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Chapter 1PROFILE OF THE FINANCIAL SERVICES INDUSTRY AND IL&FS INVESTSMART LTD.
INTRODUCTIONFinancial services are vital tools of machinery for economy and they lubricate the wheels of economic development. Indian economy has undergone a sea change in its structure; policy and regulation, due to liberalization and globalization, since 1991. The financial service sector is considered as the sunrise sector due to increasing growth and contribution towards the GDP of India. Once the economy crosses the subsistence level, financial services become more prominent and important to that economy. Financial services in current days are emerging as a crucial industry world over and are termed as a sun rise industry. The services offered by this sector not only raise the required funds, but also lead to the efficient management of funds. Today, the financial service products, as turned out to by financial services industry are innovative and paving ways for vivid opportunities for further economic development. With market sentiment turning positive due to the formation of a stable newly elected government, the ripple effect is likely to felt across all the financial services in India. The sectors, including banking and insurance, and mutual funds are all beginning to reap the benefits of a good closure for 2008-09. In 2008-09, the Indian economy is estimated to have grown by 6.7 per cent. According to the latest Central Statistical Organization (CSO) data, financial services and real estate sector rose by 9.5 per cent in the first quarter of 2009-10. Investing means putting your money to work for you. Essentially, it's a different way to think about how to make money. There are many different ways you can go about making an investment. This includes putting money into stocks, bonds, mutual funds, or real estate
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(among many other things), or starting your own business. Sometimes people refer to these options as "investment vehicles," which is just another way of saying "a way to invest."
PROFILE OF THE FINANCIAL SERVICES INDUSTRYFinancial services like banking, merchant banking, factoring, Insurance, Venture capital, act as vital machinery of an economy. These financial services that facilitate financial transactions of individuals and institutional services resulting in their resources allocation activities through time. The sector that deals with such financial services is known as financial services sector. The Three pillars of Financial System are: 1. Banking2. Insurance and Mutual Funds
3. Online Trading Financial system acts as an intermediary
World ScenarioThe first publicly issued security can be traced back to the fourteenth century in Venice where the government made the first known issue of bonds. Merchants and landowners as investments purchased these government securities. The need for stock exchanges developed out of early trading activities in agricultural and other commodities. In and around 1750s in England, traders in the shares of early companies would commonly meet in Jonathans Coffee House to trade shares and make business deals. Early share bids and offers were written on the Coffee House walls and the trading process was highly unregulated, with insider trading forming the basis for most investment decisions. By 1773, Trading Clubs had formed, and in 1801 a group of traders raised 20,000 pounds to build the London Stock Exchange in Capel Court. A similar process was occurring in America. By the early 1790s many merchants had begun trading shares. Just as in London, these early traders often met at coffeehouses in an informal environment.ACHARYA INSTITUTE OF MANAGEMENT & SCIENCES 2
In 1792, 24 Merchants and Brokers paid $400 each for a "trading seat" and signed the Buttonwood Tree Agreement, who decided to act as agents for other persons and give preference to each other in their negotiations. They did much of their trading under a tree at what is now 68 Wall Street. This agreement outlined the regulations under which shares Could be bought and sold. These regulations formed the basis for trading rules that still exist today and led to the formation in 1817 of the New York Stock Exchange (NYSE). Today, nearly three thousand companies from all over the world trade their stocks valued at trillions of dollars here. At that time, many stocks that were deemed not well enough for the New York Stock Exchange (NYSE) were traded outside on the curbs. This, so called curb trading has now become the American Stock Exchange (AMEX). Today much water has passed under the bridge since then and we forward all the way to late 1990s. By late 1990s, most of the stock exchanges had been automated, and the open outcry method of trading was the thing of the past. Most stock exchanges began to use computers to replace floor traders. Floor traders take phone and computer orders from brokers, and negotiate a trade with stock specialists at trading stations on the trading floor. The internet orders placed by clients are first processed and authorized through the stock brokers computer system before being automatically placed on the stock exchanges computer systems. This period saw the rise in popularity and acceptance of online stock broking. Various segments in financial services industry are as under: Insurance Mutual funds Stock broking
InsuranceThe insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in theACHARYA INSTITUTE OF MANAGEMENT & SCIENCES 3
Indian insurance sector reveals the 360 degree turn witnessed over a period of almost two centuries. A brief history of the Insurance sector The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. Some of the important milestones in the life insurance business in India are: 1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business.
1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses.
1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public.
1956: sec 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India. The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British.
Milestones in the insurance sector Some of the important milestones in the general insurance business in India are:
1907: The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business.
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1957: General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices.
1968: The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up
1972: The General Insurance Business (Nationalization) Act, 1972 nationalized the general insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC incorporated as a company.
Key players in insurance Sector of India
Reliance General Insurance Company Ltd. Life Insurance Corporation of India HDFC Standard Life Insurance Kotak Mahindra ICICI Prudential SBI Life Insurance Company Ltd. Oriental Insurance Company Ltd. National Insurance Company Ltd. Bajaj Allianz Life Insurance Company Ltd.
Mutual FundsLet us start the discussion of the performance of mutual funds in India from the day the concept of mutual fund took birth in India. The year was 1963. Unit Trust of India invitedACHARYA INSTITUTE OF MANAGEMENT & SCIENCES 5
investors or rather to those who believed in savings, to park their money in UTI Mutual Fund. For 30 years it goaled without a single second player. Though the 1988 year saw some new mutual fund companies, but UTI remained in a monopoly position. The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People rarely understood, and of course investing was out of question. But yes, some 24 million shareholders were accustomed with guaranteed high returns by the beginning of liberalization of the industry in 1992. This good record of UTI became marketing tool for new entrants. The expectations of investors touched the sky in profitability factor. However, people were miles away from the preparedness of risks factor after the liberalization. The Assets under Management of UTI was Rs. 67bn. by the end of 1987. Let me concentrate about the performance of mutual funds in India through figures. From Rs. 67bn. the Assets under Management rose to Rs. 470 bn. in March 1993 and the figure had a three times higher performance by April 2004. It rose as high as Rs.1, 540bn. the net asset value (NAV) of mutual funds in India declined when stock prices started falling in the year 1992. Those days, the market regulations did not allow portfolio shifts into alternative investments. There was rather no choice apart from hol