FINANCIAL SERVICES November 2010 FINANCIAL SERVICES November 2010

Contents

 Advantage

 Market overview

 Investments

 Policy and regulatory framework

 Opportunities

 Industry associations

2 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 Modern The Indian financial market is profile with a large segment of the technology growing rapidly, with significant population under 30 years. potential for further growth. Favourable Tremendous ( NSE is ranked 17th in terms of demographic growth value of shares traded in the profile potential world during 2010 till October end) Advantage India One of the India is among the fastest- India has a strong financial fastest-growing growing economies in the world, Strong regulatory regulatory system, administered with a real GDP growth rate of economies in framework by Reserve (RBI) 7.4 per cent in 2009–2010. the world and supported by regulatory body such as Securities and Exchange Board of India (SEBI), which High saving rate govern capital markets and mutual funds, among other financial institutions.

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.

Sources: EY research, RBI website, www.rbi.org.in, accessed 2 December 2010 3 FINANCIAL SERVICES November 2010

Contents

 Advantage India

 Market overview

 Investments

 Policy and regulatory framework

 Opportunities

 Industry associations

4 MARKET OVERVIEW Financial Services November 2010

Market overview — key segments

Financial services

Portfolio/asset Capital markets NBFCs and MFIs management

Non-banking Capital markets Retail brokerage Mutual funds financial companies

India has 19 There are more Mutual funds in More than I2,500 The microfinance recognised stock than 8,000 India had assets NBFCs are segment in India is exchanges. The NSE in addition to over under management registered with the witnessing rapid and the BSE are the 75,000 sub-brokers to the tune of RBI. More than 80 growth. These main exchanges, with registered with US$ 155 billion per cent of the institutions reach out the NSE contributing SEBI. (INR 7,132 billion) equipment hire to the grass-root level more than 75 per as of September purchase segment and have fewer defaults cent of the turnover. 2010. is financed by them. in comparison to commercial banks. 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 BSE – SEBI – Securities and Exchange Board of India MFIs – Microfinance institutions 5 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 2009–2010.

Growth in market capitalisation of Indian companies

1,400 1,331 1,215 1,200

1,000 773 800 631 568 600

(in US$ US$ (in billion) 362 400 258 200 113

0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

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

Source: NSE factbook 2010, National Stock Exchange of India

6 MARKET OVERVIEW Financial Services November 2010

Capital markets … (2/3)

NSE — average daily turnover NSE — number of listed companies 3.00 2.85 1600 1432 1512 2.50 2.22 1400 1228 1200 2.00 1.79 970 1000 1.50 1.03 800

1.00 600 (in US$ US$ billion) (in 0.50 400

0.00 200 2004-05 2006-07 2008-09 2010-11 (Upto 0 Sep) 2004-05 2006-07 2008-09 2010-11 (Upto Sep)

• 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

7 MARKET OVERVIEW Financial Services November 2010

Capital markets … (3/3)

• There are18,511 brokers (cash segment, derivative Branch network of top brokerage houses* and currency derivatives) and 82,278 sub-brokers 9000 7729 8000 (cash segment), registered with the SEBI as of 31 6857 6812 October 2010. 7000 6000 5000 4371 • Market share of the top 10 brokers in India grew 4000 from 12 per cent in 2001–02 to 23.5 per cent in 3000 2000 2009–2010. 1000 0 • Several foreign companies are entering the retail March 2007 March 2008 March 2009 September brokerage market. 2009

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

8 MARKET OVERVIEW Financial Services November 2010

Portfolio/Asset management — mutual funds

• Gross mobilisation of resources by all mutual Mutual fund industry – Assets Under Management funds in India was US$ 2,087 billion (INR (AUM) 100,190 billion) in 2009–2010 in comparison to 160 137 US$ 1,130 billion (INR 54,263 billion) in 2008– 140 128 09. 120 105 100 87 • Several large banks and financial institutions are 80 awaiting approval from SEBI to launch asset 68 management services. billion) US$ (in 60 48 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

9 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.

• These NBFCs are non-deposit companies. There are more than 12,000 NBFCs registered NBFC-ND 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 NBFC-D 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,

10 MARKET OVERVIEW Financial Services November 2010

Microfinance institutions (MFIs)

• In India, most microfinance loans are between Industry size US$ 100 (INR 4,800) and US$ 415 (INR 20,000). 6

5 4.79 • In 2009, about 230 microfinance institutions added 8.5 million borrowers, taking the total 4 CAGR number to 22.6 million. 93% 3 2.4

• Microfinance institutions exist in many legal billion) US$ (in 2 forms such as trusts, societies, non-profit 1 companies and NBFCs. 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, Sa- Dhan website, www.sa-dhan.net/Resources/MicroFinanceMatters- AugustIssue.pdf, accessed 30 November 2010

11 MARKET OVERVIEW Financial Services November 2010

Key players — retail brokerage

Company Service offerings

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

12 MARKET OVERVIEW Financial Services November 2010

Key players — asset management companies (AMCs)

AUM, March 2009 AUM, September 2010 Company (US$ billion) (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

• 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.

