FINANCIAL SERVICES

November 2010

FINANCIAL SERVICES

November 2010

Contents
Advantage India Market overview Investments Policy and regulatory framework Opportunities Industry associations

ADVANTAGE INDIA Financial Services November 2010

Advantage India

Availability of modern infrastructure and technology, i.e., electronic transfer, T+2 settlement, dematerialisation of securities, rolling settlements, etc.

India has a favourable demographic profile with a large segment of the population under 30 years.

Modern technology Favourable demographic profile Tremendous growth potential

The Indian financial market is growing rapidly, with significant potential for further growth. ( NSE is ranked 17th in terms of value of shares traded in the world during 2010 till October end)

India is among the fastestgrowing economies in the world, with a real GDP growth rate of 7.4 per cent in 20092010.

One of the fastest-growing economies in the world

Advantage India
Strong regulatory framework
India has a strong financial regulatory system, administered by Reserve Bank of India (RBI) and supported by regulatory body such as Securities and Exchange Board of India (SEBI), which govern capital markets and mutual funds, among other financial institutions.

High saving rate

Indias high savings rate offers significant opportunity to channelise resources into the financial markets. RBI projects Indias gross domestic savings to be 34 per cent in FY11, which is likely to increase to 35.3 per cent by FY12.
Sources: EY research, RBI website, www.rbi.org.in, accessed 2 December 2010

FINANCIAL SERVICES

November 2010

Contents
Advantage India Market overview Investments Policy and regulatory framework Opportunities Industry associations

MARKET OVERVIEW Financial Services November 2010

Market overview key segments

Financial services

Capital markets

Portfolio/asset management

NBFCs and MFIs

Capital markets
India has 19 recognised stock exchanges. The NSE and the BSE are the main exchanges, with the NSE contributing more than 75 per cent of the turnover.

Retail brokerage
There are more than 8,000 brokers in addition to over 75,000 sub-brokers registered with SEBI.

Mutual funds
Mutual funds in India had assets under management to the tune of US$ 155 billion (INR 7,132 billion) as of September 2010.

Non-banking financial companies

More than I2,500 NBFCs are registered with the RBI. More than 80 per cent of the equipment hire purchase segment is financed by them.

Microfinance
The microfinance segment in India is witnessing rapid growth. These institutions reach out to the grass-root level and have fewer defaults in comparison to commercial banks.

Sources: SEBI annual report 200910; AMFI website, www.amfiindia.com, accessed 30 November 2010; RBI website, www.rbi.org.in, accessed 30 November 2010 NSE National Stock Exchange BSE Bombay Stock Exchange SEBI Securities and Exchange Board of India 5 MFIs Microfinance institutions

MARKET OVERVIEW Financial Services November 2010

Capital markets (1/3)

Market capitalisation of Indian companies on the stock exchange has more than tripled between 2004 05 and 20092010.
Growth in market capitalisation of Indian companies
1,400 1,215 1,200 1,000 (in US$ billion) 800 631 600 400 200 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 113 362 258 773 568 1,331

The NSE is the largest stock exchange in India, followed by the BSE.

Source: NSE factbook 2010, National Stock Exchange of India

MARKET OVERVIEW Financial Services November 2010

Capital markets (2/3)

NSE average daily turnover
3.00 2.50 (in US$ billion) 2.00 1.50 1.00 0.50 0.00 2004-05 2006-07 2008-09 2010-11 (Upto Sep) 1.03 1.79 2.22 2.85 1600 1400 1200 1000 800 600 400 200 0 2004-05 2006-07 2008-09 2010-11 (Upto Sep) 970 1228

NSE number of listed companies

1432 1512

The NSE ranks fourth among the top stock exchanges in the world, with respect to number of trades in equity shares. The cumulative net investments by FIIs was US$ 82 billion (INR 3,934 billion) between 199293 and 20092010. Foreign Institutional Investors (FII) investment in India in 20092010 was close to US$ 23 billion (INR 1,102 billion).
Sources: National Stock Exchange website, www.nseindia.com, accessed 30 November 2010; SEBI Annual Report 200809; SEBI bulletin, October 2010; World Federation of Exchanges statistics, WFE website, www.world-exchanges.org, accessed 30 November 2010

MARKET OVERVIEW Financial Services November 2010

Capital markets (3/3)

There are18,511 brokers (cash segment, derivative and currency derivatives) and 82,278 sub-brokers (cash segment), registered with the SEBI as of 31 October 2010. Market share of the top 10 brokers in India grew from 12 per cent in 200102 to 23.5 per cent in 20092010. Several foreign companies are entering the retail brokerage market.

