Role Played by the regulatory framework of Financial Services with

reference to the present economic scenario.

India has grown to become a trillion dollar economy characterisedby

liberalisedforeign investment and trade policy. Of the growth, the
dominant role is played by the private sector which is spurred by
deregulation. The country‟s GDP is growing at an average rate of 8.5%
every year and is counted as one of the best amongst the emerging
economies. Notwithstanding the global slowdown and turbulent financial
conditions, the Indian economy smoothly sailed through the testing
times, thanks to a strong and vibrant financial and banking sector in
India. A lot of credit goes to the efficient regulatory supervision and
measures undertaken by the Reserve Bank of India (RBI), the Indian
central bank cum banking regulator and the Securities and Exchange
Board of India (SEBI), the Indian securities market regulator. As per the
recent Global Competitiveness Report 2010-2011 published by the World
Economic Forum, India ranks 17 (out of 139 countries) in the vital field
of “Financial Market Development”.

Financial Services comprises various functions and services that are provided by
financial institutions in a financial system. It includes asset management companies
and liability management companies and helps not only in raising the required funds
but also in ensuring efficient distribution. As provided by S.E, specialized and general
financial institutions, banks and insurance companies. Financial Services are
regulated by SEBI, RBI, Dept. of Banking and Insurance, and Govt. of India and
helps in deployment of funds raised , assist in decision making in regard to financial
mix etc. It also Contributes towards the growth and development through
mobilization of savings and channelizing them into productive investments.

Constituents of financial services

 Financial services market – constituents who render services.
 Four major constituents
1. Market players: host of institutions and agencies, like banks, fin.Inst, MFds,
MB, stock brokers, consultants, underwriters, etc.
2. Financial instruments: imp part of the financial services. Equity, debt, hybrid and
exotic instruments.
3. Specialized institutions: includes acceptance houses, discount houses, factors,
depositories, credit rating agencies, VC Inst.
4. Regulatory bodies: Fin mkt is regulated by a host of institutions and agencies,
like, Dept. of Banking & Insurance of the Govt., RBI, SEBI, BIFR.
Example of financial services
1. Leasing, credit cards, factoring, portfolio management, technical and
economic consultancy, credit information.
2. Underwriting, discounting and rediscounting of bills,
3. Acceptances, brokerage and stockholding
4. Depository, housing finance and book building,
5. Hire purchase and instalment credit
6. Deposit insurance
7. Financial and performance guarantees
8. E-commerce and securitization of debts
9. Loan syndicating and credit rating

Growth of financial services in India

 Discussed under the various stages

1. Merchant Banking Era (1960 onwards)
fin.services like MB, Insurance, Leasing services began to grow.
2. Investment Companies Era: (1970 onwards)
includes establishment of variety of investment institutions and banks. Like, UTI,
MFds, LIC, Nationalization of major commercial banks.
3. Modern Services Era: (1980 onwards)
launch of a variety of financial products and services like OTCEI, MF, Factoring,
VC, and credit rating.
4. Depository Era: (1990 onwards)
depositories were set up, promoting paperless trading through dematerialization of
securities. Book Building, NSE and computerization of BSE.
5. Legislative Era: (1995 onwards)
FERA replaced by FEMA, Amendments in Co. Act 1956,

1. Amendments in Inc. Tax Act, etc to facilitate safe and orderly trading and
settlement of transactions and separate law to regulate the internet trading of
securities was framed.
2. FIIs Era: (1998 onwards)
economic reforms envisaged the free play of Foreign Institutional Investors in
Indian capital market towards the growth & development. GDR plays a vital role in
portfolio investments in India.
Indian financial services have worked together with the world level financial
services institutions, such as, Lehman Brothers, Arthur Anderson and Goldman Sachs as
a part of their efforts to upgrade to world standards in context to the management of
financial services.