13 MARKET OVERVIEW Financial Services November 2010

Key players — NBFCs

Company Service offerings

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

Commercial vehicle finance, construction equipment finance, working capital loan, Shriram Transport Finance engine replacement loan and freight bill discounting. Consumer durable loans, loan against shares, personal loan, loan against property, Bajaj Finance 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. Housing finance services — home loan portfolio and home loan counselling, loans for HDFC home extension, improvement and land purchase loan. Two-and four-wheeler loans, utility vehicle loans, tractor loans and commercial Mahindra Finance vehicle loans. Loan against gold, business loans, security loans — against government instruments Manappuram Finance and insurance services.

Sources: EY research, Websites of NBFCs Note: This is an indicative list.

14 MARKET OVERVIEW Financial Services November 2010

Key players — MFIs

Company Legal status Lending model Number of branches 2,029 SKS Microfinance Ltd Public limited (NBFC) JLG (as of March 2010)

1,117 Share Microfin Ltd Public limited (NBFC) JLG, Individual (as of July 2010)

1,551 Bandhan Financial Services Private Ltd Private limited (NBFC) JLG (as of October 2010) 269 Cashpor Micro Credit Section 25 company JLG (as of August 2010) 1,533 Spandana Sphooty Financial Ltd Public limited (NBFC) JLG, Individual (as of March 2010) Shri Kshetra Dharmathala Rural Trust SHG 22 Development Project 327 Micro Finance Private Ltd Private limited (NBFC) JLG (as of September 2010)

Sources: EY research; Company websites Note: This is an indicative list. JLG-Joint Liability Group SHG-Self Help Group

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

M&A scenario — details Cumulative FDI inflows Period : January 1, 2010–October 31, 2010 Period: April 2000–September 2010 Total deal value Amount of FDI inflows Deal type No of deals Sector (US$ million) (US$ million) Inbound 20 221.05 Services sector (including 25,668 financial services) Outbound 7 269.31 % of total FDI 21 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

17 INVESTMENTS Financial Services November 2010

Investments (top 10 deals) … (2/2)

Date of Announced total Target Deal Acquirer name Target name announcement value (US$ million) country Religare Enterprises Northgate Capital Group Outbound 22-Feb-10 200.00 United States Ltd LLC Ambit Corporate Finance Inbound 18-Feb-10 54.17 QInvest LLC India Pte Ltd Vijay Associates(Wadhwa) Inbound 8-Jul-10 39.49 Undisclosed Acquirer India Constructions Pvt Ltd Tube Investments of Cholamandalam DBS Finance Domestic 8-Apr-10 38.76 India India Ltd Ltd Inbound 29-Jul-10 33.74 Investor Group Muthoot Finance Ltd India Hindustan Outbound 15-Mar-10 32.98 Karl Steiner AG Construction Co Ltd Sundaram BNP Paribas Domestic 30-Jun-10 30.47 Sundaram Finance Ltd India Trustee Co Ltd Farhat Developers Pvt Red Fort Capital Outbound 25-Oct-10 27.06 Ltd Management Co LLC Bhartiya Samruddhi Finance Domestic 5-Apr-10 26.58 Investor Group India Ltd ARIA Investment Equitas Micro Finance India Inbound 27-Mar-10 24.00 India Partners III LP Pvt Ltd

Source: Thomson One Banker accessed on 8 November 2010

18 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 FDI Cap/Equity Entry route Other conditions Financial infrastructure in securities market a. Stock exchanges 49%(FDI+FII) Foreign Conditions apply as per b. Commodity exchanges Investment by registered FII Investment FDI Policy c. Depositories under portfolio investment Promotion d. Clearing corporations scheme (PIS) will be limited Board (FIPB) to 23% and investment under FDI scheme limited to 26% NBFCs a. Merchant banking and underwriting portfolio 100% Automatic Conditions apply as per b. Management services, investment advisory FDI Policy 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

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

20 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)

• 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. New product segments • 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. Growth potential in related business • Offshore funds: Five AMCs manage offshore funds. segments • 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. Access to pension • This move is expected to allow asset managers to access long-term pension funds. fund money • The corpus, estimated to be more than USD417 million, will be split between LIC, SBI and UTI Mutual Fund.

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 22 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 Geographic funds1. expansion • 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 Managing assets of to witness significant growth, thus presenting AMCs with the opportunity to manage these funds. the new pension scheme (NPS) • 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 (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

23 OPPORTUNITIES Financial Services November 2010

Opportunities – micro finance

• Large proportion of India’s population has limited access to bank credit.

Market expansion • 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 Alternate revenue started focusing on alternate revenue streams besides their income from core microfinance streams 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. Better funding options • 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 24 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.

Favourable growth • Lower penetration of the retail investor segment in the capital markets offers a significant dynamics 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. Increasing number NSE offers futures and options contracts on 202 stocks and 5 indices. of exchange- • Similarly, there the number of commodities available for trading has also been on the rise. Until traded FY04, trading of only agricultural derivatives was permitted. However, with the incorporation of instruments 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.

Bigger product • This includes trading in several assets such as equities, commodities futures and exchange traded portfolio 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.

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 25 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) – 400051 Phone: 91-22 -26590382/ 26590243 Fax: 91-22-26590235

27 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

28 FINANCIAL SERVICES November 2010

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