Branch network of top brokerage houses*

9000 8000 7000 6000 5000 4000 3000 2000 1000 0 7729 6857 4371 6812

March 2007

March 2008

March 2009

September 2009

Sources: *EY research, data compiled for seven brokerage houses India Infoline Ltd, Motilal Oswal Financial Services Ltd, Edelweiss Capital Ltd, Emkay Global Financial Services Ltd, Religare Enterprise Ltd, Kotak Securities Ltd and Sharekhan Ltd; SEBI annual report 2009-10, SEBI bulletin, November 2010

MARKET OVERVIEW Financial Services November 2010

Portfolio/Asset management mutual funds

(in US$ billion)

Gross mobilisation of resources by all mutual funds in India was US$ 2,087 billion (INR 100,190 billion) in 20092010 in comparison to US$ 1,130 billion (INR 54,263 billion) in 2008 09. Several large banks and financial institutions are awaiting approval from SEBI to launch asset management services.

Mutual fund industry Assets Under Management (AUM)

160 140 128 105 87 68 48 137

120
100 80 60 40 20 0 Mar-06 Mar-07

Mar-08

Mar-09

Mar-10

Sep-10

Sources: AMFI website, www.amfiindia.com, accessed 30 November 2010; SEBI Annual Report 2008-09; SEBI Bulletin October 2010

MARKET OVERVIEW Financial Services November 2010

NBFCs niche players, niche market

NBFCs are prominent players in the transport finance business. More than 80 per cent of equipment leasing and hire purchase activity in India is financed by NBFCs.

NBFC-ND

These NBFCs are non-deposit companies. There are more than 12,000 NBFCs registered with the RBI as of June 2010. Kolkata has the highest base with over 5,000 companies.

NBFC-D

These NBFCs are public deposit companies. Three hundred and eighty such NBFCs are registered with the RBI. Some of the key NBFCs in this category include Manappuram General Finance and Leasing company, Bajaj Finance, Sriram Transport Finance, Sundaram Finance, etc.

Sources: NBFCs, now an essential component of financial sector, The Economic Times, dated September 24, 2009; RBI website, www.rbi.org.in, accessed 20 January 2010; Report on trend and progress of banking in India 2009-10, Reserve Bank of India

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MARKET OVERVIEW Financial Services November 2010

Microfinance institutions (MFIs)

In India, most microfinance loans are between US$ 100 (INR 4,800) and US$ 415 (INR 20,000).
In 2009, about 230 microfinance institutions added 8.5 million borrowers, taking the total number to 22.6 million. Microfinance institutions exist in many legal forms such as trusts, societies, non-profit companies and NBFCs.

Industry size
6 5
(in US$ billion)

4.79 CAGR 93% 2.4

4 3 2 1 0.18 0 2005

2009

2010 E

Sources: Micro finance lenders to stop multiple loans, Mint, dated December 17, 2009; Micro finance matters, August 2010 issue, SaDhan website, www.sa-dhan.net/Resources/MicroFinanceMattersAugustIssue.pdf, accessed 30 November 2010

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MARKET OVERVIEW Financial Services November 2010

Key players retail brokerage

Company India Infoline Investment Services Ltd Motilal Oswal Financial Services ICICIdirect.com HDFC Securities Service offerings Online trading, equities, derivatives, commodity trading, initial public offerings (IPOs), MF distribution, personal finance, market and sector research, investment banking and wealth management. Equity, derivatives, portfolio management, online trading, insurance, commodity trading, mutual funds and margin funding. Online trading, market and research, personal finance and corporate services, equity, futures and options (F&O), IPO, overseas trading, retirement solutions and life insurance. Online trading, call and trade, IPO, equity and derivatives.

Religare Enterprises Ltd

Sharekhan.com Emkay Global Finance Ltd Indiabulls Securities Services Ltd Edelweiss Capital Ltd Geojit BNP Paribas Financial Services Ltd

Equities, commodity trading, personal finance, wealth management, asset management, portfolio management services and insurance solutions.
Equities, commodity trading, portfolio management, MF distribution and research. Wealth management, e-broking, research, commodity trading, equities and derivatives Equities, research, commodities, MF distribution and derivatives Equities, F&O, research, asset management services and investment banking Online trading, MF distribution, insurance services, PMS, IPO and property services

Sources: EY research, websites of brokerage houses Note: This is an indicative list.