Overview of regulatory framework

FRAMEWORKFrom 1991, trade liberalisationin India has been accompanied
by a process of gradual liberalisationof capital flows management
regulations. Foreign Direct Investment (FDI) by non-resident in resident
entities through transfer or issue of securities to persons resident outside
India is a „capital account transaction‟ and Government of India and RBI
regulate the same under the Foreign Exchange Management Act, 1999
(FEMA) and various regulations framed under the Act. RBI is given primary
authority to regulate capital flows through FEMA. Notably, Section 6 of
FEMA authorisesthe RBI to manage foreign exchange transactions and
capital flows in consultation with the Ministry of Finance. SEBI (Foreign
Institutional Investors) Regulations, 1995 (FII Regulations) have facilitated
the regulation of portfolio investments and strengthened India‟s opening to
world markets. Supplementing RBI and SEBI, the other institutional bodies
regulating capital flows include the Forward Markets Commission (FMC),
the Insurance Regulatory and Development Authority (IRDA) and the
Pension Fund Regulatory and Development Authority (PFRDA). The two
routes for foreign investments -the foreign direct investment route and
foreign portfolio investment route are the key constituents of this concept
paper.

Regulatory framework

 Broad classification of the regulatory framework relating to financial service

sector in India is as:
1. Institutional regulations: also known as structural regulations which call for a
clear demarcation of activities of Financial institutions. It is to promote healthy
competition among players. Apex agencies like SEBI to regulate the MB, Stock
Broking Co. and RBI another structural entity prescribing the activities of
commercial banking.
2. Prudential regulations: related to internal management of financial institutions
and other financial services org, regarding capital adequacy, liquidity and
solvency etc. Aims at preventing the entry of firms without adequate resources.
(ex. Minimum net worth requirement for various financial service firms is fixed
by the SEBI and RBI`s regulations relating to the NBFC`s)

3. Investors regulations: the role of SEBI is highlighted with periodic guidelines on

investor protection.
4. Legislative Regulations: brought out by Govt. for all round development of
financial services industry. They are, Banking Regulation Act, Securities Contract
Regulation Act, meant for evolving rules, guidelines and regulations that govern
the micro aspect and operational issues.
5. Self-regulations: this is addition to the above regulations that are self imposed
regulations such as, Foreign Exchange Dealers association, and Merchant Bankers
association in addition to SEBI regulation that governs their members.

The framework of regulations currently operating in India is elaborated as

 banking and financial services
 insurance services
  investment services
 Merchant Banking and Financial Services

Framework for Banking and Financial services

 regulated by the central government and RBI.
 RBI through RBI ACT and the Banking regulation Act ensure the orderly
functioning of the institutions.
 Regulations relating to banking institutions are about sanction of new branch,
minimum capital, reserves, maintenance of minimum capital reserves and other
liquid assets.
 Appointment of Chairman, CEO, and nominating of member to BOD.
 Drawing and implementing the monetary and credit policies to effectively
regulate the credit flows, CRR, SLR, and REPOS.
 Implementing various credit control measures (qualitative and quantitative)
 Regulating factoring, bill discounting and credit card services, etc.
Regulations relating to the non-banking financial companies (NBFC`s)
 Regulated by RBI thru a host of measures such as Banking Laws Act, 1963,
powers of regulation are exercised by RBI under the directives such as the
NBFC`s Directions, 1997, 1987,etc.
 The regulation of NBFC`s is in relation to reports, periodical statements for the
functioning.
 Prescribing eligibility to raise funds from the public its terms and conditions.
 Norms related to investing a % of the deposits in the approved securities and
maintain funds, capital adequacy norms, accounting standards, formulation of
policy in relation to deployment of funds.
 Punishing the NBFC`s by imposing penalties, canceling the license or
registration, and initiating appropriate actions against the management of
NBFC`s.

