28 54.33 51.42

1996 55.12 61.83 73.52 55.16

1997 50.81 56.1 71.54 51.26

1998 50.76 50.95 68.32 50.39

1999 47.35 49.38 62.18 47.95

2000 48.37 49.04 72.21 49.26

2001 48.23 49.8 72.64 49.82

2002 49.03 68.71 75.39 53.69

2003 50.36 66.55 75.27 54.53

2004 51.43 63.45 75.5 54.82

2005 58.74 70.34 87.18 62.63

2006 68.27 73.04 85.77 70.07

2007 73.27 75.14 83.78 73.46

2008 73.23 76.80 84.60

2009 72.60 78.13 77.25

2010 73.24 76.87 68.64

Figure: 4.21 (based on table-4.23)

Credit Deposit Ratio

0

10

20

30

40

50

60

70

80

90

100

1 3 5 7 9 11 13 15

Year (1990 - 2009)

C-D

Rati

o (%

)

PSBs

Private Banks

Foreign Banks

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4.4.4.6 Asset Quality

The asset quality reflects the structural soundness of the banking sector. The ratio of

contingent liability shows, the foreign banks are more exposed to default, which implies the

foreign banks provide most sophisticated services. It is because most of the foreign banks are

concentrated in urban areas and mostly carter to large clients. The contingent liability to

asset ratio of the total commercial banks shows, it has declined from 25 percent in 1980 to 16

percent in 2007 (Table – 4.24 & Figure 4.22). The foreign banks and the private banks are

exposed to more losses in case of default and the public sector banks are less exposed to

default.

Table – 4.24 Ratio of Contingent Liability to Asset

Year PSBs Private Banks

Foreign Banks

All Banks

1990 0.16 0.09 0.18 0.14

1995 0.17 0.18 0.16 0.15

1996 0.2 0.13 0.25 0.17

1997 0.16 0.09 0.22 0.14

1998 0.14 0.08 0.23 0.12

1999 0.14 0.11 0.29 0.13

2000 0.14 0.11 0.31 0.13

2001 0.13 0.11 0.33 0.13

2002 0.12 0.31 0.33 0.16

2003 0.12 0.24 0.29 0.14

2004 0.12 0.21 0.3 0.14

2005 0.14 0.19 0.31 0.16

2006 0.15 0.17 0.31 0.16

2007 0.14 0.19 0.34 0.16

Figure: 4.22 (based on table-4.24)

Cotingent Libilities to Asset Ratio

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Year (1990 - 2007)

PSBs

Private

Banks

Foreign

Banks

Source: RBI Manual

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4.4.4.7 Ratio of Investment in Securities to Assets

The ratio of investment in securities to assets indicates that banks invest about 20 to 30

percent in government securities in response to SLR (Table – 4.25 & Figure: 4.23). The

public sector banks have higher percentage of investment in government securities and the

foreign bank’s investment is the lowest. The public sector banks prefer to invest more in the

government securities because; it is more liquid and the safest investment. Even after

financial reforms the PSBs’s investment in government securities has gone up.

Table – 4.25

Ratio of Investment in Securities to Assets

Year PSBs Private Banks Foreign Banks All Banks

1990 0.22 0.25 0.14 0.22

1995 0.3 0.21 0.23 0.28

1996 0.27 0.21 0.19 0.26

1997 0.29 0.23 0.21 0.28

1998 0.28 0.23 0.22 0.27

1999 0.28 0.23 0.22 0.27

2000 0.29 0.24 0.23 0.28

2001 0.31 0.24 0.23 0.29

2002 0.32 0.24 0.22 0.29

2003 0.36 0.25 0.27 0.33

2004 0.37 0.26 0.24 0.33

2005 0.34 0.23 0.22 0.3

2006 0.27 0.23 0.21 0.25

2007 0.22 0.21 0.2 0.22

Figure: 4.23 (based on table-4.25)

Investment in Securities to Assets

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Year (1990 - 2007)

PSBs

Private Banks

ForeignBanks

Source: RBI Manual

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4.4.4.8 Ratio of Term Loans to Assets

The ratio of term loans to asset shows, over years it has increased to about 58 percent in

2007 (Table – 4.26 & Figure: 4.24). The private banks have increased the term loans to

about 70 percent and the public sector banks have been almost consistent about 30 percent

on average till 2003 and thereafter witnessed a rapid increase in their term loans.

