Financial Services Industry in India- An overview Role of SEBI in Financial Sector Role of RBI in Financial Sector

Services cover a wide range of economic activities which are intangible and invisible services cannot be stored. The world Trade Organisation has divided the services into 12 sectors:
Business (including professional and computer)

services Communication services Construction and engineering services Distribution services Environmental services

 Financial (insurance and banking) services Health services Tourism and travel services

Recreational services
Cultural and sporting services Transport services and

Other services not included elsewhere.

These 12 sector have been divided into 155 sub-sectors.

A financial service is any service of a financial nature offered by a financial service supplier of a member. Financial services include all insurance and insurance-related service and all banking and other financial services. Financial services sector in our nation is undergoing a typical change and new methods, techniques and players are emerging everyday.

Financial services is concerned with the design and delivery of advice and financial products to individuals and businesses within the areas of banking and related institutions, personal financial planning, investment, real assets, insurance and so on. A wide variety of fund/ asset-based and non-fund-based/advisory services are provided mainly by the non-banking finance companies.

Instruments Market Players Regulatory Bodies and Specialised Institutions

Financial services can be divided into two parts:

Fund /asset-Based financial services Equipment leasing Hire purchase Bill discounting Loans/ investments Venture Capital Housing Finance Factoring Forfaiting

 Fee-based/advisory Financial Services Issue management Portfolio management Corporate counseling Loan-base syndication Arranging foreign collaboration Merger and acquisition Capital restructuring

Government Regulatory Agencies

SEBI (securities and exchange board of

India) CCI (controller of Capital Issue) RBI (Reserve Bank of India)

Financial Institutions
IFC IDBI

Banks Mutual Funds Stock Exchanges Merchant Bankers Portfolio Managers Stock Brokers Non-Banking Financial Institutions Financial Consultants Specialised Institutions

ICICI

CRISIL IICRA DFHIL SHCIL OTCEI

The RBI regulates different types of NBFCs under the provisions of Chapter III-B and Chapter III-C of the RBI Act. Chapter III-B contains the provisions relating to Non-Banking Institutions receiving deposits and financial institutions.

Amount received from banks Amount received from development finance corporations/state financial corporations or any other financial institutions Amount received in the ordinary course of business by way of security deposit, dealership deposit, earnest money, advance against order for goods/properties/services..

Amount received from an individual/firm/association related to money lending. Amount received by way of subscription in respect of a chit. Loans from mutual funds.

Financing by way of loans, advances and so on. Acquisition of share/stocks/bonds/debentures/securities. Hire-purchase Any class of insurance, stock broking etc. Chit funds Collection of money by way of subscription/sale of units or other instruments.

Role Pricing Problems Issues

The insurance industry is classified into two major groups:

Life

property

Structure & size Growth of Resources and investments Resource mobilization Investment pattern Money market mutual funds Regulatory framework Problems & prospects of MF industry

Mutual funds are financial intermediaries that pool the financial resources of investors and invest those resource in diversified portfolios of assets. There are two schemes of mutual funds:

Open-end mutual funds

Close-end mutual funds

When the units are sold and redeemed everyday or continuously on all-going basis at the price determined by the funds NAV, they are called open-ended funds. These funds have to announce their sale and repurchase prices from time to time and these prices and NAVs normally remain close to each other.

There is no ceiling on the amount, the investors can invest in these funds and have the right to sell the units back to MFs whenever they choose and the MFs are legally bound to repurchase those units. The units of such funds are without any redemption date, no lock-in period and they need not get listed on the stock markets since in their case, the investors carry out transactions directly with MFs. The units of OEFs differ from equity shares. Usually the investors of OEFs are assured of dividends, capital appreciation, safety and liquidity.

Closed-ended funds do not sell any additional units after the sale of a fixed number of units at the initial or inception stage, during a fixed period of time when the issue is open for subscription. The CEFs have a fixed time duration for their operation. They have a lock-in period of three to five years and they may offer a guaranteed dividend.

The units of CEFs are not repurchased or redeemed by MFs before the termination of the period of the scheme or the lock-in period. They have to be listed on the stock markets and can be traded only between the investors on the secondary markets at least till the lock-in period is over. Once these units are listed, they may trade at a discount (market price<NAV) or at a premium or at NAV.

The first mutual fund was set up in 1964 as a trust in terms of UTI Act, 1963. It was an associate institute of the RBI till Feb. 1976 when it was made an associate institute of IDBI. The UTI got its borrowing powers from these parent institutions. It provides attractive investment opportunities through issues of units and shares under various schemes.

The initial capital contributed by the RBI, LIC, SBI and other banks, borrowings from RBI/IDBI and other banks and the unit capital are the major sources of its funds, which are largely invested in corporate securities. An amendment to the UTI Act in April 1986, the UTI is now allowed to grant term loans, rediscount bills, undertake equipment leasing and hire purchase financing, provide housing and construction finance, provide merchant banking and portfolio management services etc.

The UTI now has 19 associates/group institutions which include UTI securities exchange ltd., UTI Bank, UTI Investors services ltd., three credit rating agencies (ICRA, CRISIL and CARE), DFHI, SHCIL, OTCEI and others.

Sponsor

Board of Trustee

Trust

Mutual Fund

AMC

Custodian

Some of the factors which must have contributed to this rapid growth are: stepping-up of dividend rates continuously and to very attractive levels under various schemes. Launching of more and more new schemes i.e. diversification of the portfolio on a continuous basis

Building up and strengthening the marketing network Introduction of new and innovative strategies to further penetrate into untapped savings sources Making a number of tax benefits available to the investors in units.

