Dynamics and Regulatory System of Indian Financial Markets

Journal of Financial Regulation and Compliance
Dynamics and regulatory system of Indian financial markets: A dialectic view

A.K. Sharma, Ashutosh Vashishtha,
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Dynamics and
Dynamics and regulatory system regulatory
of Indian financial markets system
A dialectic view
275
A.K. Sharma and Ashutosh Vashishtha
Department of Management Studies,
Indian Institute of Technology Roorkee, Roorkee, India
Abstract
Purpose – This paper aims to trace the evolution of Indian financial market structure and regulation,
in the broad dialectic sense and to suggest a consolidated, holistic regulatory model.
Design/methodology/approach – The paper sketches the evolution of Indian financial market
structure and its regulation in terms of dialectic cycles. The first cycle extending practically over four
decades, from the 1950s to the 1980s, was a period of foundation, expansion, and policy introspection.
The decade of the 1990s marked the commencement of the second cycle – a period of liberalization and
emergence of financial conglomerates. The Indian financial system has since completed one full circle
in the dialectic process and is now passing through the last phase (synthesis) of the second cycle.
Based on this dialectic approach, a consolidated and holistic regulatory model has been developed and
suggested.
Findings – The paper concludes that, from a regulatory perspective, the recent developments in the
financial sector have led to an appreciation of the limitations of the present segmental approach to
financial regulation and favors adopting a consolidated supervisory approach to financial regulation
and supervision, irrespective of its structural design.
Originality/value – This paper will be of value to financial regulators, financial intermediaries and
investors across all the countries, developed as well as developing. It will facilitate and guide in the
process of regulatory restructuring and strengthening the overall health of the financial markets.
Keywords Financial markets, Regulation, Financial reporting, India
Paper type Research paper
1. Introduction
The financial system and its critical driving force, that is, financial infrastructure[1]
that are in existence at anytime may be seen as the outcome of a continuous process of
interactive exchange and chain sequence of actions and reactions between regulators,
regulated institutions, financial markets, and the consumers (of financial services and
products). Innovative changes in financial institutions, regulatory structures and
practices, and financial instruments occur, from time to time, over a long period. These
changes affect the generation, mobilisation and distribution of savings, and
are important for shaping the direction and pace of growth of an economy. The
circumstances and imperatives faced by an economy, both internally and externally,
play an important role in appreciating the need for, and initiating the change process.
The Indian financial system consists of banks, insurance companies, mutual funds Journal of Financial Regulation and
and other institutions such as, non-bank financial institutions, which promote and Compliance
Vol. 15 No. 3, 2007
mobilise savings and make the same available to actual investors – individual pp. 275-302
investors, industrial and trading companies and the government. It also includes other q Emerald Group Publishing Limited
1358-1988
institutions, which actually act as alternative channels for investment of savings rather DOI 10.1108/13581980710762282
JFRC than promoters of savings. For instance, the new issue market and the stock exchanges
15,3 which facilitate the buying and selling of shares and debentures of various companies.
Finally, the various regulatory agencies[2] are also an important part of the financial
system. They are indispensable from the point of view of promoting financial stability
and protecting interests of consumers of financial services. Above all, they play a
crucial role in giving a direction to the financial sector to align it with the mood and
276 needs of the macroeconomic system.

The evolution of Indian financial markets and the regulatory system, considering
the vast network of banking institutions, insurance companies and stock exchanges
and their regulatory agencies, can be said to have occurred mainly over the later half of
the last century. This is, in fact, also the period when the country’s financial regulatory
system was founded, nurtured, and given a direction and purpose and the necessary
strength in a gradual way as warranted by the circumstances and contingencies, from
time to time. During this period, the system played varied roles – an instrument of
planned development in the initial stage; a precursor of social change a little later; and
a custodian of modern complex and robust financial sector, presently.
The beginning of the process may be seen in the coming into existence of the
Reserve Bank of India (RBI). The growth of financial system that has since occurred
may be conceptualised, to a large extent, in dialectic terms[3]. An understanding of the
dynamics of the financial system is useful in many respects. In particular, it facilitates
a correct perception of its present state for identifying the areas where policy initiatives
need to be undertaken to plug the loopholes. Viewing the growth process of the system
in simple historical stages is not of much use. It is more important to see how it has
been affected as a result of actions and reactions of different interest groups in course
of various corrective measures initiated in the past. This approach to investigating into
a problem and seeking solutions contains the essence of what is known as dialectic
process.
2. Rationale of study
India’s financial sector has seen major changes over the past decade. Banks have
begun to move towards universal banking structure as frontiers between banking,
securities and insurance sectors have become thin and blurred. Competitive pressures
have resulted in a growing number of mergers, the emergence of financial
conglomerates, growing instances of regulatory arbitrage and overlapping and
duplicacy of regulations. These changes have important implications for both financial
intermediaries and financial regulators. The present study highlights the limitations
and irrelevance of the present segmental approach to regulation of Indian financial
markets. Although study focuses on Indian financial system and its regulatory
architecture but it is quite relevant for other developing and developed economies also
as there is a global trend towards reviewing the financial regulatory architecture. The
dialect approach to regulate the financial markets as suggested in this study may offer
a useful insight in this regard.
The paper has been divided into four sections. Section 3 briefly describes the
analytical frame of dialectic dynamics. Section 4 sketches the dialectic dynamics of
Indian financial system, Section 5 proposes a comprehensive and holistic integrated
regulatory model for Indian financial sector and Section 6 concludes the paper.
3. Analytic frame of dialectic dynamics Dynamics and
The word dialectic refers to changes occurring through a process of actions and
reactions by opposite forces, overtime. It implies essentially a process of evolution of
regulatory
ideas, institutions and systems. In his classic presentation, the Philosopher Hagel[4] system
described the dialectic process in terms of three critical elements or phases:
(1) an initial set of arguments or rules, the thesis;
(2) a contradicting or repudiatory set of arguments, the antithesis; and 277