Table – 4.26 Ratio of Term Loans to Assets

Year PSBs Private Banks Foreign Banks All

Banks

1992 29.56 23.41 23.18 29.44

1993 26.95 24.99 20.76 27.12

1994 26.97 24.7 24.45 26.88

1995 24.28 23.47 27.82 24.77

1996 24.87 24.17 38.79 26.41

1997 27.5 25.42 54.66 30.22

1998 30.91 25.26 53.35 32.78

1999 33.92 28.39 48.33 34.8

2000 34.88 29.5 48.81 35.81

2001 35.05 32.48 46.1 36.09

2002 36.3 60.55 48.75 41.84

2003 39.26 64.05 47.86 44.5

2004 45.1 65.02 45.02 49.01

2005 51.64 65.49 49.16 54.04

2006 53.28 68.4 48.04 55.92

2007 54.86 70.31 49.25 57.74

Figure: 4.24 (based on table-4.26)

Term loan to assets Ratio

0

10

20

30

40

50

60

70

80

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Year (1992 - 2007)

PSBs

Private Banks

Foreign Banks

Source: RBI Manual

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4.4.4.9 Profitability

Profitability can be measured with two indicators; Return on Asset (ROA) and the Return on

Equity (ROE). The return on asset is defined as the ratio of net profit to average asset. It can

be seen (Table – 4.27 & Figure: 4.25) that, after financial reforms the banks is more

profitable. The foreign banks are more profitable than the domestic private banks and the

public sector banks. After financial liberalization, the private and the foreign banks recorded

higher rate of return on asset. During the early phase of reforms, the return on asset was

negative. But after that it increased from -0.89 percent in 1994 to 1 percent in 2007.

Table – 4.27 & Figure: 4.25 (based on table-4.27) Return on Assets

Year PSBs Private Banks Foreign Banks All Banks

1991 0.16 0.35 1.18 0.23

1992 0.26 0.63 1.71 0.38

1993 -0.8 0.38 -2.96 -1.14

1994 -0.91 0.65 1.76 -0.89

1995 0.34 1.34 1.96 0.47

1996 0.04 1.3 1.74 0.17

1997 0.64 1.3 1.29 0.7

1998 0.89 1.19 1.04 0.88

1999 0.49 0.77 0.98 0.53

2000 0.67 1.02 1.3 0.72

2001 0.48 0.77 1.1 0.54

2002 0.77 0.83 1.39 0.82

2003 1 1.04 1.59 1.05

2004 1.18 1.05 1.78 1.21

2005 0.95 0.89 1.37 0.97

2006 0.88 1 1.74 0.96

2007 0.9 0.98 1.92 1

Return on Assets Ratio

-4

-3

-2

-1

0

1

2

3

1 3 5 7 9 11 13 15 17

Year (1991 - 2007)

PSBs

Private Banks

Foreign Banks

Source: RBI Manual

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4.4.4.10 Return on Equity

Return on equity can be taken as proxy to measure profitability. The private banks are more

consistent since 1990’s in terms of the return on equity, where as the foreign banks have

been the most inconsistent. During early 1990’s the return on equity of the foreign banks was

about 132 percent and in 2007 it is about 16 percent (Table – 4.28& Figure: 4.26). The

public sector banks are performing better with 16.14 percent return on equity. On the basis of

study one interesting fact has been found that, in 1993 the return on equity of foreign banks

was suddenly goes down from 68.63% to -61.43%. Apart from this year the ROE of foreign

banks created competition for PSB.