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MARKET OVERVIEW Financial Services November 2010

Key players asset management companies (AMCs)

Company Reliance Mutual Fund HDFC Mutual Fund ICICI Prudential Mutual Fund Franklin Templeton Mutual Fund Bharti AXA Mutual Fund Kotak Mahindra Mutual Fund DSP Blackrock Mutual Fund AUM, March 2009 (US$ billion) 16.87 12.07 10.72 3.98 0.04 3.79 3.00 AUM, September 2010 (US$ billion) 22.45 19.40 14.53 9.02 0.11 5.94 5.56

Players who have recently received approvals include Axis AMC, Motilal Oswal Financial Services and Peerless General Finance and Investment Company, among others.

Players awaiting approvals include Bajaj Allianz, SREI Infrastructure Finance, etc.
Sources: EY research, AMFI website, www.amfiindia.com, accessed 30 November 2010 Note: This is an indicative list.

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MARKET OVERVIEW Financial Services November 2010

Key players NBFCs

Company Sundaram Finance Shriram Transport Finance Bajaj Finance Tata Finance Magma Fincorp HDFC Mahindra Finance Manappuram Finance
Sources: EY research, Websites of NBFCs Note: This is an indicative list.

Service offerings Commercial vehicle finance, equipment finance, tyre finance, car and home finance. Commercial vehicle finance, construction equipment finance, working capital loan, engine replacement loan and freight bill discounting. Consumer durable loans, loan against shares, personal loan, loan against property, two-wheeler loan and IT product loan. Commercial vehicle finance, car finance and used vehicle finance. Commercial vehicle finance, construction equipment finance and car finance. Housing finance services home loan portfolio and home loan counselling, loans for home extension, improvement and land purchase loan. Two-and four-wheeler loans, utility vehicle loans, tractor loans and commercial vehicle loans. Loan against gold, business loans, security loans against government instruments and insurance services.

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MARKET OVERVIEW Financial Services November 2010

Key players MFIs

Company
SKS Microfinance Ltd Share Microfin Ltd Bandhan Financial Services Private Ltd Cashpor Micro Credit Spandana Sphooty Financial Ltd Shri Kshetra Dharmathala Rural Development Project Grama Vidiyal Micro Finance Private Ltd
Sources: EY research; Company websites Note: This is an indicative list. JLG-Joint Liability Group SHG-Self Help Group

Legal status
Public limited (NBFC) Public limited (NBFC) Private limited (NBFC) Section 25 company Public limited (NBFC) Trust Private limited (NBFC)

Lending model
JLG JLG, Individual JLG JLG JLG, Individual SHG JLG

Number of branches
2,029 (as of March 2010) 1,117 (as of July 2010) 1,551 (as of October 2010) 269 (as of August 2010) 1,533 (as of March 2010) 22 327 (as of September 2010)

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FINANCIAL SERVICES

November 2010

Contents
Advantage India Market overview Investments Policy and regulatory framework Opportunities Industry associations

16

INVESTMENTS Financial Services

November 2010

Investments (1/2)

The services sector in India, including financial services, attracted the maximum FDI between April 2010 and September 2010, amounting to US$ 2,067 million.

In 2010 (till 31 October 2010), the largest inbound deal in the sector was QInvests acquisition of a 25 per cent stake in Ambit Corporate Finance for US$ 54.17 million.

M&A scenario details Period : January 1, 2010October 31, 2010 Deal type Inbound Outbound Domestic No of deals 20 7 43 Total deal value (US$ million) 221.05 269.31 198.77

Cumulative FDI inflows Period: April 2000September 2010 Sector Services sector (including financial services) % of total FDI Amount of FDI inflows (US$ million) 25,668 21

Sources: Fact Sheet On Foreign Direct Investment (FDI), Department of Industrial Policy and Promotion, www.dipp.nic.in; Thomson One Banker accessed on 8 November 2010; Ernst & Young analysis

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INVESTMENTS Financial Services

November 2010

Investments (top 10 deals) (2/2)

Deal Outbound Inbound Inbound Domestic Inbound Outbound Domestic Outbound Domestic Inbound Date of announcement 22-Feb-10 18-Feb-10 8-Jul-10 8-Apr-10 29-Jul-10 15-Mar-10 30-Jun-10 25-Oct-10 5-Apr-10 27-Mar-10 Announced total value (US$ million) 200.00 54.17 39.49 38.76 33.74 32.98 30.47 27.06 26.58 24.00 Acquirer name Religare Enterprises Ltd QInvest LLC Undisclosed Acquirer Tube Investments of India Ltd Investor Group Hindustan Construction Co Ltd Sundaram Finance Ltd Farhat Developers Pvt Ltd Investor Group ARIA Investment Partners III LP Target name Northgate Capital Group LLC Ambit Corporate Finance Pte Ltd Target country United States India India India India Switzerland India Mauritius India India