(3) a change or adjustment, the synthesis, which emerges from an exchange or
interaction between opposite groups or forces.
Making use of its broad analytical frame, the dynamics of the behaviour of Indian
financial markets and their regulatory system may be rationalised in terms of
development perceptions, priorities and strategies as well as the policy instruments
that were employed for their implementation, under emerging circumstances and
contingencies over the last five decades or so. In this change process, policy
instruments and their implementation may be seen as representing the thesis.
Likewise, the responses (from different quarters) to, and the consequences of, these
policy instruments may be taken to symbolise the anti-thesis. And finally, the
adjustments of policy instruments as induced by these responses and consequences
may be interpreted as synthesis.
The main features and assumptions of the dialectic process as we see it in the
context of dynamics of the Indian financial system are as follows:
.
Existence of distinct interest groups. Three distinct groups of individuals or
institutions, namely investors, financial institutions (both public and private)
and regulators, constitute the financial system. The regulatory role may be
performed directly by the government or some outside agency having
responsibilities and powers as decided by the government. In any case, the
regulatory system operates under influence of the government, to a significant
extent[5].
.
Role of regulatory agencies. The objective of financial regulation is to ensure
stability and smooth functioning of the financial markets, as well as protection of
the interests of investors and consumers of financial products and services, and
above all, giving a direction to the financial sector to align it with the mood and
needs of the macroeconomic system.
.
Clash of group-interests. There is generally a clash of interest between/among the
various constituent groups. In particular, the financial institutions (regulatee)
seeking maximisation of their interest are involved in some kind of an on-going
struggle with the regulators and with each other. “Avoidance” is the most
common feature of this struggle. The rules that benefit a protected class are often
seen by the regulated institutions as a dent into their market share and profits.
These institutions try to find out loopholes in the regulatory provisions. The
struggle for a competitive edge, often, makes regulatory avoidance an end in
itself.
.
Presence of external sector. Both domestic economy and its regulatory set up are
susceptible to influences exercised, directly or indirectly, by external forces such
as foreign governments, international agencies and global markets.
JFRC .
Simultaneity of dialectic phases or elements. In the dialectic process, a particular
15,3 phase may set in even while its preceding phase is still continuing. In this sense,
any two phases may have an overlapping stretch of duration during their
existence.
.
Dialectic dynamics represents a sequence of several cycles occurring in continuum.
The synthesis phase of one cycle may also mark, after a lag, the thesis phase of
278 the next cycle. As such, dialectic dynamics implies a sequence of several cycles
occurring in continuum rather than in a discrete and disjointed fashion.
.
Dual aspects of “avoidance” behaviour. The “avoidance” behaviour marks the
antithesis phase in the dialectic process. It comes into existence as a lagged
reaction to the enactment and implementation of regulatory rules (thesis). If the
regulated institutions are found to violate the rules more often than observing
their compliance, then sooner or later, a stage arises for amending the rules, and
even the basic approach to regulation. These policy counter-moves that are
intended to remove the observed shortcomings and impart effectiveness to
the regulatory system constitute the synthesis phase. With this, one cycle in the
dialectic process ends, and another begins. The revised rules induce a fresh wave
of avoidance behaviour. The dialectic dynamics continues.
There is also a positive aspect of the avoidance behaviour. In some cases, the avoidance
behaviour gives rise to financial innovations. Regulatory rules are often seen by the
financial institutions as hurdles, which prevent them from expanding business and
maximising profits or market share. A search begins to find out ways and means for
exploring and expanding new business opportunities in unregulated areas,
a phenomenon commonly referred to as “regulatory arbitrage”. In this process,
sometimes new financial products and processes emerge which enable these institutions
to enhance their efficiency in terms of lower transaction costs, better customer services
and unregulated business. The emergence of derivatives and e-commerce, that is, card-
and network-based financial products, electronic bill presenting, and payment making
system, are examples of financial innovations that opened huge new business
opportunities. A study of the evolution of innovative financial products would show that
financial instruments were developed mostly to circumvent the existing laws[6]. This is
a major motive of financial innovation, although there may be other motives, too[7].
4. Dialectic dynamics of Indian financial system

As stated earlier, the evolution of the Indian financial system, considering the vast
network of its market segments and regulatory institutions, can be said to have
occurred mainly over the later half of the last century. The beginning of the process
may be seen in the coming into existence of the RBI, which was truly speaking the first
financial regulatory body in the country. The Indian financial system has since
completed one full circle in the dialectic process and is now passing through the last
phase (synthesis) of the second cycle. Our understanding of the forces pushing the
system through various cyclical phases may be expected to be more focused if a brief
reference is made to the state of financial scene which was in existence when the
country became independent. This pre-independence period may justifiably be referred
to as “pre-dialectic” stage.
4.1 Pre-dialectic stage Dynamics and
Though the RBI was established in 1935 as private shareholders’ bank and started regulatory
functioning with effect from 1 April 1935, it became an effective banking regulatory
agency only when it was nationalised about 15 years later. In the pre-independence system
period, there was hardly any financial system in the country worth the name. Banking
system was highly under-developed. It had gone through a series of crises and
consequent bank failures. Its growth during the first half of the century was quite slow. 279
At the time of independence, there were more than 400 commercial banks. There was
no separate Act to control and regulate the establishment, organisation and
functioning of commercial banks in India. In the absence of banking legislation,
banking system had developed many drawbacks.
The indigenous bankers played a dominant role in the provision of credit. In the
conduct of their business they employed traditional, rigid practices. Despite their
significance in the Indian economic system, the indigenous bankers were generally
outside the domain of organised banking. In the 1930s, the RBI suggested that they
should give up their trading and commission business and adopt a professional
approach by developing the deposit side of their money lending activity and using
modern accounting and auditing system. But the indigenous bankers declined to
accept these and other restrictions as well as the compensating benefits of securing
accommodation from the RBI on favourable terms.
Another serious malice afflicting the system was the siphoning-off its natural and
financial resources through the Managing Agency System. Apparently, during the
pre-independence period the financial system was highly disorganised, neglected and
directionless. There was no regulatory mechanism worth the name. The masters of the
system became its tormentors. There was no one to stop it. Under these conditions,
dialectic demarcations (thesis, anti-thesis and synthesis) became extremely blurred and
irrelevant. It is in this context that we have preferred to refer to this period as
“pre-dialectic” stage.
4.2 First cycle: the stage of foundation, expansion, and policy introspection
It is that stage of evolution of the Indian financial system the beginning of which may
be seen coinciding with nationalisation of the RBI in 1949. It extended practically over
four decades – from the 1950s to the 1980s. During its initial part, that is, the 1950s and
much of the 1960s, the main emphasis was on development of the necessary legislative
framework for facilitating reorganisation and consolidation of the banking system.
The Banking Regulation Act was passed which conferred upon the RBI wide powers to
control and regulate commercial banks. The co-operative credit structure was
strengthened and institutional framework for providing long-term finance to
agriculture and industry was set up. A number of financial institutions came into
existence during this period such as Industrial Credit and Investment Corporation of
India (ICICI), Life Insurance Corporation (LIC) of India[8], the Industrial Development
Bank of India and the Unit Trust of India.
A little later, from 1969 onwards, some radical policy initiatives were undertaken for
expanding and invigorating the financial system so as to make it serve, in particular,
the interests of priority areas as well as the social goals of development policy set out in
the plan documents. Simultaneously, some specialised financial institutions (such as
Industrial Reconstruction Corporation of India[9], Regional Rural Banks and the
JFRC Export and Import Bank of India) were also set up. Almost a decade later (in 1988), an
15,3 important policy measure was taken on the side of the securities market which had not
received due attention for a long. The Securities Exchange Board of India was
established for revamping and streamlining the securities market and protecting
interests of investors[10].
Among the bold, path-breaking policy decisions, nationalisation of a number of
280 financial institutions in the banking and the insurance segments was the most
important. As many as 14 large commercial banks were nationalised in 1969, followed
by nationalisation of another six banks in 1980. During this period, there was also
nationalisation of general insurance business. A little over 100 insurance companies,
both Indian and foreign, were amalgamated and grouped into four companies[11].
The nationalisation of banks and insurance companies constituted a major turning
point in the Indian financial system. The main objectives behind this move were:
.
greater mobilisation of savings through bank deposits;
.
widening of branch network of banks, especially in the rural and semi-urban
areas; and
.
re-orientation of credit flows so as to benefit the hitherto neglected sectors such
as agriculture, small-scale industries and small borrowers.
In order to strengthen the social and human dimension of the development process,
several important steps (such as priority sector lending, differential interest rate
scheme, and Integrated Rural Development Programme) were taken. For the
implementation of these schemes the major onus was placed on the public sector
banks.
Broadly speaking, the three decades preceding 1980s represented the thesis phase in
the first dialectic cycle. This was mainly the phase of policy action in terms of setting
development goals and priorities and pressing into service necessary policy
instruments such as establishment of financial institutions, and nationalisation of
banks and insurance companies. The role of regulating the financial system was
assumed basically by the government. The nationalised banks were assigned a tailored
role, “social banking”.
As a result of bank nationalisation, there was rapid expansion of far-reaching
significance of the banking system. Major objectives of nationalisation had been
mostly achieved. But these achievements inflicted a severe blow on the health of these
banks. Banking efficiency deteriorated and profitability plummeted. This was due
mainly to factors such as weak control system, retail lending to more risk-prone areas
at concessional interest rates and higher costs, and above all, misuse of funds in utter
disregard of banking ethics, and thwarting of competitive culture in banking[12]. The
excessive use of public sector banks by their political bosses as an instrument of policy
implementation led to accumulation of non-performing assets in their portfolios in
substantial proportion. These consequences of certain policy actions initiated during
this period correspond to the second phase of the first cycle, anti-thesis. It may be noted
that this policy-reaction phase was witnessed at a time when some new policy
initiatives for expansion of the financial system were being taken, and the first phase
was still going on.
The decade of 1980s was, by and large, a period of caution and policy-introspection.
In order to tone up the sagging health of public sector banks, the ambitious priority
targets set out for them were brought down and necessary action was initiated for a Dynamics and
phased rationalisation of bank deposits and lending rates and removing certain regulatory
ceilings. On the whole, the thrust of the policy initiatives during this period was mainly
at consolidation and, to some extent, deregulation (in the banking sector). There was system
emphasis on:
Slowing down the branch expansion programme significantly but not at the cost
of rural areas deficient in banking facilities. 281