Table – 4.28 & Figure: 4.26 (based on table-4.28) Return on Equity (%)

Year PSBs Private Banks Foreign Banks All Banks

1991 9.27 21.81 131.28 12.84

1992 12.36 32.15 68.63 16.55

1993 -21.58 16.21 -61.43 -40.4

1994 -17.12 23.06 27.61 -21.74

1995 8.96 28.63 23.3 8.25

1996 3.49 19.68 17.1 2.68

1997 13.12 18.3 11.63 11.09

1998 15.96 17.86 9.1 13.26

1999 8.93 12.62 9.44 8.59

2000 13.44 17.18 13.55 12.56

2001 10.08 13.52 11.97 9.98

2002 16.11 13.99 15.11 15.13

2003 20.1 16.41 14.24 18.42

2004 22.64 16.81 15.17 20.61

2005 17.61 13.28 11.72 15.74

2006 15.79 13.34 14.18 14.77

2007 16.14 13.71 15.98 15.51

Return on Equity Ratio

-100

-50

0

50

100

150

1 3 5 7 9 11 13 15 17

Year (1991 - 2007)

PSBs

Private Banks

Foreign Banks

Source: RBI Manual

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4.4.5 Technical soundness of India banking system after liberalization

As stated in RBI's Annual Monetary and Credit Policy 2002-2003: "To reap the full benefits

of such electronic message transfers, it is necessary that banks bestow sufficient attention on

the computerization and networking of the branches situated at commercially important

centers on a time-bound basis. Intra-city and intra-bank networking would facilitate in

addressing the "last mile" problem which would in turn result in quick and efficient funds

transfers across the country" following are some major initiative for technical advancement

of Indian banking system.

4.4.5.1Implementation of Centralized Funds Management System

� The centralized funds management system (CFMS) provides for a centralized

viewing of balance positions of the account holders across different accounts

maintained at various locations of RBI. While the first phase of the system covering

the centralized funds enquiry system (CFES) has been made available to the users,

the second phase comprising the centralized funds transfer system (CFTS) would be

made available by the middle of 2003. So far, 54 banks have implemented the system

at their treasuries/funds management branches.

4.4.5.2 Certification and Digital Signatures

� The mid-term Review of October 2002 indicated the need for information security on

the network and the use of public key infrastructure (PKI) by banks. The Controller

of Certifying Authorities, Government of India, have approved the Institute for

Development and Research in Banking Technology (IDRBT) as a Certification

Authority (CA) for digital signatures. Consequently, the process of setting up of

registration authorities (RA) under the CA has commenced at various banks. In

addition to the negotiated dealing system (NDS), the electronic clearing service

(ECS) and electronic funds transfer (EFT) are also being enhanced in terms of

security by means of implementation of PKI and digital signatures using the facilities

offered by the CA.

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4.4.5.3 Committee on Payment Systems

� In order to examine the entire gamut of the process of reforms in payment and

settlement systems which would be culminating with the real time gross settlement

(RTGS) system, a Committee on Payment Systems (Chairman: Dr. R.H. Patil) was

set up in 2002. The Committee, after examining the various aspects relating to

payment and settlement systems, submitted its report in September 2002 along with a

draft Payment Systems Bill. The draft Bill provides, inter alia, a legal basis for

netting, apart from empowering RBI to have regulatory and oversight powers over

payment and settlement systems of the country. The report of the Committee was put

on the RBI website for wider dissemination. The draft Bill has been forwarded to the

Government.

4.4.5.4 Multi-application Smart Cards

� Recognizing the need for technology based payment products and the growing

importance of smart card based payment flows, a pilot project for multi-application

smart cards in conjunction with a few banks and vendors, under the aegis of the

Ministry of Communications and Information Technology, Government of India, has

been initiated. The project is aimed at the formulation of standards for multi-

application smart cards on the basis of inter-operable systems and technological

components of the entire system.

4.4.5.5 Special Electronic Funds Transfer

� As indicated in the mid-term Review of October 2002, national EFT (NEFT) is being

introduced using the backbone of the structured financial messaging system (SFMS)

of the IDRBT. NEFT would provide for movement of electronic transfer of funds in a

safe, secure and quick manner across branches of any bank to any other bank through

a central gateway of each bank, with the inter-bank settlement being effected in the

books of account of banks maintained at RBI. Since this scheme requires

connectivity across a large number of branches at many cities, a special EFT (SEFT)

was introduced in April 2003 covering about 3000 branches in 500 cities. This has

facilitated same day transfer of funds across accounts of constituents at all these

branches.

