mfs by lokesh

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Financial Services Industry in India- An

overview

Role of SEBI in Financial Sector

Role of RBI in Financial Sector



Services cover a wide range of economicactivities which are intangible and invisibleservices cannot be stored. The world TradeOrganisation has divided the services into12 sectors:¾ Business (including professional and computer)

services

¾ Communication services¾ Construction and engineering services

¾ Distribution services

¾ Environmental services



¾ Financial (insurance and banking) services

¾ Health services¾ Tourism and travel services

¾ Recreational services

¾ Cultural and sporting services

¾ Transport services and

¾ Other services not included elsewhere.

These 12 sector have been divided into

155 sub-sectors.



A financial service is any service of afinancial nature offered by a financialservice supplier of a member. Financialservices include all insurance andinsurance-related service and allbanking and other financial services.

Financial services sector in our nation isundergoing a typical change and newmethods, techniques and players are

emerging everyday.



Financial services is concerned with the

design and delivery of advice and

financial products to individuals andbusinesses within the areas of banking

and related institutions, personal

financial planning, investment, realassets, insurance and so on.

A wide variety of fund/ asset-based and

non-fund-based/advisory services are

provided mainly by the non-bankingfinance companies.



Instruments

Market Players

Regulatory Bodies and Specialised

Institutions



Financial services can be divided into

two parts:¾ Fund /asset-Based financial services

x Equipment leasing

x Hire purchase

x Bill discounting

x Loans/ investments

x Venture Capital

xHousing Finance

x Factoring

x Forfaiting



¾ Fee-based/advisory Financial Services

xIssue management

x Portfolio management

x Corporate counseling

x Loan-base syndication

x Arranging foreign collaborationx Merger and acquisition

x Capital restructuring



Government

Regulatory Agencies

¾ SEBI (securities and exchange board ofIndia)

¾ CCI (controller of Capital Issue)

¾ RBI (Reserve Bank of India)

Financial Institutions

¾ IFC

¾ IDBI



¾ ICICI

Banks Mutual Funds Stock Exchanges Merchant Bankers Portfolio Managers

Stock Brokers Non-Banking Financial Institutions Financial Consultants Specialised Institutions

¾

CRISIL¾ IICRA

¾ DFHIL

¾ SHCIL

¾ OTCEI



The RBI regulates different types of NBFCs

under the provisions of Chapter III-B and

Chapter III-C of the RBI Act. Chapter III-B contains the provisions

relating to Non-Banking Institutionsreceiving deposits and financial

institutions.



Amount received from banks

Amount received from development

finance corporations/state financial

corporations or any other financialinstitutions

Amount received in the ordinary course

of business by way of security deposit,dealership deposit, earnest money,

advance against order for

goods/properties/services..



Amount received from an

individual/firm/association related tomoney lending.

Amount received by way of subscription

in respect of a chit.

Loans from mutual funds.



Financing by way of loans, advances andso on.

Acquisition ofshare/stocks/bonds/debentures/securities.

Hire-purchase

Any class of insurance, stock broking etc.

Chit funds Collection of money by way of

subscription/sale of units or other instruments.



Role

Pricing

Problems

Issues



The insurance industry is classified into

two major groups:

¾ Life¾ property



Structure & size

Growth of Resources and investments

Resource mobilization

Investment pattern

Money market mutual funds

Regulatory framework

Problems & prospects of MF industry



Mutual funds are financial intermediaries

that pool the financial resources of

investors and invest those resource indiversified portfolios of assets.

There are two schemes of mutual funds:

¾ Open-end mutual funds

¾ Close-end mutual funds



When the units are sold and redeemed

everyday or continuously on all-going

basis at the price determined by the

fund·s NAV, they are called open-endedfunds.

These funds have to announce their sale

and repurchase prices from time to timeand these prices and NAVs normally

remain close to each other.



There is no ceiling on the amount, theinvestors can invest in these funds and havethe right to sell the units back to MFswhenever they choose and the MFs arelegally bound to repurchase those units.

The units of such funds are without any

redemption date, no lock-in period andthey need not get listed on the stock markets since in their case, the investorscarry out transactions directly with MFs.

