Game changer in Indian Financial Market: The Current Decade

Introduction

The primary purpose of this article is to cover innovation in financial product, introduction of new financial product in this decade and regulatory change in the same period which changed the shape of Indian financial market. We have seen that in the last few years, many steps were taken by regulatory body to do such thing which made Indian financial market at par to world developed financial market. So current decade is really considered as one of the major decade in setting up milestone for India in area of finance. We try to attempt to cover those major things which are categorised as follow:-

Products

Derivative

• Index Future
• Stock Future
• Index Option
• Stock Option

ULIP (Unit Linked Insurance Plan)

IDR (Indian Depository Receipt)

Derivative

Derivative, a financial instrument that changed the way the trading has been done in world. Derivative instruments were introduced in year 2000 and derivative trading commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in index options started on June 4, 2001 while trading in options on individual securities started on July 2, 2001. Various reforms were made by the government in year 1996 and 1999 that paved the way to start for exchange traded derivative in India.

Derivatives are used to shift risk and act as a form of insurance or we can say hedging of the money. Below is some of the statistics showing the strong growth of the derivative market in India.

Year	Index Futures	Stock Futures	Index Options	Stock Options	Average Daily Turnover (Rs. cr.)
	Turnover (Rs.cr.)	Turnover (Rs. cr.)	Notional Turnover (Rs. cr.)	Notional Turnover (Rs.cr.)
2001-02	21483	51515	3765	25163	410
2002-03	43952	286533	9246	100131	1752
2003-04	554446	1305939	52816	217207	8388
2004-05	772147	1484056	121943	168836	10107
2005-06	1513755	2791697	338469	180253	19220
2006-07	2539574	3830967	791906	193795	29543
2007-08	3820667.27	7548563.23	1362110.88	359136.55	52153.3
2008-09	3570111.4	3479642.12	3731501.84	229226.81	45310.63
2009-10	3934388.67	5195246.64	8027964.2	506065.18	72392.07

Source: NSE

The above analysis clearly depict that the stock future is clearly the dominant product in the derivate market with market share of 44% whereas stock option is still in the developing stage with a meager share of 3%.

Derivatives contain three type of contracts namely Forward, futures and options. Futures and options will be further classified into stock and index futures and options.

There are various reasons behind the success of derivatives in India are:

Ø Increased integration of Indian financial market with international financial market.

Ø Communication facilities have improved a lot because of decreasing cost of hardware.

Ø Coming up of new risk management tools.

Ø Beneficial for risk adverse people as it will shift the risk from him to risk oriented individual. So more participation in this type of industry that overall increase the volume of trading in derivatives.

The derivative market has a very bright future in India. The market has made enormous progress in terms of technology, transparency, and the trading activity.

ULIP (Unit Linked Insurance Plan)

In 2005, IRDA issued guidelines for insurance product which revolutionizes the insurance sector in india.The product was ULIP (Unit Link Insurance Plan).A ULIP is a life insurance policy which provides a combination of risk cover and investment. The dynamics of the capital market have a direct bearing on the performance of the ULIPs. ULIPs contribute around 85-90 per cent of portfolio for insurance companies, with traditional plans contributing the rest. Ulip provide benefits of both of insurance and investment in share market. This product is able huge amount of money in the share market resulting in increasing exposure of retail investor in the share market in indirect way.

IDR (Indian Depository Receipt)

The year 2010 brought one of the major products in India which may be is another step in taking Indian financial to the world market. The product was IDR (Indian Depository Receipts) which is essentially means an instrument to raise money from Indian market.

According to SEBI:

Ø IDRs are regulated by the same Indian securities laws and grievance redress mechanism will be similar to grievance redress mechanism as in the case of equities in India.

Ø IDRs shall not be redeemable into underlying equity shares before the expiry of 1 year period from the date of issue of the IDRs.

Ø On capital gains where there is no tax in India, you have to pay 20% tax in case of IDRs and similarly on short term gains, the tax is around 18-19% but for IDRs you have to pay 30%.

This product provides a platform for Indian retail investor to invest in foreign market through the route of IDR. Standard Chartered was the first company to issue IDRs in India. Considering the success factors of both ADR (American Depository Receipts) and GDR (Global Depository Receipts), it is expected that IDR may also be major breakthrough for both Indian and world market.