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4.4.5.6 National Settlement System (NSS)

� The clearing and settlement activities are dispersed through 1,047 clearing houses

managed by RBI, the State Bank of India and its associates, public sector banks and

other institutions. In order to facilitate banks to have better control over their funds, it

is proposed to introduce national settlement system (NSS) in a phased manner.

4.4.5.7Real Time Gross Settlement System (RTGS)

� As indicated in the mid-term Review of October 2002, development of the various

software modules for the RTGS system is in progress. The initial set of modules is

expected to be delivered by June 2003 for members to conduct tests and

familiarization exercises. The live run of RTGS is scheduled towards the end of

2003.

4.4.5.8 Reporting of Call/Notice Money Market Transactions on NDS Platform

� Negotiated dealing system (NDS), which has become operational since February

2002, enables on-line dealing and dissemination of trade information relating to

instruments in money, government securities and foreign exchange markets.

Membership in NDS is open to all institutions which are members of INFINET and

are maintaining subsidiary general ledger (SGL) Account with RBI. These include

banks, financial institutions (FIs), primary dealers (PDs), insurance companies,

mutual funds and any other institution as admitted by RBI. At present, all deals in

government securities, call/notice/term money, CDs and CP executed among NDS

members have to be reported automatically through NDS, if the deal is done on NDS

and within 15 minutes of concluding the deal, if done outside NDS. However, it has

been observed that a very sizeable proportion of daily call/notice money market deals

is not reported by members on NDS as stipulated. With a view to improving

transparency and strengthening efficiency in the market, it is proposed that:

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4.5 IMPACT LIBERALIZATION IN INDIAN INSURANCE SECTOR

The Insurance sector in India 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 Acts.

With such a large population and the untapped market area of this population Insurance

happens to be a very big opportunity in India. Today it stands as a business growing at the

rate of 15-20 per cent annually. Together with banking services, it adds about 7 per cent to

the country’s GDP .In spite of all this growth the statistics of the penetration of the insurance

in the country is very poor. Nearly 80% of Indian populations are without Life insurance

cover and the Health insurance. This is an indicator that growth potential for the insurance

sector is immense in India. It was due to this immense growth that the regulations were

introduced in the insurance sector and in continuation “Malhotra Committee” was

constituted by the government in 1993 to examine the various aspects of the industry. The

key element of the reform process was Participation of overseas insurance companies with

26% capital. Creating a more efficient and competitive financial system suitable for the

requirements of the economy was the main idea behind this reform.

Since then the insurance industry has gone through many sea changes .The competition LIC

started facing from these companies were threatening to the existence of LIC .since the

liberalization of the industry the insurance industry has never looked back and today stand as

the one of the most competitive and exploring industry in India. The entry of the private

players and the increased use of the new distribution are in the limelight today. The use of

new distribution techniques and the IT tools has increased the scope of the industry in the

longer run.

4.5.1Policy Change in the Indian Insurance market

The Insurance Regulatory Development Act, 1999 (IRDA Act) allowed the entry of private

companies in the insurance sector, which was so far the sole prerogative of the public sector

insurance companies. The act was passed to protect the concerns of holders of insurance

policy and also to govern and check the growth of the insurance sector. This new act allowed

the private insurance companies to function in India under the following circumstances:

� The company should be established and registered under the 1956 company Ac

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� The company should only the serve the purpose of life or general insurance or

reinsurance business

� The minimum paid up equity capital for serving the purpose of reinsurance business

has been decreed at Rs 200 crores

� The minimum paid up equity capital for serving the purpose of reinsurance business

has been decreed at Rs 100 crores

� The average holdings of equity shares by a foreign company or its subsidiaries or

nominees should not go above 26% paid up equity capital of the Indian Insurance

company.