.
Maintenance of adequate levels of efficiency and productivity by individual
banks in terms of organisation and structure, training, house-keeping, customer
service, credit management, loan recovery, staff productivity, etc.
.
Compliance (by banks) of the Health Code System introduced in 1985.
As such, this decade of reactive policy initiatives may be seen to have marked the last
phase of the first dialectic cycle, synthesis.
4.3 Second cycle: liberalisation and its after-math

By the time the decade of 1990s started, a number of problems having their origin in
the past many years had cumulated to a level that required a total change in the basic
approach to the development trajectory. Besides, the problems afflicting the financial
sector, there were also numerous other maladies that were weakening the
macroeconomic system and threatening its stability. The situation had become
extremely grave and uncontrollable. It was approaching almost a flash point. Fiscal
deficit was constantly growing. Balance-of-payment situation had become extremely
critical. The country was almost on the brink of default. There were pressures from the
external sector for putting the domestic economy in order. The need for initiating
radical structural reforms was being greatly emphasised. The moment had arrived for
duly recognising the role of market mechanism in different spheres of economic
activity and integrating the domestic economy with the global economy. The stage was
fully set for the enactment of next episode on the policy front heralding the beginning
of another cycle.
Under structural reforms, to a large extent, the emphasis was on relaxing
restrictions, which severely impeded the functioning of the market mechanism and led
to inefficiency and sub-optimal resource allocation. It was a period when policy
measures were directed towards liberalisation, privatisation and globalisation of the
economy in a selective, phased manner. This policy shift has, inter alia, changed the
complexion of the financial sector substantially, in recent years. Today, there is an
impressive, rather, surprising growth of large financial institutions, known as,
financial conglomerates, which present a remarkably different phenomenon distinct in
scale of operation, objectives, scope and modus operandi[13]. This phenomenon is
relatively more marked in the private sector, which is expanding fast in the new
growth-conducive policy scenario. The scale and complexity of financial activities has
created new challenges for the regulators. Looking at the nature and sequence of major
events during this period, the dialectic process can be said to have almost completed
the first two phases by now. It is well set to enter the third phase. All so suddenly!
The thesis part of the process can rightly be attributed to the initiation of structural
reforms in the early 1990s, the necessary “momentum” for which came mainly from the
external sector. Financial sector reforms constituted an important component of
JFRC structural reforms. The basic objective of these reforms was to promote a diversified,
15,3 efficient and competitive financial sector for achieving improved allocative efficiency
of available savings, greater investment profitability and accelerated growth of the real
sector of the economy. A three-pronged strategy was adopted under these reforms:
(1) improving the overall monetary policy framework;
(2) strengthening the financial institutions; and

282
(3) integrating the domestic financial system with the global economy, in a phased
manner.
One of the most important policy initiatives of this phase was the acceptance and
implementation of many recommendations of far-reaching implications for the
financial sector, made by the Narsimham Committee. Simultaneously, for revamping
and strengthening the securities market, Securities Exchange Board of India was made
a statutory body and given sufficient powers to deal with various fraudulent practices
and scams effectively[14]. A few years later, Insurance Regulatory and Development
Authority was set up to regulate and promote the insurance business on competitive
lines.
In order to improve the financial strength and the profitability of the public sector
banks and tone up the over all Indian financial system by examining all aspects
relating to its structure, organisation, functions and procedures, the Government of
India set up two high-level committees with M. Narsimham, a former Governor of the
RBI, as their Chairman. The first committee submitted its Report in 1991 (Narsimham
Committee, 1991), and the second committee, which was set up a few years later,
submitted Report in 1998 (Narsimham Committee, 1998)[15].
These reports made certain recommendations for introducing radical measures. The
major thrust of the recommendations was to make banks competitive and strong and
conducive to the stability of the financial system. The Government was advised to
make a policy declaration that there would be no more nationalistion of banks. Foreign
banks would be allowed to open offices in India either as branches or as subsidiaries. In
order to promote competitive culture in banking, it was suggested that there should be
no difference in the treatment between public sector banks and private sector banks. It
was emphasised that banks should be encouraged to give up their conservative and
traditional system of banking and take to new progressive functions such as merchant
banking and underwriting, retail banking, mutual funds, etc. The Committee
recommended that foreign banks and Indian banks should be permitted to set up joint
ventures in these and other newer forms of financial services.
The Narsimham recommendations came perhaps at the most opportune time when
waves of liberalisation and delicensing had, in fact, already started the financial
cleansing of the economy. Besides, some important reforms in the spheres of money
market and capital market were already underway. With initiative-conducive scenario
around, the Government of India accepted all major recommendations of the Narsimham
Reports and started implementing them straightaway, despite stiff opposition from
bank unions and political parties in the country. In a way, these negative reactions of
bank unions and political parties motivated by their vested interests constituted what
may be called the “still” birth of the second phase, anti-thesis.
It is primarily because of the financial sector reforms initiated during the last two
decades or so that the Indian financial system is acquiring fast the shades of a vibrant,
dynamic, globalised, complex system today, creating new opportunities and Dynamics and
challenges. But it still continues to be largely dominated by the presence of a giant regulatory
public sector particularly in banking and insurance even though the private sector has
been growing at a much faster rate in the recent years, out-playing the public sector in system
the matter of efficiency and performance (see Appendices)[16].
Notably, an important consequence of financial sector reforms is the emergence of
financial conglomerates and the growing internationalisation of the financial sector. 283
The complex linkages among different segments of the financial system, induced by
the multi-faceted business of financial conglomerates, are a major challenge before the
regulatory system. The increasing internationalisation of financial sectors has
augmented this challenge. As foreign ownership of financial institutions increases, the
need for a proper cross-border coordination among financial regulators assumes
increasing importance, more so, when financial market shocks are more easily
transmitted across borders and sectors. Under these circumstances, the need for
introduction of necessary changes in the regulatory structure and laws, and deposit
insurance systems cannot be overlooked.
From a regulatory perspective, the recent developments in the financial sector, in
particular, the emergence of financial conglomerates, have led to an appreciation of the
limitations of the present segmental approach to financial regulation. The need for
addressing the risks associated with conglomeration is being widely appreciated. A
debate is going around as regards the ways and means of ensuring an effective regulatory
system, which has the qualities of neutrality[17], cost-effectiveness[18], transparency and
accountability, and moreover, which suits the political and social structures and
commitments as well as the government, industry and societal inter-relations[19].
In this on-going debate, there is a consensus on adopting a consolidated, holistic
supervisory approach to financial regulation and supervision, irrespective of its
structural design. This is, in fact, the thrust of the approach advocated and
recommended by the Joint Forum[20] to deal with the regulatory problems posed by
the emergence and growth of financial conglomerates. The RBI, recognising the
relevance and effectiveness of this approach, took the first step towards consolidated
supervision of banking entities by issuing guidelines to the Banks in February 2003 on
the basis of Working Group Report (RBI, 2004). But this is an initiative of just
peripheral nature; much more remains to be done on this front. In the next section, we
are proposing an integrated regulatory model for Indian financial sector which is likely
to address the regulatory challenges we have just discussed.
5. Holistic integrated model for Indian financial sector

