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FINANCIAL SERVICESNovember 2010

2

Advantage India

Market overview

Investments

Policy and regulatory framework

Opportunities

Industry associations

Contents

FINANCIAL SERVICES November 2010

3

Advantage India

Advantage

India

Modern

technology

Availability of modern infrastructure and technology, i.e., electronic transfer,

T+2 settlement, dematerialisation of securities, rolling settlements, etc.

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)

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

India’s high savings rate offers significant opportunity to channelise resources into the

financial markets. RBI projects India’s gross domestic savings to be 34 per cent in

FY11, which is likely to increase to 35.3 per cent by FY12.

One of the

fastest-growing

economies in

the world

India is among the fastest-

growing economies in the world,

with a real GDP growth rate of

7.4 per cent in 2009–2010.

Favourable

demographic

profile

India has a favourable demographic

profile with a large segment of the

population under 30 years.

Sources: EY research, RBI website, www.rbi.org.in, accessed 2 December 2010

Financial Services November 2010

ADVANTAGE INDIA

4

Advantage India

Market overview

Investments


Opportunities


Contents


5

Capital markets Retail brokerage

Non-banking

financial

companies

Microfinance

Financial

services

There are more

than 8,000 brokers

in addition to over

75,000 sub-brokers

registered with

SEBI.

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.

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.

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.

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.

Capital marketsPortfolio/asset

managementNBFCs and MFIs

Sources: SEBI annual report 2009–10; 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

MFIs – Microfinance institutions

Market overview — key segments

MARKET OVERVIEW


6

Capital markets … (1/3)

Market capitalisation of Indian companies on the stock exchange has more than tripled between 2004–05 and 2009–2010.

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

Source: NSE factbook 2010, National Stock Exchange of India

Growth in market capitalisation of Indian companies

MARKET OVERVIEW

113

258

362

631

773

1,215

568

1,331

0

200

400

600

800

1,000

1,200

1,400

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

(in

US$

bill

ion

)


7


• 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 1992–93 and 2009–2010.

• Foreign Institutional Investors (FII) investment in India in 2009–2010 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 2008–09; SEBI bulletin, October

2010; World Federation of Exchanges statistics, WFE website, www.world-exchanges.org, accessed 30 November 2010

NSE — average daily turnover NSE — number of listed companies

MARKET OVERVIEW

1.03

1.79

2.22

2.85

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2004-05 2006-07 2008-09 2010-11 (Upto Sep)

970

1228

1432 1512

0

200

400

600

800

1000

1200

1400

1600

2004-05 2006-07 2008-09 2010-11 (Upto Sep)


(in

US$

bill

ion

)

8


4371

6857 6812

7729

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

March 2007 March 2008 March 2009 September 2009

• 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 2001–02 to 23.5 per cent in

2009–2010.

• Several foreign companies are entering the retail

brokerage market.

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

Branch network of top brokerage houses*

MARKET OVERVIEW


9

Sources: AMFI website, www.amfiindia.com, accessed 30 November

2010; SEBI Annual Report 2008-09; SEBI Bulletin October 2010

• Gross mobilisation of resources by all mutual funds in India was US$ 2,087 billion (INR 100,190 billion) in 2009–2010 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.

Portfolio/Asset management — mutual funds

(in U

S$ b

illio

n)

Mutual fund industry – Assets Under Management

(AUM)

MARKET OVERVIEW

48

68

105

87

128137

0

20

40

60

80

100

120

140

160

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Sep-10


10

NBFCs — niche players, niche market

NBFC-ND

NBFC-D

• 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.

• 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.

• 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.

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

MARKET OVERVIEW


11

0.18

2.4

4.79

0

1

2

3

4

5

6

2005 2009 2010 E

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.