Years
1998-99 1999-2000 2000-01 2001-02 2002-03

UTI
11679 13536 12413 4643 5505

Public Sec
1732 4039 6192 13613 22923

Private Sec
7966 42173 74352 146267 220551

Total
21377 59748 92957 164523 248979

The mutual funds invest their resources in different types of financial assets subject to the guidelines from the Government and the SEBI. The government directs that investments by the UTI in anyone company should not exceed five percent of its total investible funds or 10 percent of the value of the outstanding securities of that company, whichever is lower.

It is further laid down that UTI should not invest more than five percent of its funds in the initial issues of any new industrial concern. The objectives of Government regulations are to minimizes risk and avoid concentration of investments in a few large companies. The SEBI requires other mutual funds to invest not more than 5 percent of the outstanding equity capital of any company.

Money market mutual funds are a part of short-term investment pooling arrangements. Their basic function is to purchase large pools of short term financial instruments and sell shares in these pools to investors. Most of the money market instruments typically have to be purchased in large amounts and the pooling arrangements enable small investors to gain access to money market yields.

The average maturity period of investments of Money Market Mutual funds is about 40 days. They are mostly open ended mutual funds. Investors in them usually do not pay sales or redemption charges but they have to pay management fee. Investors often use MMMFs as a parking place for cash reserves awaiting investment in longer-term financial assets.

As per norms issued in December 1995, private sector MFs have been allowed to set up MMMFs with the prior approval of the RBI and SEBI. The ceiling on the size of MMMFs has now been withdrawn and they are now free to determine the extent of their investment in each instrument. Further, the restriction that the units of MMMFs can be issued only to individual has been withdrawn from April 1996, making them available to corporate and others.

A reduction of the minimum lock-in period from 46 days to 30 days has been effected from July 1996. The first MMMF set up by Kothari Pioneer in early 1997 did not succeed. The UTI MMMF which opened on April 1997 had collected about Rs. 30 crore by the middle of 1997. The investors can withdrew any amount any number of times after the lock-in period of 30 days, subject to a monthly ceiling of Rs. Five crore.

The working of MF is governed by UTI Act1963, Indian Trust Act 1882, provisions of the Companies Act 1956 and Securities Contracts Act 1956 and various Tax laws. The overall regulation overseeing and supervision of MFI is done by the Ministry of Finance of the GOI, the RBI and the SEBI.

Initially the RBI had issued guidelines for bank-sponsored MFs in 1987. Thereafter, the SEBI issued guidelines in 1991 and a comprehensive set of regulations in 1993. With the growth of MFI, it became necessary that all MFs follow uniform norms for valuation of investments and accounting practices so that anyone could judge their performance on a comparable basis. Therefore the SEBI issued new mutual fund regulations in Dec. 1996 base on the recommendations of the mutual fund 2000 report prepared by it.

The new(1996) SEBI regulations are uniformly applicable to all the existing mutual funds in all the sectors, including the UTI. Offshore funds are governed by the MOF, GOI and the RBI. MMMFs are governed by the RBI. The SEBI is the principal regulatory authority for the MFs.

Poor performance of mutual funds More concentration on the metro markets Lack of informed selling Investors lack of knowledge Lack of attracting retail saving Lacunae in regulations

Venture Capital Bought out Deals Consumer Finance Factoring

Venture capital has been defined as providing seed, start-up and first stage financing International finance corporation, Washington (IFCW) defines venture capital as equity or equity featured capital seeking investment in new ideas, new companies, new projects, new processes or new services that offer the potential of high returns on investment.

Venture capital institutions (fund) is a financial intermediary between investors looking for high potential returns and entrepreneurs who need institutional capital as they are yet not ready to go to public. It is a long-term investment in growthoriented small/medium firms. The acquisition of outstanding shares from other shareholders cannot be considered venture capital investment. It is new, long-term capital that is injected to enable the business to grow rapidly.

There is a substantial degree of active involvement of the venture capital institutions with the promoters of the venture capital undertakings. Venture capital is not technology finance though technology finance may form a sub-set of venture capital financing.

Central level Development finance institutions (DFIs) State level DFIs Banks Private sector financial institutions Overseas financial institutions

The need for venture capital in the country was felt around 1985. Before its emergence, the development finance institutions had been partially playing the role of venture capitalists. The creation of venture capital fund was announced by the Ministry of Finance in Dec. 1985.

The concept was operationalised only in the fiscal budget for 1987-88 when a cess of upto 5% was introduced on all technology import payments to create a pool of funds. In 2003 there were 43 domestic VCFs and six foreign VCFs registered with the SEBI. SEBI is responsible for overall regulations and registrations of VCFs.

A bought deal occurs when an underwriter, such as an investment bank or a underwriter, purchases securities from an issuer before a preliminary prospectus is filed. The investment bank (or underwriter) acts as principal rather than agent and thus actually "goes long" in the security. The bank negotiates a price with the issuer (usually at a discount to the current market price, if applicable).

The division of retail banking that deals with lending money to consumers. This includes a wide variety of loans, including credit cards, mortgage loans, and auto loans, and can also be used to refer to loans taken out at either the prime rate or the subprime rate.

Seller

Factor

Buyer

Assumption of Credit risk Maintenance of sales ledger Collection of accounts receivables Finance of trade debt Provision of advisory services Credit analysis of the customer

Recourse and non-recourse factoring Advance and maturity factoring Undisclosed and disclosed factoring Domestic and international factoring Bulk/agency factoring Limited factoring and full factoring