4.5.2 Investment policy in the Indian insurance market

� A policy known by the name of 'Health plus Life Combi Product', offering life cover

along with health insurance has been granted permission by the IRDA act and

insurance companies are allowed to provide it now.

� The FDI limit in the insurance sector has been capped at 26% for the foreign

marketeers but the government is thinking to increase it to 49% and a bill of this offer

is pending at the Rajya Sabha

� A low cost pension scheme is supposed to be formed by the Pension Fund Regulatory

and Developmental Authority (PFRDA) on 1st April, 2010 to provide social security

to the the poorer class.

� The compulsory ceding by every General Insurance Corporation (GIC), would go on

to stay at 10% under current regulations as specified by IRDA.

4.5.3 Foreign Companies in Indian Insurance Sector

The insurance sector has also been fast developing with substantial revenue growth in the

non-life and life insurance market. However, despite its enormous population, India only

accounts for 3.4% of the Asia- Pacific general insurance market’s value. The cap on foreign

companies’ equity stakes in insurance joint ventures is 26%, but is expected to rise to 49%.

Following table showing the growth in Indian insurance sector with the collaboration of

foreign insurance companies it is clear that the maximum merger and acquisition in this

sector were after year 2000.

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Table – 4.29

Name of the player in insurance market

Sl.

No.

Insurers Foreign Partners Regn.

No.

Date of

Registration

Year of

Operation

1. HDFC Standard

Life Insurance Co.

Ltd.

Standard Life

Assurance, UK

101 23.10.2000 2000-01

2. Max New York

Life Insurance Co.

Ltd.

New York Life,

USA

104 15.11.2000 2000-01

3. ICICI-Prudential

Life Insurance Co.

Ltd.

Prudential , UK 105 24.11.2000 2000-01

4. Om Kotak Life

Insurance Co. Ltd.

Old Mutual, South

Africa

107 10.01.2001 2001-02

5. Birla Sun Life

Insurance Co. Ltd.

Sun Life, Canada 109 31.01.2001 2000-01

6. Tata-AIG Life

Insurance Co. Ltd.

American

International

Assurance Co.,

USA

110 12.02.2001 2000-01

7. SBI Life

Insurance Co. Ltd.

BNP Paribas

Assurance SA,

France

111 29.03.2001 2001-02

8. ING Vysya Life ING Insurance 114 02.08.2001 2001-02

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161

Sl.

No.

Insurers Foreign Partners Regn.

No.

Date of

Registration

Year of

Operation

Insurance Co. Ltd. International B.V.,

Netherlands

9. Allianz Bajaj Life

Insurance Co. Ltd.

Allianz, Germany 116 03.08.2001 2001-02

10. Metlife India

Insurance Co. Ltd.

Metlife

International

Holdings Ltd.,

USA

117 06.08.2001 2001-02

11. Reliance Life

Insurance Co. Ltd.

(Earlier AMP

Sanmar Life

Insurance

Company from

3.1.02 to 29.9.05)

--- 121 03.01.2002 2001-02

12. AVIVA Aviva International

Holdings Ltd., UK

122 14.05.2002 2002-03

13. Sahara Life

Insurance Co. Ltd.

--- 127 06.02.2004 2004-05

14. Shriram Life

Insurance Co. Ltd.

Sanlam, South

Africa

128 17.11.2005 2005-06

15. Bharti AXA Life

Insurance Co. Ltd.

AXA Holdings,

France

130 14.07.2006 2006-07

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Sl.

No.

Insurers Foreign Partners Regn.

No.

Date of

Registration

Year of

Operation

16. Future Generali

India Life

Insurance

Company Ltd.

Pantaloon Retail

Ltd.; Sain

Marketing

Network Pvt. Ltd.

(SMNPL),

Generali, Italy

133 04.09.2007 2007-08

17. IDBI Fortis Life

Insurance

Company Ltd.

Fortis, Netherlands 135 19.12.2007 2007-08

18. Canara HSBC

OBC Life

Insurance

Company Ltd.

HSBC, UK 136 08.05.2008 2008-09

19. Aegon Religare

Life Insurance

Company Ltd.