Foreign Direct Investments

India continues to remain one of the most attractive
destination for FDI in the world thanks to a liberal FDI policy,
recently modified, consolidated and notified on September
29, 2010 under the Circular 2 of 2010. According to the
World Investment Prospects Survey 2010–20121, India will be
the second-most popular destination for FDI globally over the
next two years2. This is an improvement over the projection
made in World Investment Prospects Survey 2009–2011,
which ranked India third in the list. Cumulative amount of
FDI equity inflows from August 1991 to November 2010 in
India stood at US$ 140,920 million, as per the data released
by Department of Industrial Policy and Promotion (DIPP) of
the Ministry of Commerce and Industry. FDI is permitted in
most of the sectors under the automatic route with only post
investment notifications, except a few areas where approval
from the government is required. Several key sectors like
telecom, insurance, construction, information technology,
broadcasting, financial services, civil aviation and even
defenceare open to FDI investments. Foreign Investment
Promotion Board (FIPB) is a nodal agency which approves
foreign investment proposals falling under the approval
route.
•Recent regulatory changes facilitating foreign direct
investments: The Indian FDI policy has seen some rapid
changes, especially in the past 18 months. The beginning of
year 2009 witnessed issue of Press Notes 2, 3 and 4
pertaining to notification of the new methodology to
calculate direct and indirect foreign investments in Indian
companies and in turn simplifying the FDI regime3. The
circulars provided for a very rational and reasoned approach
to define what “owned” and “controlled” would mean while
calculating the foreign ownership in Indian companies from
an FDI perspective. The Finance Minister‟s budget speech of
2010-11 stressed on making the FDI policy user-friendly by
consolidating all prior regulations and guidelines into one
comprehensive document. As a result, Circular 1 of 2010
was issued on March 31, 2010 which consolidated all the
prior policies/regulations, press notes, press releases,
clarifications etc. pertaining to FDI. The Government is
committed to bring out an updated FDI policy every six
months consolidating the entire regime for FDI at one place
for easy reference. Pursuant to this the recent Circular 2 of
2010 issued by DIPP provides an updated and consolidated
FDI policy effective from October 1, 2010.
In the recent Circulars 1 and 2 of 2010, a number of positive
changes have been brought in viz. (i) It is now clarified that
the issue of partly paid shares and warrants to persons
resident outside India is permissible with prior Government
approval, (ii) 100% FDI under automatic route has been
permitted for undertaking certain agriculture activities and
animal husbandry, (iii) For sectors not mentioned under
sector specific policy for FDI, it has been stated that 100%
FDI under automatic route will be allowed, subject to
applicable laws, (iv) Earlier all foreign investments above the
limit of INR 600 crores(INR 6 billion) required approval of the
Cabinet Committee of Economic Affairs (CCEA), which has
now been raised to INR 1200 crores(INR 12 billion) in order
to further reduce the approval processes.
•Figures that count:As per data sourced from DIPP, the
cumulative amount of FDI equity inflows from August 1991
to November 2010 stood at US$ 140.9 billion. India received
FDI inflows of US$ 393 million4in the financial year 1992-93
which have substantially increased to US$ 25. 8 billion in the
financial year 2009-10. During the financial year 2010-11
(April-November), FDI equity inflow of US$ 14 billion has
already been attracted by India. As on November 2010, the
service sector (financial and non-financial) has been the
prominent sector staying at the top in terms of FDI inflows
standing at 21.07% of the total inflows since the year 2000.
Computer software and hardware follows the list with 8.40%
share closely followed by telecommunication and housing &
real estate at 8.06% and 7.53% respectively. This clearly
reflects that the key sectors viz. the service sector, IT,
telecommunication and infrastructure which provide
attractive profit margins to foreign investors, have attracted
greater FDI inflows and the foreign investors have a great
opportunity to further participate in India‟s growing
economy by investing in these key sectors along with the
other strategic areas like defence, insurance, retail etc.
Opening up and widening of several important sectors like
infrastructure, townships, housing, cash and carry trading,
wholesale trading, E-Commerce, single brand retail,
commodity exchanges etc. have further spurred the interest
in India as the FDI capital of world. More interest is being
shown in retail sector which India is gradually opening up.
Plans to introduce FDI in multi brand retail seem to be on the
horizon.As a result of opening up of several key sectors,
substantial investments have been received and this in turn
has assisted in re-iterating the India growth story even
during the financial turmoil. The key sectors in India have
been adequately capitalisedand insulated from external
jitters of the likes of global slowdown of 2008-09.

