Financial Services

Financial Services Last Updated: November 2, 2007

The Indian financial services sector is on an accelerated growth path, reflected in robust growth in the stock markets. Fuelled by a strong investor (both domestic and foreign) interest, Indian stock markets rose to new record levels, with the popular Sensex crossing the 19,000-mark and Nifty crossing the 5,000-mark for the first time. Consequently, 12 companies, led by Reliance Industries Limited (RIL), have entered a hall of fame after their market caps soared beyond the trillion-rupee mark. Also, the bull run in the stock market has in turn propelled two Indians to the list of the top five richest individuals in the world. The booming Indian markets have helped the National Stock Exchange become the world's second fastestgrowing bourse (in terms of number of listed companies), while Bombay Stock Exchange has consolidated its position as the biggest bourse. According to the World Federation of Exchanges (WFE), the NSE recorded a 16.6 per cent jump in the number of listings to 1,274 during a one-year period ended July 2007. In fact, NSE has seen a whopping surge of about 13 times in the number of listed companies in nearly 13 years from about 100 firms in 199495. Simultaneously, the Multi Commodity Exchange of India (MCX) has tied up with Shanghai Futures Exchange (SHFE) of China to share knowledge and expertise, to strengthen the exchanges. Mutual Funds Mutual fund assets grew by 52.26 per cent during April-August 2007 over the corresponding period last year, following a stellar stock market during the year. The assets under management (AUM) of the mutual fund industry as on August 31, 2007 stood at US$ 118.34 billion as against US$. 77.72 billion during the corresponding period in the previous year. The combination of increasing number of fund houses (along with new schemes) and increase in the number of people parking their savings in mutual funds has resulted in total funds mobilisation increasing at a whopping 117.21 per cent during April-August 2007 to stand at US$ 380.13 billion as against US$ 175.06 billion for the corresponding period last year. Also, t he number of mutual funds investors has reached 5.3 million by July 2007. Continuing the growth, the mutual funds sector is expected to grow at a compounded annual growth rate of 30 per cent in the next three years to become a US$ 24,0.53-billion industry, on the back of 25 per cent growth rate between 1999 and 2007. Consequently, market penetration in the MF industry would more than double by 2010 from about 4 per cent in 2007. The stellar performance of Indian mutual funds has resulted in their bagging as many as 22 awards for best performance across various categories in the Gulf region. The Anil Ambani Group entity Reliance MF has stolen the show with the highest number of accolades, followed by Franklin Templeton, HDFC, UTI, DSP Merrill Lynch and Birla Sunlife MF. Offshore Funds The bull run in the Indian capital markets has also attracted global retail investors to bet their money on India-dedicated offshore funds. Experts estimate the total AUM of offshore funds may actually be higher than domestic mutual fund schemes. According to market research firm Value Research, there are 236 offshore funds that are currently operating in India, as against 300 domestic mutual fund schemes. HSBC has the largest offshore fund dedicated to

India, worth US$ 7-8 billion. Besides HSBC, Morgan Stanley, Fidelity, JP Morgan, Aberdeen, Reliance, Birla, UTI are some of the other asset management companies that have large offshore funds. Equity India ranked second in capital market inflows in the Asia Pacific (including Japan), during January-August 2007. The data compiled by Thomson Financial revealed that 121 Indian firms mobilised US$ 23.96 billion during January-August 2007 as against US$ 9.27 billion mobilised in the whole of 2004, US$ 14.39 billion in 2005 and US$ 16.1 billion in 2006. The strong inflows saw India's share in capital markets in the Asia Pacific region increase to 17.3 per cent from 9.7 per cent in calendar 2006. Global private equity firms have made an investment of US$ 3.8 billion in 2007 so far in the country, up 50 per cent from the year-ago period. The record volume has been reached through 81 M&A deals. Last year, foreign private equity players had invested US$ 2.6 billion, data complied by global consulting firm Dealogic showed.