Religare,

Netherlands

138 27.06.2008 2008-09

20. DLF Pramerica

Life Insurance Co.

Ltd.

Prudential of

America, USA

140 27.06.2008 2008-09

21. Life Insurance

Corporation of

India

512

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4.5.4 Competition in Indian insurance market

Private and Foreign entrants in the Insurance Industry made others difficult to retain their

market. Higher customer aspirations lead to new expectations and compel him to move

towards the insurer who provides him the best service in time. It becomes less viable for

them even to maintain the functional networks or competitive standards and services. To

survive in the Industry they analyze, the emerging requirements of the policyholders /

insurers and they are in the forefront in providing essential services and introducing novel

products. Thereby they become niche specialists, who provide the right service to the right

person in right time. Table – 4.30

Market share (%) of Insurance Player (Life and Non life Life Insurance Non Life Insurance

SN.

Name of Company

Market

Share

SN.

Name of Company

Market

Share

1. LIC 76.07 1. New India 21.41

2. ICICI Prudential 6.91 2. National 17.11

3. Bajaj Allianz 4.75 3. United India 17.11

4. HDFC Standard 2.98 4. Oriental 17.02

5. Brila Sunlife 1.72 5. ICICI- Lombard 8.04

6. Tata AIG 1.66 6. Bajaj Allianz 6.15

7. SBI Life 1.46 7. IFFCO-Tokio 4.00

8. Max New York 1.28 8. Tata-AIG 2.89

9. Aviva 1.08 9. ECGC 2.50

10. Kotak Mahindra 0.71 10. Royal Sundaram 2.17

11. ING Vysya 0.54 11. Cholamandala 1.22

12. AMP Sanmar 0.46 12. HDFC-Chubb 0.89

13. Met Life 0.37 13. Reliance General 0.75

14. Sahara Life 0.03 14. Agriculture

Insurance Co.

--

Total Private 23.94 Total Private 27.37

Public 76.07 Public 72.63

Source: www.irdaindia.org

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In the above table shows, the private players in the life insurance business have increased

their market share to 23.93 per cent. Among them ICICI prudential is ranked first in

capturing the market followed by Bajaj Allianz and HDFC Standard. In the General

Insurance sector the private players have captured 27.35 per cent. Among them ICICI-

Lombard is ranked first, followed by Bajaj Allianz and IFFCO-Tokio.

The healthy competition in the sector enabled the State owned insurers of our mother country

to reduce its market share to 76.07 per cent and 72.65 percent in life and non-life business

respectively. Moreover, private insurers have planned to increase their market share in the

next five years. The public insurers have to enrich its approach to withhold its share.

4.5.5 Information Technology

� Insurers are the earlier adopters of technology. Because of the Information

revolution, customers are free to choose from a wide range of new and innovative

products. The Insurance companies are utilizing the Information technology

applications for better customer service, cost reduction, new product design and

development and many more.

� New technology gives the policyholders / insured better, wider and faster access to

products and services. The impact of Information Technology in Insurance business

is being felt at an accelerating pace. In the initial years IT was used more to execute

back office functions like maintenance of accounts, reconciling broker accounts,

client processing etc. With the advent of "database concepts", these functions are

better integrated in an administrative efficiency.

� The real evolution is however emerged out of Internet boom. The Internet has

provided brand new distribution channels to the Insurers. The technology has enabled

the Insurer to innovate new products, provide better customer service and deeper and

wider insurance coverage to them. At present, Insurance companies are giving

customers a distinct claim id to track claims on-line, entertaining on-line enrollment,

eligibility review, financial reporting, and billing and electronic fund transfer to its

benefit clan customers.

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4.5.6 Product Innovations

� Insurers are continuously innovating new products based on forward-looking models.

They have developed new products addressing the new challenges in society and

products to address the hazards from new environmental issues. Companies will need

to constantly innovate in terms of product development to meet ever-changing

consumer needs. Understanding the customer better will enable Insurance companies

to design appropriate products, determine price correctly and to increase profitability.