Vijay Associates(Wadhwa) Constructions Pvt Ltd

Cholamandalam DBS Finance Ltd Muthoot Finance Ltd Karl Steiner AG

Sundaram BNP Paribas Trustee Co Ltd

Red Fort Capital Management Co LLC Bhartiya Samruddhi Finance Ltd Equitas Micro Finance India Pvt Ltd

Source: Thomson One Banker accessed on 8 November 2010

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FINANCIAL SERVICES

November 2010

Contents
Advantage India Market overview Investments Policy and regulatory framework Opportunities Industry associations

19

POLICY AND REGULATORY FRAMEWORK Financial Services November 2010

Policy and regulatory framework

Sector/Activity Financial infrastructure in securities market a. b. c. d. Stock exchanges Commodity exchanges Depositories Clearing corporations 49%(FDI+FII) Investment by registered FII under portfolio investment scheme (PIS) will be limited to 23% and investment under FDI scheme limited to 26% Foreign Investment Promotion Board (FIPB) Conditions apply as per FDI Policy FDI Cap/Equity Entry route Other conditions

NBFCs a. Merchant banking and underwriting portfolio b. Management services, investment advisory services and financial consultancy c. Stock broking, asset management d. Venture capital e. Custodial services f. Factoring g. Credit rating agencies h. Financial leasing and hire purchase finance i. Housing finance j. Forex broking k. Credit card business l. Money changing business m. Micro credit n. Rural credit 100% Automatic Conditions apply as per FDI Policy

Sources: Department of Industrial Policy and Promotion, www.dipp.nic.in, accessed 29 December 2009; Ernst & Young analysis

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FINANCIAL SERVICES

November 2010

Contents
Advantage India Market overview Investments Policy and regulatory framework Opportunities Industry associations

21

OPPORTUNITIES Financial Services November 2010

Opportunities asset management (1/2)

New product segments

Guidelines have been released for real estate mutual funds (REMFs). The launch of REMFs will mark the entry of asset management companies into an entirely new asset class. While Gold ETFs made a modest start, another relatively new product segment, international equity funds, is growing rapidly. The limit for investment in foreign securities for domestic mutual funds has been relaxed in a phased manner to US$ 7 billion. Portfolio management services (PMS): Currently, 31 AMCs offer PMS. Venture capital (VC) funds: Currently,12 AMCs have VC funds. Offshore funds: Five AMCs manage offshore funds. India-dedicated foreign funds: Several foreign fund managers, such as Janus, T Rowe Price, Wellington Management, Aberdeen Asset Management and Fidelity, have expresses their plans to increase India allocation. Of around 74 India-dedicated foreign funds, 36 are managed by 22 Indian mutual funds. Pension Fund Regulatory and Development Authority (PFRDA) has allowed fund managers to invest up to 15 per cent of their assets in equities. This move is expected to allow asset managers to access long-term pension funds. The corpus, estimated to be more than USD417 million, will be split between LIC, SBI and UTI Mutual Fund.

Growth potential in related business segments

Access to pension fund money

Sources: SEBI annual report 2006-07; Reliance Cap joins race to manage private sector pension fund, The Economic Times, 26 December 2008, via Dow Jones Factiva; Direct Investment by Residents in Joint Venture (JV)/Wholly Owned Subsidiary (WOS) abroad, 1 July 2008, RBI website, www.rbi.org.in; Managers axe fees for PFRDA, The Financial Express, 26 December 2007; Realty MFs: New avenue for retail players, The Times of India, 4 June 2008, via Dow Jones Factiva, (c) 2008 The Times of India Group

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OPPORTUNITIES Financial Services November 2010

Opportunities asset management (2/2)

Although the industry has a presence in 150 cities, a major proportion of its investments is derived from a few top cities, creating a high potential to tap other cities. The top seven cities have contributed 62 per cent of the total equity assets flowing into mutual funds1. Growth potential through the expansion of geographic reach is significant. Recent advances in internet- and mobile-based payment systems have made it possible for AMCs to expand their reach to remote areas in a profitable manner.

Geographic expansion

Managing assets of the new pension scheme (NPS)

Due to its low fund-management costs and government support, funds under the NPS are expected to witness significant growth, thus presenting AMCs with the opportunity to manage these funds.
Although only a limited number of AMCs manage NPS funds currently, more AMCs may be allowed to participate once funds under the NPS increase.