Before we propose a suitable holistic regulatory model for Indian financial sector it
would be appropriate to outline some of the important preconditions for developing an
effective regulatory infrastructure:
.
appropriate accounting, auditing, tax, legal and judicial systems;
.
sound and sustainable macroeconomic policies;
.
effective market discipline;
.
appropriate mechanisms for provision of consumer protection;
.
efficient and well-developed financial markets; and
JFRC .
adequate level of awareness of the large majority of consumers of financial
15,3 services as regards responsibilities of the service providers as well as their own
responsibilities so as to fend for themselves while buying complex financial
products.
When we view these requirements in the context of Indian regulatory infrastructure,

284 we observe that some of them practically do not exist, and much needs to be done in
respect of most others. Moreover, a fundamental requirement for efficient regulation is
that the possibility of arbitrage, as far as possible, should not be there. When a
financial institution is able to choose among regulators, either by altering its corporate
form, or its regulatory jurisdiction, or simply its institutional label, there is an incentive
to arbitrage among potential regulators so as to minimise the regulatory burden. This
problem is exacerbated in conglomerate situations where a heavily regulated parent
may be able to reduce its regulatory burden by shifting business to an unregulated or
much less regulated subsidiary. Since, regulatory arbitrage constitutes a major form of
“avoidance” its presence in Indian financial system may be interpreted as a sign of
activation of the second phase, anti-thesis, in the dialectic process. We are proposing a
holistic financial regulatory model as a possible out come of this anti-thesis phase of
the dialectic process. Figure 1 shows this integrated regulatory model, which is
proposed to replace the present “Institutional Model (Multiple Sectoral Regulators)”.
The regulatory framework of this model has the following features:
International Financial System
International International
Bank for
Association of Association of
International
Insurance Securities
Settlements
Supervisors Commissions
(BIS)
(IAIS) (IOSCO)
Central Monetary Integrated Financial

Antitrust Authority
Authority Services Authority
(AA)
(CMA) (IFSA)
Banking Securities Insurance

Companies Companies Companies
Figure 1.
A holistic financial
regulatory model for Indian Financial System
Indian financial sector
.
Present sectoral regulators, namely, RBI (banking sector), Securities and Dynamics and
Exchange Board of India (SEBI) (securities sector) and IRDA (insurance sector) regulatory
have been replaced by a single supervisory authority (IFSA) for entire financial
sector. This has been done to deal with the regulatory problems posed by the system
emergence of financial conglomerates and regulatory arbitrage. Besides, this,
there is a growing trend towards integrated financial sector regulation all over
the world (Deringer, 2003). 285

.
An antitrust authority or a competition commission to promote fair competition,
avoid abuses of dominant position and limit monopolistic concentrations in
banking, security and insurance sectors.
.
Separating the supervisory function of banking sector from the central bank and
retaining it as a pure Central Monetary Authority (CMA) responsible for
designing and implementing the monetary policy.
.
Cross border coordination with Bank for International Settlements, the International
Association of Insurance Supervisors (IAIS) and the International Organisation of
Securities Commissions (IOSCO) to facilitate the successful and smooth
implementation of Basel Core Principles for Effective Banking Supervision,
Insurance Core Principles and Objectives and Principles of Securities Regulation.
.
Whereas IFSA assumes the overall regulation and supervision of financial sector
it also coordinates with CMA in matters of monetary policy and other traditional
roles of monetary authority.
The suggested model aims to deliver the effective regulatory system by ensuring
regulatory neutrality, cost-effectiveness, transparency and accountability and respond
to the legal and political structure of the country. Regulatory neutrality is ensured as
the regulation has functional and objective orientation and not the institutional.
Transparency, accountability and cost effectiveness comes from the integrated
structure of regulatory model. It is generally argued that an integrated financial
regulator itself assumes a dominant position and becomes bureaucratic in approach
(Abrams and Taylor, 2000; de Martinez and Rose, 2003). Although such apprehensions
are not unfounded but proposed IFSA is itself under the proper system of checks and
balances and is accountable to at least five such agencies as shown in Figure 2. We call
it “A Pentagon of influences” as Supreme Court, Parliament, Tribunal for Financial
Services Dispute Settlement (TFSDS), Ministry of Finance and Antitrust Authority are
five such power full agencies which exercises direct or indirect influence over the IFSA.
Except TFSDS all other institutions/agencies are already present in India. TFSDS
may be set up as the financial sector dispute settlement and appellate authority.
Appeals against the decisions of TFSDS may be made in the apex court of the country
(Supreme Court).
This model is termed as holistic in a sense that it attempts to look at financial
markets as continuously evolving entities, irrespective of traditional sectoral
distinctions and accordingly delivers supervision which is more effective in
handling the challenges of regulatory arbitrage, financial conglomerates and cross
border integration of domestic financial sector.
Although this model has been suggested for India but it has relevance for other
developing and developed economies as well. This model aims to deal with the
JFRC Supreme Court
15,3
286 Tribunal
Parliament For
Integrated Financial
Financial Services
Services Dispute
Authority Settlement
(TFSDS)
Figure 2.
Pentagonal influences on
integrated financial Ministry of Antitrust Authority
services authority Finance (Competition
Commission)
problems of financial conglomerates, instances of regulatory arbitrage and