Since a single policy cannot meet all the Insurance objectives, one should have a

portfolio of policies covering all the needs. Product development is made possible by

integrating actuarial, rating, claims and illustration systems. At present, the Life

Insurers are concentrating on the pension schemes and the Non-Life Insurers on

many innovative schemes of various realms and thereby enriching their market share.

Moreover, with increased commoditization of insurance products, brand building is

going to play a vital role.

4.5.7 Distribution Network

� While companies have been successful in product innovation, most of them are still

grapping with right mix of Distribution Channels for capturing maximum market

share to build brand equity, building strong and effective customer relationships and

cost effective customer service. While the traditional channel of tied up advisors or

agents would be the chief distribution channel, insurer should innovate and find new

methods of delivering the products to customers. Corporate agency, brokerage, Banc

assurance, e-insurance, cooperative societies and panchayats are some of the

channels, which can be tapped by the insurers to reach the appropriate market

segments. Now days, the urban masses are tapped with the new techniques provided

by Information Technology through Internet. Rural masses are attracted by the

consultative approach adopted by the Insurers. Moreover, they attract the customers

through telephone and mobile also.

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4.5.8 Customer Education and Services

� Insurance is a unique service industry. The key industry drivers are related to life

style issues in terms of perceiving insurance as a savings instrument rather than for

risk cover, need based selling, quality of service and customers awareness.

� In the present competitive scenario, a key differentiator is the professional customer

service in terms of quality of advice on product choice along with policy servicing.

Servicing focus is on enhancing the customer's experience and maximizing his

convenience. This calls the effective CRM system, which eventually creates

sustainable competitive advantage and enables to build long lasting relationship.

4.5.9 Modern marketing approach

� Marketing strategies for insurance in the emerging scenario could be understood in

terms of the following steps:

1. Having done market research and finalizing on segmentation, targeting and

positioning the strategy would focus on the marketing mix namely, Product,

Price, Place and Promotion While determining the implementation

methodology, the four characteristics viz. Intangibility, Inseparability, Perish

ability and Variability gives rise to certain unique requirements that deserve

careful attention while formulating the marketing strategy for insurance. After

implementation, the insurers should concentrate on the effective control that

would enhance their business.

In India Insurance is sold and not bought. The agents / Advisors by using various strategies

sell the product by convincing the customers. Moreover, they push Policies with the highest

premium to pocket a higher commission. The consultative approach to selling is the modern

approach, which helps customers and prospects to buy. A consultant makes calls and sells

just like any other sales person. The difference is in their attitude, their approach and their

commitment.

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Conclusion

This chapter concludes that, India has come a long way since 1991 in so far as quantum of

FDI inflow is concerned. But it is still a mere USD 4 billion per year, and seems to have

stagnated at that level. Indeed, FDI inflow in 2002 was just 3.2 percent higher than FDI

inflows in132001. The popular wisdom is that MNCs are discouraged from investing in India

by bureaucratic hurdles and uncertainty about the sincerity of the government(s) about

economic reforms.

This chapter also attempted to evaluate the reforms that have occurred in the Indian banking

sector by focusing on different indicator ratios like credit – deposit ratio, return on

investment ratio ext, there has been significant change in the performance of the banking

sector after the initiation of financial liberalization in India. Being a bank based financial

system; the banking performance has an obvious impact on the economy. Using RBI data

from the’ Statistical Tables Relating to Banks in India’ data base, the study finds there has

been significant transformation in the structure of the banking sector. The relative

importance of the public sector banks has been declining which results in the emergence of

the domestic private sector banks and more foreign banks. The asset, the deposit and the

credit share shows the share of public sector has been declining and the share of the private

banks going up, which implies declining concentration and increasing competition. The

indicators of profitability demonstrate, all bank groups recorded an increase in the rate of

profit and the foreign banks are found to behave more profitable in comparison to the

domestic private banks and the public sector banks. An analysis of the post reform period

shows, the domestic private banks are becoming more efficient.

The Indian stock markets have really come of age there were so many developments in the

last 10 years that make the markets on par with the developed markets. The important feature

of developed markets is the growing clout of institutional investors; foreign institutional

investor’s shows different behaviour for different category of shares.

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