(in U

S$ b

illio

n)

Sources: ―Micro finance lenders to stop multiple loans,‖ Mint, dated

December 17, 2009; Micro finance matters, August 2010 issue, Sa-

Dhan website, www.sa-dhan.net/Resources/MicroFinanceMatters-

AugustIssue.pdf, accessed 30 November 2010

Industry size

MARKET OVERVIEW


CAGR

93%

12

Key players — retail brokerage

Company Service offerings

India Infoline Investment Services Ltd

Online trading, equities, derivatives, commodity trading, initial public offerings (IPOs),

MF distribution, personal finance, market and sector research, investment banking and

wealth management.

Motilal Oswal Financial ServicesEquity, derivatives, portfolio management, online trading, insurance, commodity

trading, mutual funds and margin funding.

ICICIdirect.com

Online trading, market and research, personal finance and corporate services, equity,

futures and options (F&O), IPO, overseas trading, retirement solutions and life

insurance.

HDFC Securities Online trading, call and trade, IPO, equity and derivatives.

Religare Enterprises LtdEquities, commodity trading, personal finance, wealth management, asset management,

portfolio management services and insurance solutions.

Sharekhan.com Equities, commodity trading, portfolio management, MF distribution and research.

Emkay Global Finance Ltd Wealth management, e-broking, research, commodity trading, equities and derivatives

Indiabulls Securities Services Ltd Equities, research, commodities, MF distribution and derivatives

Edelweiss Capital Ltd Equities, F&O, research, asset management services and investment banking

Geojit BNP Paribas Financial Services Ltd Online trading, MF distribution, insurance services, PMS, IPO and property services

Sources: EY research, websites of brokerage houses

Note: This is an indicative list.

MARKET OVERVIEW


13

Key players — asset management companies (AMCs)

CompanyAUM, March 2009

(US$ billion)

AUM, September 2010

(US$ billion)

Reliance Mutual Fund 16.87 22.45

HDFC Mutual Fund 12.07 19.40

ICICI Prudential Mutual Fund 10.72 14.53

Franklin Templeton Mutual Fund 3.98 9.02

Bharti AXA Mutual Fund 0.04 0.11

Kotak Mahindra Mutual Fund 3.79 5.94

DSP Blackrock Mutual Fund 3.00 5.56

Sources: EY research, AMFI website, www.amfiindia.com, accessed 30 November 2010


• 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.

MARKET OVERVIEW


14

Key players — NBFCs

Company Service offerings

Sundaram Finance Commercial vehicle finance, equipment finance, tyre finance, car and home finance.

Shriram Transport FinanceCommercial vehicle finance, construction equipment finance, working capital loan,

engine replacement loan and freight bill discounting.

Bajaj FinanceConsumer durable loans, loan against shares, personal loan, loan against property,

two-wheeler loan and IT product loan.

Tata Finance Commercial vehicle finance, car finance and used vehicle finance.

Magma Fincorp Commercial vehicle finance, construction equipment finance and car finance.

HDFCHousing finance services — home loan portfolio and home loan counselling, loans for

home extension, improvement and land purchase loan.

Mahindra FinanceTwo-and four-wheeler loans, utility vehicle loans, tractor loans and commercial

vehicle loans.

Manappuram FinanceLoan against gold, business loans, security loans — against government instruments

and insurance services.

Sources: EY research, Websites of NBFCs


MARKET OVERVIEW


15

Key players — MFIs

Company Legal status Lending model Number of branches

SKS Microfinance Ltd Public limited (NBFC) JLG2,029

(as of March 2010)

Share Microfin Ltd Public limited (NBFC) JLG, Individual1,117

(as of July 2010)

Bandhan Financial Services Private Ltd Private limited (NBFC) JLG1,551

(as of October 2010)

Cashpor Micro Credit Section 25 company JLG269

(as of August 2010)

Spandana Sphooty Financial Ltd Public limited (NBFC) JLG, Individual1,533

(as of March 2010)

Shri Kshetra Dharmathala Rural

Development ProjectTrust SHG 22

Grama Vidiyal Micro Finance Private Ltd Private limited (NBFC) JLG327

(as of September 2010)

Sources: EY research; Company websites


JLG-Joint Liability Group

SHG-Self Help Group

MARKET OVERVIEW


16

Advantage India

Market overview

Investments


Opportunities


Contents


17

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 QInvest’s acquisition of a 25 per cent stake in Ambit Corporate Finance for US$ 54.17 million.

