Topic: Investor confidence needs to be build if Financial Services sector is to grow

To begin with this topic let us first mention what do we understand by Investor Confidence. As per our understanding, Investor confidence in the confidence or faith of the investors that if they invest in some asset/instrument, they will get their desired return on their investment. Investor confidence is necessary to stimulate potential investors to invest their money. Here we would discuss Investor confidence in the Indian economy and how it impacts the Indian Financial Services sector. India is a growing economy and thus needs both long term domestic and foreign investments to grow and sustain its growth rate. These investments will come only if there is an environment both economic and political which is conducive for long term investments. The Government and the RBI has a greater role to play in this regard. In order to sustain its economic growth and attract long term investments India must administer steps fostering policy environment that attracts investments. For any growing economy foreign direct investment is very important and thus, attracting larger foreign direct investment (FDI) into its various productive sectors becomes very important. It invariably makes contribution to the development of the economy through the transfer of technological know-how, financial resources and innovative and improved management techniques along with raising productivity. Developing countries like India need substantial foreign inflows to achieve the required investment to accelerate economic growth and development. FDI can become a critical element for domestic industrial development. Also, FDI helps in accelerating economic activity and usually scarce productive factors such as technical knowhow and managerial experience come along with it, which are no less important for economic development of a country. The financial services sector of India is in fifth place where FDI is concerned. Indias financial services industry has grown 21% in the last year and the value of projects has increased by 75%, according to research firm Gartner. The Indian Financial Services sector is directly and indirectly impacted by investor confidence in the Indian Economy. Let us discuss how. The economic development of a nation is reflected by the progress of the various economic units, which can be broadly classified into the corporate sector, the government sector and the household sector. For these units to perform their activities they need money, for example a corporate manufacturing company needs money to buy machinery for production purposes.

In the economy there are institutions or individuals who have surplus funds and there are those who need funds for various economic activities. The financial system or the players in the financial services sector functions as an intermediary and facilitator of the flow of funds from surplus areas to deficit areas (who need funds). Thus, the financial services sector needs money to flow in the system so that it can perform its financial services activities. For example, an insurance company needs money/funds from investors in the form of Premiums so that it can further invest the funds and make profit for itself and provide necessary insurance cover to the investor. Similarly, a mutual fund company needs investments from investors in order to build its corpus so that it carry out its investments activities with the corpus. If these investments dont come then their business activities will fail and so will the company and the industry. Thus, clearly investor confidence is very important for investments to come from investors. These investments might come from both domestic and foreign investors. The Indian economy economy has recently suffered from declining Investor confidence levels. This has occured in the backdrop of a series of scams, corruption scandals, policies like retrospective-taxation and tightning regulatory changes. The Indian government has a key role to play through its policy making mechanism in order to restore investor confidence in the Indian economy. We believe opening up FDI in insurance sector by the government is the right step which will enable more capital to flow into the sector and foster investor confidence. India's insurance industry needs an estimated $12 billion in capital to be adequately funded. We believe that there must be many similar actions in the policy front from the Government for other areas of the financial services sector as well. Below are the existing norms for FDI limits in India.

Sector Specific Limits of Foreign Investment in India Sector Asset Reconstruction companies Banking (private) sector Insurance NBFCs : underwriting, FDI Cap/Equity 49% 74% (FDI+FII). FII not to exceed 49% 26% (to be increased to 49%) Entry Route FIPB Automatic Automatic Clearance from IRDA s.t.minimum capitalisation Other Conditions

portfolio management services, investment advisory services, financial consultancy, stock broking, asset management, venture capital, custodian, factoring, leasing and finance, housing finance, forex broking, etc.

norms

100%

Automatic

SOURCE: http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513

In conclusion, building investor confidence in the economy is very important for the financial services sector to grow in India since with good investor confidence there would be investments from the investments which is the life line of the sector. The government needs to act to foster good investment climate through its policy making mechanism. Good and consistent policies will attract stable investments in the country.