Regulatory change

The primary purpose of understanding regulatory change is to understand that how the regulation had changed in the last decade which makes the Indian financial market up to the world. The major committees set up by various autonomous bodies like Tarapur committee, C Achuthan committee for M&A takeover regulation etc brought more clarity both to the domestic investors and foreign investors and help in making preferred investment destination.

So important regulation that happens in the last decade is as follow:-

· Roadmap for Foreign Bank

· IFRS and GST Platform

· Base Rate Change

· M&A regulation changed

Roadmap for Foreign Bank

One of the major regulator change in banking sector was to draw roadmap for the presence of foreign bank in India in 2005.There were two phases defined for that one was in 2005 and other was 2009.First phase majorly focus on setting up wholly owned banking subsidiary where the second phase was focus on dilution of stake and permitting mergers and acquisitions of private sector bank with foreign banks.

As now one can see the presence of foreign banks, the list is endless. And on the same hand one cannot ignore the financial innovation that these banks brings to India like universal banking, syndicate lending and various kind of interest product like teaser loan, fixed v/s floating loan etc.

IFRS and GST Platform

Though both GST and IFRS will not be applicable in the year 2010 but this decade specially provide a platform for implementing both in India. India’s Globalized presence makes it pertinent for Indian companies to comply with world standard through IFRS. On other hand to make simplified tax structure, GST is immensely required.

This decade also provide strong foundation for the adoption of various international standards like IFRS and GST. Currently GAAP followed by Indian companies is very close to IFRS. So it will not be tough for Indian corporate to align with IFRS.The advantages of having IFRS are immense a country like India.

The research also shows that the investor are willing to invest more in country in which practices of accounting followed by that country is similar to their own country. As a result of which we can attract large amount of investible funds in India to grow India more and more. Job opportunities for Indian accountants will jump once the world realizes and recognizes that accounting in India is identical to that in Western Europe, which adopted IFRS in 2005.

Same is the case with Goods and Services Tax. It will result in both central and states taxes to be collected at point of sale. Both components will be charged at manufacturing cost. It will reduce tax burden on consumers. The simple, transparent and east tax structure will result in revenue resilience and also help I evade in cascading effect in indirect tax regime.

Base Rate Change

Base rate is the rate below which bank will not lend you money. The Base rate will included 4 components to calculate the rate. These are as follow:-

1. Cost of Deposits
2. Adjustment for the negative carry in respect of CRR and SLR
3. Administration expenses,depreciation,IT spending and cost incurred related to deposit insurance
4. Profit margin

The introduction of the Base Rate is expected to make pricing more transparent, as banks are required to review the base rate quarterly, are not permitted to lend below the base rate and also disclose the Base Rate publicly.

Over time the system of BPLR lost its relevance as a meaningful reference rate as the bulk of loans were advanced below BPLR. This not only made the loan pricing system non-transparent but also impeded the smooth transmission of monetary signals.

Sub PLR Lending as a % of total lending	2005	2006	2007	2008	2009
Overall	59	69	77	76	67
Public Sector Banks	51	64	73	71	64
Private Sector Banks	78	85	91	89	83
Foreign Banks	89	85	71	78	68

Source: RBI

M&A regulation changed

In the last decade the M&A were continuously reviewed by SEBI and as a result we are reaching up to the world standard. The panel recommends hiking open offer trigger to 25% as opposed to the existing 15% and raised the offer size to 100% of the equity in the target company in case of a statutory open offer. This means an open offer will kick in only when an entity acquires at least 25% in a listed company. But, once a company crosses that mark it will also have to make an open offer to buy 100% of the company’s shares. This limit is 30 % in UK & Germany where as in South Africa it is 35%. This will help Indian as a financial destination as per the global standard.

The above regulation will also help companies to raise more funds from the strategic investors. They can also look fund from private equity and QIB without diluting their control.

Conclusion

So all in all we can say that both regulatory change and new product which seems complementary in the ending current played a pivotal role in setting up milestone in Indian financial market which is evident from the increasing retail and institutional investor in Indian capital market and other financial markets.

Contributed by

Ankur Singla

Ayush Gupta

Member,FEF