Cumulative FDI inflows

Period: April 2000–September 2010

SectorAmount of FDI inflows

(US$ million)

Services sector (including

financial services)25,668

% of total FDI 21

M&A scenario — details

Period : January 1, 2010–October 31, 2010

Deal type No of dealsTotal deal value

(US$ million)

Inbound 20 221.05

Outbound 7 269.31

Domestic 43 198.77

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

INVESTMENTS


18

DealDate of

announcement

Announced total

value (US$ million)Acquirer name Target name

Target

country

Outbound 22-Feb-10 200.00Religare Enterprises

Ltd

Northgate Capital Group

LLCUnited States

Inbound 18-Feb-10 54.17 QInvest LLCAmbit Corporate Finance

Pte LtdIndia

Inbound 8-Jul-10 39.49 Undisclosed AcquirerVijay Associates(Wadhwa)

Constructions Pvt LtdIndia

Domestic 8-Apr-10 38.76Tube Investments of

India Ltd

Cholamandalam DBS Finance

LtdIndia

Inbound 29-Jul-10 33.74 Investor Group Muthoot Finance Ltd India

Outbound 15-Mar-10 32.98Hindustan

Construction Co LtdKarl Steiner AG Switzerland

Domestic 30-Jun-10 30.47 Sundaram Finance LtdSundaram BNP Paribas

Trustee Co LtdIndia

Outbound 25-Oct-10 27.06Farhat Developers Pvt

Ltd

Red Fort Capital

Management Co LLCMauritius

Domestic 5-Apr-10 26.58 Investor GroupBhartiya Samruddhi Finance

LtdIndia

Inbound 27-Mar-10 24.00ARIA Investment

Partners III LP

Equitas Micro Finance India

Pvt LtdIndia

Source: Thomson One Banker accessed on 8 November 2010

Investments (top 10 deals) … (2/2)

INVESTMENTS


19

Advantage India

Market overview

Investments


Opportunities


Contents


20


Sector/Activity FDI Cap/Equity Entry route Other conditions

Financial infrastructure in securities market

a. Stock exchanges

b. Commodity exchanges

c. Depositories

d. 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

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

POLICY AND REGULATORY FRAMEWORK


21

Advantage India

Market overview

Investments


Opportunities


Contents


22

Opportunities – asset management … (1/2)

OPPORTUNITIES

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

New product

segments

Growth potential

in related business

segments

Access to pension

fund money


• 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.

23

Opportunities – asset management … (2/2)

OPPORTUNITIES

1Data for 50 months (Feb–Mar 2005, May–Aug 2005, Dec 2005–Apr 2006, Jun–Jul 2006, Oct 2006–Apr 2007, Jun 2007, Nov 2007–Aug 2008, Oct–

Dec 2008, Feb 2009–Oct 2009, Jan 2010–July 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

Geographic

expansion

Managing assets of

the new pension

scheme (NPS)


• 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.

• 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.

24

Opportunities – micro finance

OPPORTUNITIES

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

Market expansion

Alternate revenue

streams

Better funding

options


• Large proportion of India’s 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.

• 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.

• 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.

25

Opportunities – capital markets

OPPORTUNITIES

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

Favourable growth

dynamics

Increasing number

of exchange-

traded

instruments

Bigger product

portfolio


• 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.

26

Advantage India

Market overview

Investments


Opportunities


Contents


27


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

INDUSTRY ASSOCIATIONS


28

Note

Wherever applicable, numbers in the report have been rounded off to the nearest whole number.

Conversion rate used: US$ 1= INR 48

NOTE


29

DISCLAIMER

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Young Pvt Ltd to prepare this presentation and the same

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IBEF.

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presentation), modified or in any manner communicated

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This presentation is for information purposes only. While

due care has been taken during the compilation of this

presentation to ensure that the information is accurate to

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the content is not to be construed in any manner

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