1Data

for 50 months (FebMar 2005, MayAug 2005, Dec 2005Apr 2006, JunJul 2006, Oct 2006Apr 2007, Jun 2007, Nov 2007Aug 2008, Oct Dec 2008, Feb 2009Oct 2009, Jan 2010July 2010) Sources: SEBI annual report 2006-07; Market size report, Karvy MFS website, www.karvymfs.com; Reliance Cap joins race to manage private sector pension fund, The Economic Times, 26 December 2008, via Dow Jones Factiva; Direct Investment by Residents in Joint Venture (JV)/Wholly Owned Subsidiary (WOS) abroad, 1 July 2008, RBI website, www.rbi.org.in; Managers axe fees for PFRDA, The Financial Express, 26 December 2007; Realty MFs: New avenue for retail players, The Times of India, 4 June 2008, via Dow Jones Factiva, (c) 2008 The Times of India Group

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OPPORTUNITIES Financial Services November 2010

Opportunities micro finance

Large proportion of Indias population has limited access to bank credit. Unorganised money lending is a general practice in micro-credit. High level of professionalism, more transparency and low interest rates brought in by organised microfinance firms, is expected to expand the market.

Market expansion

The focus of microfinance sector is gradually shifting from not-for-profit and philanthropic considerations to being positioned as a commercial and profit-driven sector. In order to develop into sustainable and profitable microfinance enterprises, NGOs and SHGs have started focusing on alternate revenue streams besides their income from core microfinance operations. This includes services such as micro insurance, money transfer, procurement and supply chain financing for agriculture and allied activities.

Alternate revenue streams

Better funding options

Besides investment by some established microfinance-focused funds (such as Unitus Equity Fund, Lok Capital, Aavishkar Goodwell and the India Financial Inclusion Fund), the microfinance sector is witnessing a significant increase in funding by some of the private equity players. These private equity investors are capable of infusing substantial capital. As of March 2010, microfinance-focused funds accounted for 30 per cent of total investment in the Indian microfinance sector, while mainstream private equity contributed 69 per cent.

Source: All Eyes on Asset Quality: Microfinance Global Valuation Survey 2010, CGAP, March 2010, p.3

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OPPORTUNITIES Financial Services November 2010

Opportunities capital markets

High GDP growth rate, driven by significant corporate earnings, is expected to create the need for more intermediaries in the capital market. Lower penetration of the retail investor segment in the capital markets offers a significant opportunity, given the increasing per capita incomes. Robust market and settlement infrastructure, coupled with surveillance systems in India could help provide efficiencies in the operations of the equity markets. There has been a consistent increase in the stocks and indices traded on the derivatives segments. NSE offers futures and options contracts on 202 stocks and 5 indices. Similarly, there the number of commodities available for trading has also been on the rise. Until FY04, trading of only agricultural derivatives was permitted. However, with the incorporation of national electronic exchanges, the government has steadily increased the basket of tradable commodities on exchanges. Broking firms, which earlier used to offer only stock broking services, have now comprehensively enlarged their offerings. This includes trading in several assets such as equities, commodities futures and exchange traded funds, distribution of mutual funds, insurance, personal loans, etc. At the higher end, business segments such as portfolio management services, art advisory and asset management are also gaining momentum.

Favourable growth dynamics

Increasing number of exchangetraded instruments

Bigger product portfolio

Source: F&O, National Stock Exchange of India website, http://www.nseindia.com/, accessed 29 September 2010 ; Rakesh Mohan, Financial stability CFSA report presentation, Reserve Bank of India website, accessed on 20 September 2010; SEBI 2010 annual report; India : Domestic brokerages' institutional mkt share to be 50% by 2015, Euclid Infotech - Procurement News, 8 May 2010, via Dow Jones Factiva, Copyright 2010. Euclid Infotech Pvt Ltd

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FINANCIAL SERVICES

November 2010

Contents
Advantage India Market overview Investments Policy and regulatory framework Opportunities Industry associations

26

INDUSTRY ASSOCIATIONS Financial Services November 2010

Industry associations
Association of Mutual Funds in India (AMFI) 706-708, Balarama Bandra- Kurla complex Bandra (east) Mumbai 400051 Phone: 91-22 -26590382/ 26590243 Fax: 91-22-26590235

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NOTE Financial Services

November 2010

Note
Wherever applicable, numbers in the report have been rounded off to the nearest whole number. Conversion rate used: US$ 1= INR 48

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FINANCIAL SERVICES

November 2010

DISCLAIMER
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