India-An Opportunity Dawns_financial Services

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India An opportunity dawnsOpportunities for South African Companies in theIndian Financial Services Sector

August 2007

K P M G I N I N D I A


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ExecutiveSummary 1

IndiaPoisedforGrowth 7

OverviewoftheIndian

FinancialServicesSector 10

InvestmentOpportunitiesinthe

IndianFinancialServices 12

RegulatoryFrameworkfor

FinancialServicesinIndia 25

Contents


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The India Growth StoryIndiaisthesecondfastestgrowingeconomyintheworld,withaGDP

growthrateof9.4percentinthefinancialyear2006-07.Theaverage

growthrateoverthepastfouryearshasbeen8.6percentwhichisthe

fastestsinceitsindependencein1947.Thisstellarperformancecanbe

attributedtofavorablemacro-economic,demographicandpsycho-graphic

factors,amongstacombinationofotherfactors.Theresultantimpactof

rapidGDPgrowthhasbeenanincreaseinthepercapitaGDPandalso

anincreaseintheincomelevelsofbothruralandurbanhouseholds.

Overthepastfewyears,Indiahaswitnessedashifttowardstheservices

sectorwhichhasledtoanincreaseindisposableincomesandagrowing

shiftinconsumerism.Theconsumption-ledboominIndiahasfueledthe

demandforlifestyleproducts,consumerdurablesandfinancialproducts

amongothers.

Indiasfavorabledemographicmix,itsabundanceofeducatedand

talentedmanpower,andamongtheyoungestpopulationsintheworld,

hasfurthercatapultedtheeconomytoanenviableposition.

TheattractivenessoftheIndianeconomyhasresultedinanincreasein

foreigninvestmentinthecountry.Besides,increasingconfidencelevels

amongretailinvestorsandtheprevalentliquidityowingtoforeigninflows

intotheeconomy,hasledtofavorablegrowthintheIndianequity

markets.

South Africas Financial Services CapabilitiesSouthAfricasfinancialservicessector,backedbyasoundregulatoryand

legalframework,haswitnessedthepresenceofalargenumberof

domesticandforeigninstitutionsprovidingafullrangeofservices-commercial,retailandmerchantbanking,mortgagelending,insurance

andinvestment.

SouthAfrica'sbankingsectorcomparesfavourablywiththoseof

industrialisedcountries.SouthAfricanbanksarewellmanagedandutilise

sophisticatedrisk-managementsystemsandcorporate-governance

structuresinconductingtheirbusiness.Thestockmarketshavebeen

performingwellwithexponentialgrowthinthe1990sandtherehasalso

beenariseintheshareofforeigntransactions.

ExecutiveSummary

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PlayersintheSouthAfricanfinancialservicessectorpossessseveralkey

capabilitiesthatcanbeleveragedinIndia.Playerspossessthenecessary

expertiseonnewproductdevelopment,riskmanagementandtheability

toserveadiversecustomerbase,whichwouldbevaluedinIndia.

The Indian Financial Services SectorTheservicessectorinIndiahasbeenwitnessingaboominrecenttimes.

InadditiontothestronggrowthinIT/ITES,theIndianfinancialservicessectorisconsideredtobestableandprogressive,andhasbeenamajor

beneficiaryofIndiasgrowthstory.

Retaillendinghaspoweredtheexplosivegrowthinthefinancialservices

sectorwithplayersfocusedontheretailsegmentregisteringimpressive

top-linegrowth.Theretailportfolionowaccountsforasignificantshare

ofthetotallendingformostplayers.

IncreasingprosperitycoupledwithrisingconsumerismofIndian

consumershasfueledaremarkableboominretailcreditdemand.Rapid

growthbythecorporatesectorhasgeneratedaneedforcapitalwhich

hasresultedingrowthofinstitutionalfinance.AlargenumberofNon-

BankingFinanceCompanies(NBFCs)havebeenoperatinginthecountry.

Thishashelpeddriveassetpenetrationonaccountofawiderdistribution

reach.

Thegrowingattractivenessofthefinancialservicessectorhastriggered

theentryofglobalmajors.Aggressiveplansofincumbentscoupledwith

theentryofnewplayersareexpectedtofurtherdrivethegrowthofthe

sector.

Thefinancialservicessectoranalyzedcomprisesthefollowingkey

sub-sectors:

BankingandFinancingConsumerFinance,SmallandMedium

Enterprise(SME)finance,Agricultureandruralfinance,Institutional

FinanceandProjectFinance

InsuranceLifeandNon-lifeinsurance

CapitalMarketsAssetManagement,Pension,Wealthmanagement,

InvestmentBankingandSecuritiesBroking

EmergingOpportunitiesWealthManagement,StructuredFinance,

PrivateEquity,DistressedAssets,RealEstateFinance,Leveraged

FinanceandNon-recourseLending

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Attractive Investment OpportunitiesTheopportunitiesinIndianfinancialserviceshavebeenanalysedindetail

basedonparameterssuchasmarketsize,growth,profitability,intensity

ofcompetition,futureoutlookandgovernmentregulationsgoverning

entry.Ananalysisofthevarioussub-sectorsusingtheabovecriteriahas

yieldedseveralattractiveopportunitiesforentryinthemediumterm.