complexities of blurring sectoral distinctions, which are not restricted to India but
affecting the financial markets across the world.
6. Conclusion
After having a long stint with heavy dose of regulation, which led to the stifling of market
mechanism, the need for deregulation was widely appreciated to usher in a liberalised
financial regime. But it threw new problems and challenges. The phenomenon of financial
conglomerates has necessitated serious consideration of a shift in regulatory paradigm.
New ground is now emerging for a fresh wave of what we may call re-regulation.
Regulation, de-regulation and re-regulation! Indeed, this only reveals the dialectic nature of
the financial system, in general and regulatory system, in particular.
Today an intense debate is going around as regards the suitability of various
alternative regulatory models. A dialectic approach to seeking solution of the problem
may be regarded as a pragmatic way of approaching the problem. The financial sector
and its necessary infrastructure evolve over a pretty long period. Most features of the
financial regulatory system that we observe around us today are the result of constant
interest-conflicts in the past. Identification and analysis of the current critical issues
that lie at the heart of interest-conflict as well as their solution by policy-reconciliation
constitute essential elements in the dialectic process, which is an endless hide-and-seek
game.
Notes
1. During the last three decades or so, there has been a growing interest of economists in
analysing the link between financial structure and financial stability More recently,
the interest has extended to include analysis of the interrelationship between financial Dynamics and
infrastructure and economic development (Financial infrastructure of an economy is usually
taken to include financial system, legal system, accounting standards, and payment and regulatory
settlement system). Angadi (2003) makes an interesting theoretical as well as empirical system
reading, in this regard.
2. It may be mentioned here that a distinction is usually made between regulation, monitoring
and supervision of the financial sector. Regulation is interpreted to imply the establishment 287
of specific rules of behaviour. Monitoring is said to mean observing whether financial
institutions comply with the specified, relevant rules. And, supervision is believed to refer to
the more general oversight of the behaviour of these institutions. Since, these terms relate
ultimately to disciplining the financial institutions to make them conform to prescribed
procedures and objectives, these are frequently employed interchangeably in the financial
literature, although, strictly speaking, the distinction is quite important.
3. The idea that financial regulatory system is dialectic in nature was introduced by Kane
(1977) who developed it further in his subsequent works. Kane’s (1981, 1986, 1989, 1996)
model of regulatory dialectic has since been widely regarded as an insightful explanation of
evolution of most regulatory practices, world over.
4. Hegel (1770-1831) was a nineteenth century German Philosopher and Theologist who wrote
the Science of Logic (Hegel, 1812). For many historians, Hegel is perhaps the greatest of the
German idealist philosophers.
5. de Martinez and Rose (2003) present the results of a survey conducted in a group of 15 countries
that have adopted integrated supervision. An important conclusion emerging from analysis of
the regulatory powers of the regulatory agencies in these countries is that the ministries of
finance continue to play a key role in issuing and amending relevant prudential regulations,
authorising or revoking licenses to financial intermediaries, and enacting other important laws.
These results show that the powers of the unified agencies have wide powers mostly in core
supervisory functions, including the power to conduct on- and off-site examinations, as well as
the power to impose sanctions and fines for non-compliance with existing laws and regulations.
6. In this context, there exist a number of instance such as coming into existence of bank deposits
and bills of exchange in the thirteenth century in the UK, and in the sixteenth century, bonds in
France. In the same tradition, equity came into existence as a result of the ventures of
merchants – the Muscovy Company in 1553, and the East India Company in 1600. Preference
shares came to prominence in 1845 in the UK, while the first issue of commercial paper
occurred around the same time in the USA. Other major changes occurred more than a century
later: the first certificate of deposit in 1966, the first floating rate note in 1970, and the first
financial futures contract in 1972, and so on. Interestingly, it was only about two decades back
that there was a spurt in financial innovations. Today all of us are familiar with the emergence
of e-commerce, which includes both product and process innovations, and the wide range of
financial products made available by it in the recent past. In e-commerce, process innovations
refer to products that enable the consumers to use electronic means of communication to
access otherwise conventional payment services, for instance, the use of the internet to make a
credit card payment or for general “online banking”. Product innovations refer to stored value
or prepaid products, in which a record of the funds or value available to the consumer is stored
on a device in the consumer’s possession, such as, prepaid cards and prepaid software
products that use computer networks such as the internet.
7. For a description of the evolution of innovative financial products, and the motives
underlying these innovations, see Walmsley (1988) and Currie (2002). The motives behind
financial innovations have been described as follows:
† Aggressive motive, that is, introduction of a new product in response to a perceived
demand or to enhance market share.
JFRC † Defensive motive, that is, innovation of a financial product or process in response to a
changed environment or transaction costs. E-commerce is due both to aggressive and
15,3 defensive motives. It is aggressive in the sense that it has been used for tapping new
markets extensively. It is defensive, too, as it enabled the business firms to circumvent
regulatory requirements that were intended to control the payments systems and
monitor transactions so as to detect tax evasion or any unlawful financial transaction.
The same holds about derivatives, too, that came to be evolved as a response both to
288 regulatory requirements and the desire for accessing new markets.
† Risk transfer motive, that is, innovating in order to transfer the price or credit risks in
financial positions (for instance, interest rate and foreign exchange futures and options,
and interest rate swaps).
† Liquidity enhancing motive, that is, the desire to improve the negotiability. Emergence
of secondary markets for trading securities, and more recently, setting up of mutual
funds, and selling securities with put options, fall in this category.
† Credit-generating motive, that is, innovating new ways of broadening the supply of
credit either by mobilising dormant assets to back borrowings or tapping hitherto
untouched market segments, for instance, advancing credit against securities backed by
specific buildings.
† Equity-generating motive that is, innovating financial instruments which enable access
to entirely new pockets of investors, for instance, floating rate debt instruments, or
variable-rate preference shares.
8. Prior to the establishment of LIC, as many as 145 Indian insurers, and 16 non-Indian insurers
were operating as private, small entities in the country. The insurance business of these
entities was brought together under the monopolistic control of the LIC. Looking at the life
insurance scenario in the country in the distant past, we observe that the life insurance
business was first introduced in 1818 by a British firm, which charged higher premiums for
insuring Indian lives as against non-Indian lives. The Bombay Mutual Life Assurance
Society, which was set up in 1871, was the first Indian insurer to charge same premium from
both Indians and non-Indians. In order to regulate the insurance business, the Indian Life
Assurance Companies Act was enacted in 1912. Much later, following the nationalisation of
the life insurance business in 1956 and coming into existence of the LIC, the life insurance
business has expanded vastly and contributed substantially to the growth of the Indian
financial sector.
9. It was converted first into Industrial Reconstruction Bank of India in 1985, and thereafter,
into Industrial Investment Bank of India in 1997.
10. Prior to the setting up of SEBI, the Capital Issues (control) Act of 1947, administered by the
Controller of Capital Issues (CCI), governed capital issues in India. As part of liberalisation
programme, CCI was abolished and SEBI was set. Its objectives are to protect the interests of
investors, ensure the fairness, integrity and transparency of the securities market and attain
best international regulatory practices. SEBI’s responsibilities and authority have vastly
increased since its coming into existence. Recently, under the (amendment) Act (2002), its
powers have been expanded to cover all securities-market transactions. In 2003, it was given
powers to impose enhanced penalties for non-compliance of certain regulatory provisions.
Today, SEBI as a member of IOSCO is committed to attaining international accounting
standards, and disclosure and capital adequacy norms. Its vision statement put up on the
web site reads: “Sebi to be the most dynamic and respected regulator globally.” SEBI has
been making constant efforts to improve regulatory practices and contribute significantly to
the ongoing capital market reforms.
11. The first general insurance company, namely, Triton Insurance Company Ltd was
established in Calcutta in 1850. Its shareholders were mainly British. The first Indian
company to enter the general insurance business was the Indian Mercantile Insurance
Company Ltd, which was set up in 1907 in Mumbai. For a description of the evolution, Dynamics and
theoretic aspects, performance and regulation of insurance market in India, the interested
reader may refer to Samuel (2000). regulatory
12. Boot et al. (2000) has presented a useful analysis of the interaction between profitability of system
financial institutions and the absence of an effective competitive system.
13. According to RBI (2004, p. 4), a group may be designated as a financial conglomerate if any