The units of OEFs differ from equity shares.

Usually the investors of OEFs are assured ofdividends, capital appreciation, safety andliquidity.



Closed-ended funds do not sell anyadditional units after the sale of a fixed

number of units at the initial or inceptionstage, during a fixed period of timewhen the issue is open for subscription.

The CEFs have a fixed time duration for

their operation. They have a lock-in period of three to

five years and they may offer aguaranteed dividend.



The units of CEFs are not repurchased or

redeemed by MFs before thetermination of the period of the scheme

or the lock-in period.

They have to be listed on the stock markets and can be traded only

between the investors on the secondary

markets at least till the lock-in period is

over. Once these units are listed, they may

trade at a discount (market price<NAV)

or at a premium or at NAV.



The first mutual fund was set up in 1964as a trust in terms of UTI Act, 1963.

It was an associate institute of the RBI till

Feb. 1976 when it was made anassociate institute of IDBI.

The UTI got its borrowing powers fromthese parent institutions.

It provides attractive investmentopportunities through issues of units andshares under various schemes.



The initial capital contributed by the RBI,

LIC, SBI and other banks, borrowings fromRBI/IDBI and other banks and the unitcapital are the major sources of its funds,which are largely invested in corporatesecurities.

An amendment to the UTI Act in April 1986,the UTI is now allowed to grant term loans,rediscount bills, undertake equipmentleasing and hire purchase financing,

provide housing and construction finance,provide merchant banking and portfoliomanagement services etc.



The UTI now has 19 associates/group

institutions which include UTI securitiesexchange ltd., UTI Bank, UTI Investors

services ltd., three credit rating agencies

(ICRA, CRISIL and CARE), DFHI, SHCIL,

OTCEI and others.



Sponsor

Board ofTrustee

MutualFund

AMC Custodian

Trust



Some of the factors which must have

contributed to this rapid growth are:

stepping-up of dividend ratescontinuously and to very attractive levels

under various schemes.

Launching of more and more newschemes i.e. diversification of the

portfolio on a continuous basis



Building up and strengthening the

marketing network

Introduction of new and innovativestrategies to further penetrate into

untapped savings sources Making a number of tax benefits

available to the investors in units.



Years UTI Public Sec Private Sec Total

1998-99 11679 1732 7966 21377

1999-2000 13536 4039 42173 59748

2000-01 12413 6192 74352 92957

2001-02 4643 13613 146267 164523

2002-03 5505 22923 220551 248979



The mutual funds invest their resources indifferent types of financial assets subject

to the guidelines from theG

overnmentand the SEBI.

The government directs that investmentsby the UTI in anyone company should

not exceed five percent of its totalinvestible funds or 10 percent of thevalue of the outstanding securities ofthat company, whichever is lower.



It is further laid down that UTI should not

invest more than five percent of its fundsin the initial issues of any new industrialconcern.

The objectives of Governmentregulations are to minimizes risk andavoid concentration of investments in afew large companies.

The SEBI requires other mutual funds toinvest not more than 5 percent of theoutstanding equity capital of anycompany.



Money market mutual funds are a part ofshort-term investment poolingarrangements.

Their basic function is to purchase largepools of short term financial instruments andsell shares in these pools to investors.

Most of the money market instruments

typically have to be purchased in largeamounts and the pooling arrangementsenable small investors to gain access tomoney market yields.



The average maturity period of

investments of Money Market Mutualfunds is about 40 days.

They are mostly open ended mutualfunds.

Investors in them usually do not pay salesor redemption charges but they have topay management fee.

Investors often use MMMFs as a parkingplace for cash reserves awaitinginvestment in longer-term financialassets.



As per norms issued in December 1995,private sector MFs have been allowed to

set up MMMFs with the prior approval of theRBI and SEBI.

The ceiling on the size of MMMFs has nowbeen withdrawn and they are now free to

determine the extent of their investment ineach instrument.

Further, the restriction that the units ofMMMFs can be issued only to individual has

been withdrawn from April 1996, makingthem available to corporate and others.



