Financial Services

Last Updated: March 2010

 
The Indian economy is estimated to have grown by 6.7 per cent in 2008-09. According to the
latest Central Statistical Organisation (CSO) data, financial services, banking, insurance and
real estate sectors rose by 7.8 per cent in the third quarter of 2009-10.

The government has taken a number of steps in recent months to revive the economy,
including slashing interest rates, lowering factory levies and more than doubling the limit on
foreign investment in corporate bonds. The financial services space is a rapidly growing one
in India.

As per the Securities and Exchange Board of India (SEBI), number of registered FIIs as on
March 29, 2010 was 1710 and the cumulative investments in equity since November 1992 to
March 29, 2010, was US$ 76.74 billion, while the cumulative investments in debt during the
same period were US$ 11.85 billion.

The average assets under management of the mutual fund industry stood at US$ 174.06
billion for the month of February 2010, an increase of nearly 36 per cent from US$ 111.55
billion in February 2009, according to the data released by Association of Mutual Funds in
India (AMFI).

Funds raised by the Indian corporate sector via ADRs/ GDRs has jumped over 33 times from
around US$ 101.72 million in 2008 to about US$ 3.50 billion in 2009.

Furthermore, with economic outlook on Indian as well global markets being positive, PE
funds are closing deals more speedily than last year. The merger and acquisition (M&A)
activity has shown similar momentum, with domestic deals ruling the charts.

PE funds closed 29 deals in January 2010 compared to only 16 during the same period last
year. The value of such deals saw a significant jump of 303 per cent, from US$ 309 million in
January 2009 to US$ 1.24 billion this year.

Also, a study by Project Finance International (PFI), a source of global project finance
intelligence and a Thomson Reuters publication has ranked India on top in the global project
finance (PF) market in 2009, ahead of Australia, Spain and the US.

The study said the main market for PF in 2009 was the domestic Indian market, which raised
US$ 30 billion, accounting for 21.5 per cent of the global PF market. This was up from US$
19 billion in 2008.

The country's foreign exchange reserves were US$ 278.19 billion as on March 19, 2010,
according to the figures released in the Reserve Bank of India's Weekly Statistical
Supplement.

The World Bank and India have concluded negotiations for loans worth US$ 3.2 billion for
recapitalising state-run banks and funding for the India Infrastructure Finance Company Ltd.

Qualified Institutional Placements (QIPs)

QIP is a capital raising tool, whereby a listed company can issue equity shares, fully and
partly convertible debentures, or securities other than warrants, which are convertible into
equity shares, to a qualified institutional buyer (QIB).

In 2009, Indian companies had raised close to US$ 7.18 billion by way of 45 QIP issuances.

Stock markets

India's market capitalisation (m-cap) touched US$ 1.04 trillion in June 2009 making it the
ninth largest in the world.

According to data from Bloomberg, India's market cap as a percentage of world market cap
was 2.8 per cent as on December 31, 2009.

In 2009, there were 21 IPOs that raised US$ 4.25 billion as compared to 36 IPOs in 2008
that raised US$ 3.68 billion.

Moreover, on the back of an increase in the participation of agriculture and other

According to data collated by international stock market research firm Bespoke Investment
Group, India has the best PEG multiple (price earnings-to-growth) amongst several
emerging and developed markets. At over 26 times trailing P/E multiple and an estimated
2010 GDP growth rate of 8 per cent, India (denoted using Sensex) commands a rather
comfortable PEG multiple of 3.27 times.

Banking services

During 2008-09, State Bank of India (SBI) and associate banks advanced US$ 16.8 billion
for infrastructure projects such as power plants and petroleum refineries. The big-sized
credits have made SBI and group one of the largest project financiers in the country.

Finance Minister, Mr Pranab Mukherjee urged a doubling of infrastructure spending to US$ 1

The Indian financial sector is in for an overhaul. Financial sector reforms have
long been regarded as an integral part of the overall policy reforms in India.
India has recognized that these reforms are imperative for increasing the
efficiency of resource mobilization and allocation in the real economy and for
the overall macroeconomic stability. The reforms have been driven by a thrust
towards liberalization and several initiatives such as liberalization in the
interest rate and reserve requirements have been taken on this front. At the
same time, the government has emphasized on stronger regulation aimed at
strengthening prudential norms, transparency and supervision to mitigate the
prospects of systemic risks. Today the Indian financial structure is inherently
strong, functionally diverse, efficient and globally competitive. During the last
fifteen years, the Indian financial system has been incrementally deregulated
and exposed to international financial markets along with the introduction of
new instruments and products.

Banking Sector

The banking sector is the most dominant sector of the financial system in
India. Significant progress has been made with respect to the banking sector in
the post liberalization period. The financial health of the commercial banks has
improved manifolds with respect to capital adequacy, profitability, asset quality
and risk management. Further, deregulation has opened new opportunities for
banks to increase revenue by diversifying into investment banking, insurance,
credit cards, depository services, mortgage, securitization, etc. Liberalization
has created a more competitive environment in the banking sector.The
competition has increased within the banking sector (with the emergence of
new private banks and foreign banks) as well as from other segments of the
financial sector such as mutual funds, Non Banking Finance Companies, post
offices and capital markets.

Capital Market

India has a long tradition of functioning capital markets. The Bombay stock
exchange is over a hundred years old and the volume of activity has increased
in the recent years. The process of reform of capital markets started in 1992
and aimed at removing direct government control and replacing it by a
regulatory framework based on transparency and disclosure. The first step was
taken in 1992 when SEBI was elevated to a full-fledged capital market
regulator.

An important policy initiative in 1993 was the opening of capital markets for
foreign institutional investors and allowing Indian companies to raise capital
abroad. FII registrations in the country have gone up significantly over the
years. The number of registered FIIs has gone up significantly. The FIIs have
been rewarded well by attractive valuations and increasing returns. The
depository and share dematerialization systems have been introduced to
enhance the efficiency of the transaction cycle.

A number of significant reforms have been implemented in the spot equity and
related exchange traded derivatives markets since the early 1990s. For
instance, spot prices are mostly market-determined, trading volumes in the
derivatives market exceed those in spot markets and market practices such as
speed of settlement and dematerialization are close to international best
practices.