group entity coming under the jurisdiction of specified regulators has a significant presence 289
in the respective financial market segment, and the group is having operations in at least one
more financial market segment. In India there are only four financial conglomerates having
operations in all the three segments (banking, insurance and securities), namely, SBI, ICICI,
HDFC and IDBI. There are seven other financial conglomerates, which are having operations
in only two segments. These are LIC, GIC, UTI, BOB, PNB, BOI and Indian Bank.
14. In the early years of 1990s, serious irregularities and frauds were witnessed in the securities
market. There was an upward rend in the stock market, from 1988 to 1989 spearheaded by
excellent performance by market leaders, industry-friendly policies of the successive
governments, such as, liberalisation of licensing procedures, liberal fiscal measures, liberal
and positive export-import policy, greater scope for the private sector, etc. The successive
budgets of 1991-1992 and 1992-1993, which included a number of market-friendly policy
measures, gave unprecedented boost to the upward trend of the stock market. The stock
market boomed into a “frenzy.” But it was, in fact, a mostly manipulated deceptive exercise
enacted by the collusion between some unscrupulous stockbrokers and bank officials.
The established banking rules and guidelines were overlooked and huge bank funds were
siphoned off for speculative transactions in the stock market. At the heart of these
irregularities and frauds, “securities scam” as these are popularly known, was alleged to be a
big broker, Harshad Mehta. A few years later, another serious banking fraud of similar
nature came to light. This time the manipulators were Ketan Parekh, C.M. Agarwal and
some other stock brokers. These “securities scams” caused huge losses to some public sector
banks (Indian Bank, Bank of India, for instance), many urban cooperative banks (a prominent
bank in this category being the Medhavpura Urban Cooperative Bank), and even some
foreign banks.
15. These committees were, in fact, intended for two distinct purposes. The First Committee was
set up to suggest financial sector reforms. It submitted the Report in 1991. The Second
Committee was appointed to “review the progress of the banking sector reforms to date and
chart a programme on financial sector reforms necessary to strengthen India’s financial
system and make it internationally competitive”. As regards the setting up of the Second
Committee, it was believed in certain quarters that there was really no need for it especially
when not a decade had elapsed for the full implementation of the Report submitted in 1991.
Some critiques went even to the extent of labelling the Second Report as “an action replay of
the earlier report.”
16. For instance, public sector banks alone constitute about 75 per cent of total assets of all
banks, followed by “new” private sector banks (12 per cent), foreign banks (7 per cent) and
“old” private sector banks (6 per cent). The same holds in the case of total deposits, total
investments, and total loans and advances, as well. But if we evaluate the public sector
banks on the productivity criterion, they stand at a much lower position. Net profit as a
per cent of total assets is the highest in case of foreign banks (1.3 per cent), followed by “new”
private sector banks (1.05 per cent), public sector banks (0.9 per cent) and “old” private sector
banks (0.33 per cent). (These estimates are based on the RBI’s (2005) Report on Trend and
Progress of Banking in India, 2004-2005 and graphically presented in Appendix 1). As in
the banking segment, in the insurance segment also, a major chunk of the business in both
life insurance and general insurance is controlled by the public sector companies. In life
JFRC insurance, for instance, about 85 per cent of the total business, measured by first-year
premium income earned during a year, is accounted by the LIC of India alone, which is the
15,3 sole public sector company in the field, whereas the remaining 15 per cent is accounted by as
many as 13 private sector companies. (These estimates based on the information released by
Insurance Regulatory Authority of India on its web site: www.irdaindia.org and presented in
Appendix-2). Significantly, in the securities market, the situation is strikingly different
especially in respect of role of mutual funds in mobilising resources. The private sector funds
290 have acquired an extremely dominant position vis-à-vis the other funds. In 1995-1996, the
UTI Mutual Fund accounted for about 90 per cent of the gross resource mobilisation as
against an exceedingly small contribution of about 7 per cent by the private sector mutual
funds. In 2003-2004 there was a total reversal of this position, with private sector mutual
funds accounting for about 91 per cent, and the UTI Mutual Fund, just 4 per cent. (Estimates
based on Handbook of Statistics on the Indian Securities Market, Securities and Exchange
Board of India, 2004 and graphically presented in Appendix 3).
17. Regulatory neutrality implies that regulation should be service or product-based irrespective
of the financial institution, which provides the service. In the typology of Goodhart et al.
(1998), there are three broad approaches to the structure of regulatory regimes:
(1) institutional or sectoral (under this approach, supervision is focused on the type of
financial institution);
(2) functional (here, supervision is directed at the underlying business activities,
irrespective of the service provider); and
(3) objectives-based (supervision is organised according to the objectives of supervision).
As such, regulatory neutrality corresponds to the functional approach to regulatory regime.
18. Cost effectiveness of the regulatory system means that the regulatory burden should be
minimum. Regulation is often seen as a free good. But it is not so. There are costs of
administering regulation and ensuring its compliance, and there are structural costs, too.
Excessive regulatory burden leads to loss of efficiency. Over regulated entities may think of
even shifting to unregulated or less regulated areas (On various aspects of regulatory costs,
see Reddy, 2001).
19. According to Goodhart et al. (1998), a regulatory regime must be such that it satisfies the
environment in which it is to be implemented, taking complete cognizance of the business
activities of the regulated financial institutions and the specific socio-political circumstances
of the country.
20. The Basel Committee on Banking Supervision (BCBS), together with IAIS and IOSCO
formed the Joint Forum on Financial Conglomerates in 1996. The Joint Forum has come out
with a number of research papers covering various important issues relevant to the
supervision of financial conglomerates. The basic emphasis of the BCBS initiative is on a
shift from the sectoral supervisory paradigm to the consolidated, holistic supervisory
paradigm. It implies a group-wide approach to supervision of conglomerates whereby all
risks run by a group are taken into account, wherever they may have been booked. As such,
both accounting consolidation and consolidated supervision are recognised as key elements
in the supervision of financial conglomerates.
References
Abrams, R.K. and Taylor, M.W. (2000), “Issues in the unification of financial sector supervision”,
IMF Working Paper 00/213, International Monetary Fund, Washington, USA.
Angadi, V.B. (2003), “Financial infrastructure and economic development: theory, evidence and
experience”, Reserve Bank of India Occasional Papers, Vol. 24 Nos 1/2.
Boot, A.W.A., Dezelan, S. and Milbourn, T.T. (2000), “Regulatory distortions in a competitive Dynamics and
financial services industry”, Journal of Financial Services Research, Vol. 17 No. 1,
pp. 249-59. regulatory
Currie, C. (2002), “Integrity and security in the e-commerce”, Working Paper No. 117, School of system
Finance and Economics, University of Technology, Sydney, May.
de Martinez, J. and Rose, T.A. (2003), “International survey of integrated financial sector
supervision”, Policy Research Working Paper, No. 3096, World Bank, Washington, DC. 291
Deringer, F.B. (2003), How Countries Supervise Their Banks, Insurers, and Securities Markets,
Central Banking Publications Ltd, London.
Goodhart, C.A.E., Hartman, P., Llewellyn, D., Rojas-Suarez, L. and Weisbrod, S. (1998), Financial
Regulation: Why, How and Where Now?, Routledge, London.
Hegel, G.W.F. (1812), Science of Logic, Prometheus Books, Buffalo, NY.
Kane, E.J. (1977), “Good intentions and unintended evil: the case against selective credit
allocation”, Journal of Money, Credit, and Banking, Vol. 9.
Kane, E.J. (1981), “Accelerating inflation, technological innovation, and the decreasing
effectiveness of banking regulation”, Journal of Finance, Vol. 36.
Kane, E.J. (1986), “Technology and the regulation of financial markets”, in Saunders, A., White, L.J.
and Lexington, M. (Eds), Technology and the Regulation of Financial Markets, D.C. Heath
Ltd, Lexington, MA.
Kane, E.J. (1989), “Changing incentives facing financial-services regulators”, Journal of Financial
Services Research, Vol. 2.
Kane, E.J. (1996), “De Jure interstate banking: why only now?”, Journal of Money, Credit and
Banking, Vol. 28.
Narsimham Committee (1991), Report of the Committee on the Financial System, Narsimham
Committee, Mumbai.
Narsimham Committee (1998), Report of the Committee on Banking Sector Reforms, Narsimham
Committee, Mumbai.
RBI (2004), Report of the Working Group on “Monitoring of Systematically Important Financial
Intermediaries (Financial Conglomerates)”, RBI, Mumbai, May 2004.
RBI (2005), Report on Trend and Progress of Banking in India, 2004-2005, RBI, Mumbai.
Reddy, Y.V. (2001), “Issues in choosing between single and multiple regulators of financial
system”, paper presented at Speech delivered at the Public Policy Workshop at ICRIER,
New Delhi, May.
Samuel, A. (2000), “Insurance: the Indian experience”, Reserve Bank of India Occasional Papers,
Vol. 21 Nos 2/3.
Securities and Exchange Board of India (2004), Handbook of Statistics on the Indian Securities
Market, SEBI, Mumbai.
Securities and Exchange Board of India (2006), Handbook of Statistics on the Indian Securities
Market, SEBI, Mumbai.
Walmsley, J. (1988), The New Financial Instruments: An Investor’s Guide, Wiley, New York, NY.
Further reading
Kane, E.J. (2002), “Using deferred compensation to strengthen the ethics of financial regulation”,
Journal of Banking & Finance, Vol. 26 No. 9, pp. 1919-33.
15,3
292
JFRC
Table AI.
end March 2006)