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Carlyle Group has made an investment of US$ 777 million via two deals, including acquisition of over 6 per cent stake in HDFC. Dubai International Capital acquired a 2.87 per cent stake in ICICI Bank for US$ 741 million. Blackstone Group, the world's leading private equity firm, made an investment worth US$ 619 million via eight deals by acquiring stake in companies such as Intelenet Global Services, Punj Lloyd and Gokaldas Exports. Temasek, the investment arm of the Singapore government, picked close to 5 per cent in BhartiAirtel for about US$ 2,000 million

Riding high on the India growth story, private equity (PE) investments in India have crossed the US$ 10billion mark in a calendar year for the first time and amounted to US$ 10.8 billion during January-August, 2007 as against US$ 7.86 in the whole of 2006. Simultaneously, the average deal size has increased to US$ 30 million plus in 2007 from US$ 26 million in 2006 and US$ 16 million in 2005. In fact, India has emerged the third largest destination for private equity in the Asia-Pacific region in 2007 both in terms of value and volume of transactions during January-July 2007. Banking The booming consumer finance space and the growing opportunities in corporate finance has led to the total bank credit increasing by US$ 11.62 billion over the period between July 20 and September 14, compared with US$ 8.68 billion over the same period last year. Also, investment by banks in companies by way of bonds, shares and commercial paper too has gone up by US$ 388.18 million in the last couple of months, compared with a decline of US$ 273.74 million over the same period last year. In fact, the percentage of bank credit to deposits has gone up from 70.55 per cent as on July 20 to 71.39 per cent by September 14. The booming banking sector has in turn propelled nine Indian banks, led by HDFC Bank and ICICI Bank, to the list of top 50 Asian Banks, as per this year's Asian Banker 300 report. Insurance The liberalisation of the rules for the entry of domestic and foreign players has had a favourable impact on growth in this sector. Insurance recorded a 19.9 per cent growth in premium in dollar terms (adjusted for inflation) in 2006-07, compared to the world market growth rate of 2.9 per cent pushing India to being the

15th largest market from 19th in 2005. The total insurance market is expected to reach US$ 60 billion in the next four years – a growth rate of 500 per cent. During April-August 2007, general insurance recorded a growth rate of 13 per cent with gross premium income touching US$ 2.99 billion as against US$ 2.64 billion a year earlier. With the increase in per capita income and rise in penetration in urban and rural areas, the insurance intensity per capita is also increasing. As a result, the total life insurance market premiums is likely to more than double from the current US$ 40 billion to US$ 80-100 billion by 2012 (accounting for 5.1 to 6.2 per cent of the GDP in 2012 from the current 4.1 per cent.), according to a study by McKinsey & Co. Realty Funds The boom in the real estate sector has been attracting a lot realty funds into the market. Already over 35 bigticket foreign funds have already checked into the real estate sector. Over US$ 4 billion belonging to various global realty funds is ready to enter the Indian real estate sector on the back of US$ 1 billion which has already come in. For example, IL&FS Investment Managers (IIML), the publicly listed private equity arm of Infrastructure Leasing & Financial Services, is planning to launch its second real estate fund worth US$ 1 billion. Merrill Lynch forecasts that the Indian realty sector will grow from US$ 12 billion in 2005 to US$ 90 billion by 2015. Prominent global funds, including Carlyle, Blackstone, Morgan Stanley, Trikona and Warbus Pincus have a total corpus of US$ 12-15 billion earmarked for India. Other foreign investors with a presence in the Indian real estate sector are HSBC Financial Services, Americorp Ventures, Barclays and Citigroup. Simultaneously, many developers such as DLF, Parsvnath, Sobha Developers and Omaxe among others have raised large amounts of money from the primary market. Investment bank JP Morgan estimates the initial public offerings (IPOs) in the Indian real estate sector could double every year with US$ 2.5-3 billion expected to come in the coming months. Some of the other players planning an IPO are Hiranandanis, Lodha Developers, Runwal group, Kolte Patil Developers and Paranjpe Schemes (Construction). Also, at least half-a-dozen deals worth US$ 1billion are being finalised by Citigroup, Deutsche Bank, the Carlyle Group and Blackstone among others, with unlisted real estate companies as pre-initial public offering (IPO) placement. Hedge Funds According to a study by Hedge Fund Net (HFN), India-focussed hedge funds are one of the best performing groups of hedge funds in the last five and a half years. The average return for India-focussed hedge funds during August-July 2007 was an astounding 53.6 per cent, dwarfing even the robust 45 per cent return on the Sensex. In fact, since the third quarter of 2005, the average cumulative return produced by these funds was estimated over 72 per cent. Simultaneously, the total assets managed by these funds stood at US$ 13.97 billion at the end of June 2007, marking a five-fold increase from US$ 2.8 billion in the latter part of 2005, when such investments began to gain a lot of traction. Hedge funds investing in India now trail only China as the best performing region or country of investment focus with a 19.5 per cent average return for India-focussed funds during January-July 2007 (which is almost 7 percentage points above that of the Sensex).