Foreign Institutional Investments

Foreign institutional investors (FIIs) and Sub-Accounts of FIIs
can make portfolio investment in India by obtaining a simple
registration with SEBI to invest in listed Indian securities and
primary offerings. There are no restrictions on repatriation of
dividends or sale proceeds or any minimum holding time
frame. India is considered to be one of the best destinations
for foreign portfolio investments with foreign investors
generating substantial returns. India has cumulative FII
investments of US $100.9 billion as on November 2010, as
per the data provided by SEBI.
•Changes facilitating foreign portfolio investments: FII
Regulations were substantially amended in May 2008 (2008
Amendments) attracting and facilitating more foreign
investors to register with SEBI as FIIs or their Sub-Accounts
and has enabled participation in the growing Indian
economy. In the 2008 Amendments a number of positive
changes were brought in viz. (i) the definition of “broad
based fund” under FII Regulations was substantially widened
allowing several more Sub-Accounts and FIIs to register with
SEBI, (ii) Several new categories of registration viz.
sovereign wealth funds, foreign individual, foreign corporate
etc. were introduced, (iii) Registration once granted to
foreign investors was made permanent without a need to
apply for renewal from time to time thereby substantially
reducing the administrative burden. Also, the application fee
for foreign investors applying for registration has recently
been reduced by 50% for FIIs/Sub-Accounts and the
application forms were simplified making registration
process simple and fast. These measures have resulted in
increased direct registrations and greater inflows.
The number of FII registrations with SEBI has substantially
increased post the 2008 Amendments and as on November
2010 there are 1738 FIIs and 5592 Sub-Accounts registered
with SEBI. The number has increased substantially in the
past two years in view of the Indian economy offering
lucrative investment opportunities. The erstwhile rigid
criteria of requiring FIIs and Sub-Accounts to register as a
70:30 FII/Sub-Account or 100% debt FII/Sub-Account has
recently been done away with, further showing the
commitment to simplify the registration and operational
issues pertaining to foreign portfolio investors.

Banking Sector and Role of RBI

The Indian banking sector has become market driven since
1991 witnessing entry of new private sector banks and a
host of reforms introduced by RBI. The Banking Regulation
Act, 1949, and the RBI Act, 1934 provide the RBI with
supporting authority to regulate capital flows and are the
major statutes governing banking sector in India. RBI allows
a liberal FDI Policy for investing in Indian private sector
banks upto74% with permissible FII investments upto49%.
RBI has been taking gradual steps for Indian banks to be
compliant with Basel III norms. Foreign investments in public
or nationalisedbanks in India are subject to a limit of 20%.

Capital Market and role of SEBI

Indian capital markets have witnessed a huge transformation
in the past two decades and are considered to be one of the
most attractive investment destinations among large
emerging economies of the world. India has robust,
transparent and stable financial markets regulated by SEBI.
The SEBI regulatory regime provides an enabling framework
for offshore investors to invest in Indian securities and
participate in the India growth story. FII regulations and SEBI
(Foreign Venture Capital Investor) Regulations, 2000 allow
eligible foreign investors to invest in Indian listed and
unlisted securities, mutual fund units etc. SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2009
provide a robust framework for foreign investors, pension
funds, foreign insurance companies, foreign mutual funds,
sovereign wealth funds and several other eligible offshore
investors to participate in initial offerings and private
placements by Indian companies. Indian equity markets are
one of the deepest and most liquid of any market in the
world with volumes in the top five in the world and a market
cap in excess of the GDP of the country. Foreign investors
have been permitted to raise capital from Indian markets by
issuing Indian Depository Receipts (IDRs). Standard
Chartered Bank of UK recently raised US$ 530 million by way
of an IDR issue. Many foreign companies are taking interest
in raising money through this route redefining the term
„capital exporting economies‟.

Other Key Areas

•Strong Debt Markets: A deep liquid debt market in India
has been generating consistent and safe returns for offshore
investors. Considering the interests of overseas investors,
the Government has prescribed high investment limits of
USD 20 billion for investments in corporate debt securities
and USD 10 billion for investments in government debt
securities.

•Strong Deal destination:India is becoming a hub of both

in-bound and out-bound mega M&A deals, private equity
transactions and a thriving Venture Capital Industry.

•Robust Insurance Sector: India has a strong insurance

sector with liberal FDI policy permitting FDI of 26% with
proposals to raise it upto49% in the near term. Several
private players offer affordable insurance covers and
innovative products and the space is being regulated by
IRDA, the key statutes being Insurance Act, 1938 and
Insurance Regulatory and Development Authority Act, 1999.