Banking segment (as at
Net profit (2005-2006)
Return
Number Loans and (percentage of
Bank-group of banks Total assets Deposits Investments advances Amount total assets)
Public sector
banks 28 20,14,898.35 (72.3) 16,22,481.09 (75.0) 6,33,740.55 (73.1) 11,06,128.31 (72.9) 16,538.66 (67.2) 0.82
Nationalised
Appendix 1. Banking segment
banks 19 12,34,462.40 (44.3) 10, 54,071.06 (48.7) 3, 83,445.02 (44.2) 6, 81,869.31 (45.0) 10,021.29 (40.7) 0.81
State bank
and its
associates 8 6,91,871.17 (24.8) 5, 42,409.12 (25.1) 2, 24,945.00 (25.9) 3, 71,519.93 (24.5) 5,956.48 (24.2) 0.86
Other public
sector banks 01 88,564.78 (3.2) 26,000.91 (1.2) 25,350.53 (2.9) 52,739 (3.4) 560.89 (2.3) 0.63
Private sector
banks 27 5,71,407.59 (20.5) 4, 28,251.56 (19.8) 1, 80,487.41 (20.8) 3, 12,873.71 (20.7) 4,985.21 (20.3) 0.87
Old private
sector banks 19 1,49,749.03 (5.4) 1, 30,251.80 (6.0) 45,188.38 (5.2) 82,868.25 (5.5) 876.36 (3.6) 0.58
New private
sector banks 8 4,21,658.56 (15.1) 2, 97,999.76 (13.8) 1, 35,299.03 (15.6) 2, 30,005.46 (15.2) 4,108.85 (16.7) 0.97
Foreign banks 1,54,128.36 (6.78) 86,504.76 (4.75) 42,518.36 (5.04) 75,318.25 (6.81) 2,002.39 (1.30) 1.30
Foreign banks 29 2, 01,585.69 (7.2) 1,13,744.99 (5.3) 53,562.31 (6.2) 97,544.98 (6.4) 3,068.60 (12.5) 1.52
All banks 84 27, 87,891.63 (100) 21, 64,477.64 (100) 8, 67,790.27 (100) 15, 16,547.00 (100) 24,592.47 (100) 0.88
Notes: 1. Figures do not include the impact of conversion of a non-banking entity into a banking entity; 2. figures in parentheses refer to
percentages. Amount in Rs Crore
Source: RBI’s (2005) Report on Trend and Progress of Banking in India, 2005-2006
Dynamics and
regulatory
20% system
7%
73% 293
Figure A1.
Group-wise assets of
Public sector banks Foreign banks Private banks scheduled commercial
banks
Note: As per cent of the total assets
20%
5%
75%
Public sector banks Foreign banks Figure A2.