A reduction of the minimum lock-in

period from 46 days to 30 days has beeneffected from July 1996.

The first MMMF set up by Kothari Pioneer in early 1997 did not succeed.

The UTI MMMF which opened on April1997 had collected about Rs. 30 crore bythe middle of 1997.

The investors can withdrew any amountany number of times after the lock-inperiod of 30 days, subject to a monthlyceiling of Rs. Five crore.



The working of MF is governed by UTI

Act1963, Indian Trust Act 1882, provisions

of the Companies Act 1956 andSecurities Contracts Act 1956 and various

Tax laws.

The overall regulation overseeing and

supervision of MFI is done by the Ministry

of Finance of the GOI, the RBI and the

SEBI.



Initially the RBI had issued guidelines for bank-sponsored MFs in 1987.

Thereafter, the SEBI issued guidelines in 1991and a comprehensive set of regulations in1993.

With the growth of MFI, it became

necessary that all MFs follow uniform normsfor valuation of investments andaccounting practices so that anyone could

judge their performance on a comparable

basis. Therefore the SEBI issued new mutualfund regulations in Dec. 1996 base on therecommendations of the mutual fund 2000report prepared by it.



The new(1996) SEBI regulations are

uniformly applicable to all the existingmutual funds in all the sectors, including

the UTI.

Offshore funds are governed by theMOF,GOI and the RBI.

MMMFs are governed by the RBI.

The SEBI is the principal regulatory

authority for the MFs.



Poor performance of mutual funds

More concentration on the metro

markets Lack of informed selling

Investor·s lack of knowledge

Lack of attracting retail saving Lacunae in regulations



Venture Capital

Bought out Deals Consumer Finance

Factoring



Venture capital has been defined as´providing seed, start-up and first stagefinancingµ

International finance corporation,Washington (IFCW) defines venturecapital as equity or equity featured

capital seeking investment in new ideas,new companies, new projects, newprocesses or new services that offer thepotential of high returns on investment.



Venture capital institutions (fund) is a

financial intermediary between investorslooking for high potential returns andentrepreneurs who need institutionalcapital as they are yet not ready to go

to public. It is a long-term investment in growth-

oriented small/medium firms. Theacquisition of outstanding shares from

other shareholders cannot beconsidered venture capital investment. Itis new, long-term capital that is injectedto enable the business to grow rapidly.



There is a substantial degree of active

involvement of the venture capitalinstitutions with the promoters of the

venture capital undertakings.

Venture capital is not technology

finance though technology finance mayform a sub-set of venture capital

financing.



Central level Development finance

institutions (DFIs)

State level DFIs Banks

Private sector financial institutions

Overseas financial institutions



The need for venture capital in the

country was felt around 1985.

Before its emergence, the developmentfinance institutions had been partially

playing the role of venture capitalists.

The creation of venture capital fund was

announced by the Ministry of Finance in

Dec. 1985.



The concept was operationalised only in

the fiscal budget for 1987-88 when a

cess of upto 5% was introduced on all

technology import payments to create a

pool of funds. In 2003 there were 43 domestic VCFs and

six foreign VCFs registered with the SEBI.

SEBI is responsible for overall regulationsand registrations of VCFs.



A bought deal occurs when an underwriter,such as an investment bank or a

underwriter, purchases securities from anissuer before a preliminary prospectus isfiled. The investment bank (or underwriter )acts as principal rather than agent and thus

actually "goes long" in the security. Thebank negotiates a price with the issuer (usually at a discount to the current marketprice, if applicable).



The division of retail banking that deals

with lending money to consumers. This

includes a wide variety of loans,including credit cards, mortgage loans,

and auto loans, and can also be used to

refer to loans taken out at either the

prime rate or the subprime rate.



Seller

Buyer Factor



Assumption of Credit risk

Maintenance of sales ledger

Collection of accounts receivables

Finance of trade debt

Provision of advisory services

Credit analysis of the customer



Recourse and non-recourse factoring

Advance and maturity factoring

Undisclosed and disclosed factoring

Domestic and international factoring

Bulk/agency factoring

Limited factoring and full factoring

mfs by lokesh

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