•DTAA:India has entered into double tax avoidance

agreements (DTAAs) with all the major jurisdictions in the
world providing for liberal provisions to avoid any double
taxation on incomes and capital gains and grants
exemptions on earnings by foreign investors in India as per
the respective treaty provisions. Key jurisdictions used by
foreign investors include Mauritius and Singapore which
have favourabletreaties.
Way Forward

FORWARDThe Indian economy is possessed with a sound and stable financial

and banking sector resulting in greater foreign participation as is evident in
continuously rising FDI and FII investments. These trends are likely to
continue given the liberal trade policies and efficient regulatory regime.
India is in the process of introducing comprehensive and far reaching
changes to its commercial and corporate regulatory framework. Such
proposed changes include introduction of a new Companies Act, Direct Tax
Code, fully adopting International Financial Reporting Standards (IFRS) and
moving to more transparent models of governance. With a strong
commitment to ensure effective compliance with Basel norms and the
standards prescribed by International Organisationof Securities
Commissions (IOSCO), India is following international best practices and
standards. The cautious and at the same time liberal investment norms
ensure that the country would continue to attract large foreign investments
and continue to outpace other developing and developed economies.

Perception of the market to mutual funds and merchant banking:

Mutual funds are financial intermediaries, which collect the savings of
investors and invest them
in a large and well-diversified portfolio of securities such as money
market instruments,
corporate and government bonds and equity shares of joint stock
companies. A mutual fund is
a pool of common funds invested by different investors, who
have no contact with each other. Mutual funds are conceived as
institutions for providing small investors with avenues of
investments in the capital market. Since small investors generally do
not have adequate time,
knowledge, experience and resources for directly accessing the capital
market, they have to rely
on an intermediary, which undertakes informed investment decisions
and provides consequential
benefits of professional expertise. The raison d’être of mutual funds is
their ability to bring
down the transaction costs. The advantages for the investors are
reduction in risk, expert
professional management, diversified portfolios, and liquidity of
investment and tax benefits. By
pooling their assets through mutual funds, investors achieve
economies of scale. The interests of
the investors are protected by the SEBI, which acts as a watchdog.
Mutual funds are governed
by the SEBI (Mutual Funds) Regulations, 1993.

The goal of a mutual fund is to provide an individual to make money.

There are several
thousand mutual funds with different investments strategies and goals
to chosen from. Choosing
one can be over whelming, even though it need not be different
mutual funds have different
risks, which differ because of the fund’s goals fund manager, and
investment style.
The fund itself will still increase in value, and in that way you may also
make money therefore
the value of shares you hold in mutual fund will increase in value when
the holdings increases in
value capital gains and income or dividend payments are best
reinvested for younger investors
Retires often seek the income from dividend distribution to augment
their income with
reinvestment of dividends and capital distribution your money increase
at an even greater rate.
When you redeem your shares what you receive is the value of the
share.

Mutual funds have been a significant source of investment in both government and corporate securities. It
has been for decades the monopoly of the state with UTI being the key player, with invested funds
exceeding Rs.300 bn. (US$ 10 bn.). The state-owned insurance companies also hold a portfolio of stocks.
Presently, numerous mutual funds exist, including private and foreign companies. Banks--- mainly state-
owned too have established Mutual Funds (MFs). Foreign participation in mutual funds and asset
management companies is permitted on a case by case basis.

UTI, the largest mutual fund in the country was set up by the government in 1964, to encourage small
investors in the equity market. UTI has an extensive marketing network of over 35, 000 agents spread over
the country. The UTI scrips have performed relatively well in the market, as compared to the Sensex trend.
However, the same cannot be said of all mutual funds.

All MFs are allowed to apply for firm allotment in public issues. SEBI regulates the functioning of mutual
funds, and it requires that all MFs should be established as trusts under the Indian Trusts Act. The actual
fund management activity shall be conducted from a separate asset management company (AMC). The
minimum net worth of an AMC or its affiliate must be Rs. 50 million to act as a manager in any other fund.
MFs can be penalized for defaults including non-registration and failure to observe rules set by their AMCs.
MFs dealing exclusively with money market instruments have to be registered with RBI. All other schemes
floated by MFs are required to be registered with SEBI.

In 1995, the RBI permitted private sector institutions to set up Money Market Mutual Funds (MMMFs). They
can invest in treasury bills, call and notice money, commercial paper, commercial bills accepted/co-accepted
by banks, certificates of deposit and dated government securities having unexpired maturity upto one year.