Private Banks Group-wise deposits of
commercial banks
Note: As per cent of the total deposits
71,960
33 ,189
21163
6951
Figure A3.
Public Sector Banks Foreign Private Banks All Banks Group-wise average assets
of commercial banks
Note: Rs. crores
JFRC
15,3
21%
6%
73%
294
Figure A4.
Group-wise advances of Public sector banks Foreign banks Private Banks
commercial banks
Note: As per cent of the total Advances
21%
6%
73%
Figure A5.
Bank group-wise Public sector banks Foreign banks
investments of commercial Private banks
banks
Note: As per cent of the total investments
Public sector banks

85.76
Foreign banks
73.06 Private banks
68.17
47.09
42.14
39.06
Figure A6.
Group-wise advances and
investments of commercial
banks
Note: As per cent of their total deposits
First year premium income Growth index of business

Appendix 2. Insurance segment
Gross premium income (including singe premium) (first year premium income)
Total Public sector Private sector Public sector Private sector Public sector Private sector
Year companies companies companies Total companies companies Total companies companies
2001-2002 50,094.46 49,821.91 272.55 19,857.28 19,588.77 268.51 100 100 100
2002-2003 55,747.55 54,628.49 1,119.06 16,942.45 15,976.76 965.69 85.32 99.81 359.65
2003-2004 66,653.75 63,533.43 3,120.33 19,788.32 17,347.62 2,440.71 99.65 99.88 908.98
2004-2005 82,854.80 75,127.29 7,727.51 26,217.64 20,653.06 5,564.57 132.03 105.43 2072.38
2005-2006 1,05,875.76 90,792.22 15,083.54 38,785.54 28,515.87 10,269.67 195.32 145.57 3824.68
Note: Amount in Rs Crore
Source: Annual report 2005-2006, Insurance Regulatory and Development Authority of India
regulatory
Life insurance segment

system
Dynamics and
Table AII.
295
15,3
296
JFRC
segment
Table AIII.
Non-life insurance
Gross direct premium income
(within and outside India) Market share Growth index of business
Total Public sector Private sector Public sector Private sector Public sector Private sector
Year companies companies companies Total companies companies Total companies companies
2001-2002 12,385.24 11,917.59 467.65 100 96.14 3.86 100 100 100
2002-2003 14,870.25 13,520.44 1,349.80 100 90.84 9.16 120.06 113.45 288.63
2003-2004 16,542.49 14,284.65 2,257.83 100 86.24 13.76 133.57 119.86 482.80
2004-2005 18,456.45 14,948.82 3,507.62 100 80.35 19.65 149.02 125.43 750.05
2005-2006 21,337.97 15,976.44 5,361.53 100 73.66 26.34 172.28 134.06 1146.48
Note: Amount in Rs Crore
Source: Annual report 2005-2006, Insurance Regulatory and Development Authority of India
28515 Dynamics and
regulatory
19588 20653 system
17,347
15976
297
10269
5564
268 965 2440
2001-02 2002-03 2003-04 2004-05 2005-06

Figure A7.
Public sector Private sector Business of life insurance
companies in terms of
Note: Rs. crore first-year premium income
4500
4000
3824.68
3500
3000
2500
2000 2072.38
1500
1000 908.98
359.65
500
99.81 99.88
100 105.43 145.57
0
2001-02 2002-03 2003-04 2004-05 2005-06
Figure A8.
Index of growth of life
Public sector Private sector
insurance business in
India
Note: Base:2001-02
JFRC 120
15,3 5.7 12.4
100 1.4
21.3 26.5
80
298
60
98.6 94.3 87.6

40 78.7 73.5
20
0
2001-02 2002-03 2003-04 2004-05 2005-06
Figure A9.
Market shares of life
insurance companies
Note: Measured by fist-year premium income as % of the total
15976.44
14,949
14,285
13,520
11,918
5361.53
3,508
2,258
1,350
467.65
2001-02 2002-03 2003-04 2004-05 2005-06

Figure A10.
Premium income of Public Sector Private Sector
non-life insurance
companies
Note: Rs. Crores
Dynamics and
19.65
regulatory
9.16 13.76
3.86 system
26.34
299
96.14
90.84 86.24
80.35
73.66
Figure A11.
2001-02 2002-03 2003-04 2004-05 2005-06 Market shares of non-life
insurance companies in
Public Sector Private Sector India
1400
1200
1146.48
1000
800
750.05
600
482.8
400 288.63
200 119.86
113.45
100 125.43 134.06
0
2001-02 2002-03 2003-04 2004-05 2005-06
Figure A12.
Index of growth of non life
insurance business in
India
Note: Base:2001-02
JFRC Appendix 3. Securities segment
15,3
3%
7%
(a)
300
1995-96 90%
10%
7%
(b)
2005-06 83%
Figure A13.
Securities market: some
trend indicators
(1995-1996 to 2005-2006).
Resources mobilised by Private Sector
Public Sector
mutual funds UTI
(a)
39% 44%
1995-96
17%
22%
(b)
0%
2005-06
Figure A14. 78%
trend indicators
(1995-1996 to 2005-2006).
Resources raised by Pub.Eq.Issue
Pub.Debt Issue
corporate sector Pvt.Pl.of Debt Issue
Dynamics and
(a)
regulatory
system
44%
1995-96
56%
301
(b) 38%
62%
2005-06
Figure A15.
trend indicators
(1995-1996 to 2005-2006).
Direct Invesment Foreign investment
Portfolio Investment inflows
SEBI registered market intermediaries Number as on March 2006
Stock exchanges (cash market) 22

Stock exchanges (derivative market) 2
Brokers (cash segment) 9,335
Corporate brokers (cash segment) 3,961
Sub-brokers (cash segment) 23,479
Brokers (derivatives) 1120
Foreign institutional investors 882
Custodians 11
Depositories 2
Depository participants 526
Merchant bankers 130
Bankers to an issue 60
Underwriters 57
Debenture trustees 32
Credit rating agencies 4
Venture capital funds 80
Foreign venture capital investors 39
Registrars to an issue and share transfer agents 83
Portfolio managers 132
Mutual funds 38
Table AIV.
Source: Handbook of Statistics on the Indian Securities Market, Securities and Exchange Board of Securities market
India (2006) segment
JFRC
Securities market volume indicators 1995-1996 2005-2006
15,3
Resources raised by corporate sector (Rs Crores) 34,165 1,23,750
Public equity issues 14,830 27,382
Public debt issues 5,974 0
Private placements of debt issues 13,361 96,368
302 Bonds issued by public sector undertakings (Rs Crores) 2,291 27,636 (P)
Market capitalisation (BSE) (Rs Crores) 5,63,748 30,22,190
Foreign investment inflows (US$million) 4,892 20,243
Direct investment 2,144 7,751
Portfolio investment 2,748 12,492
Net FII investment (US$million) 2,036 9,332
Cumulative net FII investment (US$million) 5,202 45,259
Gross resource mobilisation by mutual funds (Rs crores) 6,508 10,98,149
Private sector 312 9,14,703
Public sector 296 1,10,319
UTI 5,900 73,127
Table AV.
Securities market Source: Handbook of Statistics on the Indian Securities Market, Securities and Exchange Board of
segment India (2006); P: Provisional
Corresponding author
A.K. Sharma can be contacted at: anilfdm@iitr.ernet.in
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Dynamics and regulatory system of Indian financial markets: A dialectic view

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276 needs of the macroeconomic system.

(2) a contradicting or repudiatory set of arguments, the antithesis; and 277

4. Dialectic dynamics of Indian financial system

of rural areas deficient in banking facilities. 281

4.3 Second cycle: liberalisation and its after-math

(2) strengthening the financial institutions; and

5. Holistic integrated model for Indian financial sector

When we view these requirements in the context of Indian regulatory infrastructure,

International Financial System

Central Monetary Integrated Financial

Banking Securities Insurance

the world (Deringer, 2003). 285

problems of financial conglomerates, instances of regulatory arbitrage and

end March 2006)

Public sector banks Foreign banks Figure A2.

Public sector banks

First year premium income Growth index of business

Life insurance segment

268 965 2440

2001-02 2002-03 2003-04 2004-05 2005-06

98.6 94.3 87.6

2001-02 2002-03 2003-04 2004-05 2005-06

SEBI registered market intermediaries Number as on March 2006

Stock exchanges (cash market) 22

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