Banking & Financing

Banking Sector:TheIndianbankingsectorisgrowingatafastpaceasplayersareaggressivelytargetingsemi-urbanandruralareaswhichare

underpenetrated.Theincreasedfocusonfinancialinclusionbythe

governmenthasalsoledtointroductionofnewerproducts,suchas

no-frillsbankingaccountsandkisan(farmer)creditcardstoenhance

bankingaccesstoruralandeconomicallyweakersectionsofthe

population.

However,undertheRBIsroadmapforpresenceofforeignbanksinIndia

announcedinFebruary2005,itisexpectedtoreviewthedevelopments

andaccordinglyallowfull-fledgedmarketaccesstoglobalplayerspost

April2009.

Consumer Finance:Risingconsumerismandincreasingfocusbyleading

banksandNBFCshaveresultedinrapidgrowthoftheconsumerfinance

sectorinIndia.SincebankingpenetrationinruralIndiaremains

significantlylowercomparedtourbanIndia,ithasbecomeanattractive

segmentforplayerstogainanearlymoveradvantage.

SME Finance:SMEfinancingiswitnessingstronggrowthduetothe

strongperformanceofthebuoyantSMEsectorandincreasingfocus

frombanksowingtohigherprofitability.TheburgeoningSMEsectorhasalsoledtoafocusonfactoringservicesforworkingcapitalmanagement

andotheradvisoryservices.

Institutional Finance and Project Finance:Anexcellentperformanceby

corporatesinIndiacoupledwiththeirexpansionstrategiesseeking

inorganicgrowth,haveresultedinahugedemandforinstitutional

finance.ProjectfinanceinIndiaisalsowitnessingparticipationfrom

leadingbanksandfinancialinstitutionsduetotheloweredoperational

andexecutionrisks.

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Agri and Rural finance:Abouttwo-thirdsofIndiaspopulationresidesin

ruralareas.Thereliesahugecustomerbasewhichisunder-serviced

providingasignificantopportunityforagri-lendingandruralfinancefor

earlymovers.

Insurance

TheinsurancesectorinIndiahaswitnessedaparadigmshiftsincethe

year2000withtheopeningupofthesectorforprivateparticipation.The

ensuingcompetitionhasprovidedcustomerswithachoiceofproductsandproviders,andalsoimprovedservicelevelsimmensely.Bothlifeand

non-lifeinsuranceinIndiahastremendousgrowthpotentialduetolow

penetrationandper-capitaspendingincomparisontoothernations.The

non-lifeinsurancesectorissettowitnessstronggrowthduetothe

recentde-tarifficationofkeycategoriesincludingmotor,fire,engineering

andworkmencompensationinsurance.Healthinsurancehasbeen

amongthefastestgrowingmarketsegmentsandisexpectedto

showcaseaminimumgrowthof30percentgoingforward.Thereisa

significantpotentialwhichisexpectedtobeunlocked,especiallyinthe

semi-urbanandruralareasinthefuture.

Capital Markets

WithIndiawitnessinganeconomicboom,capitalflowsintothecountry

viatheFIIroutehavebeenontherise,positivelyimpactingtheIndian

equitymarkets.TheperformanceofIndianequitymarketshasbeen

impressive,notonlybecauseofFIIinflowsbutalsoduetoincreased

confidencelevelsamongretailinvestorsinthecountry.Thekey

sub-sectorsthathavebenefitedfromthisstronggrowthincludeasset

management,wealthmanagement,investmentbankingandsecurities

brokingservices.

TheIndianassetmanagementindustryhaswitnessedamassive

increaseinAUM,posttheentryoflargedomesticandforeignplayers.

However,thereexistsahugeopportunityonaccountoflowpenetration

levelsincomparisonwithothercountries.Wealthmanagementservices

arelikelytowitnessheightenedactivityowingtoincreasingprosperity

andawarenessoffinancialplanning.Increasingparticipationfromretail

investorsduetoastrongequitymarketperformancehasledtoarobust

demandforsecuritiesbroking.TheincreasingappetiteofIndian

corporatesforcapitalaswell,asanacquisition-ledinorganicgrowth

strategy,hasalsoresultedinastrongdemandforinvestmentbanking

andadvisoryservices.

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TheIndianregulatoryframeworkforentryintotheIndianfinancial

servicessectorhasbeendefinedbyvariousregulatorswithrespectto

theentryvehicle(FDIorFII),modeofoperations/presence(branch,

representativeofficeorsubsidiary)whichhaveasignificantbearingon

thetaxandreportingrequirements.Todevelopacoherentstrategyfor

entryintotheIndianmarket,SouthAfricanfirmsshouldconsiderthe

regulatoryimplicationsaswell.

AnIndiastrategyisincreasinglybecomingakeyimperativeforanytrulyglobalcorporation,andinterestedSouthAfricanplayersneedtoweigh

theiroptionsandchoosetheoptimalstrategytoleveragetheIndia

opportunityinthefinancialservicessector.

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Indiaistheworld'slargestdemocracyandrankssecondinthelistoffastest

growingeconomiesglobally.Thepastdecadehaswitnessedfundamental

changesintheIndianeconomywithrespecttogovernmentpolicy,business

outlookandmoreimportantly,theIndianmindset.

SomecontributorstothedynamicgrowthoftheIndianeconomyinclude,anew

industrialresurgence,increasedbusinessandinvestorconfidence,increased

investment,relativelymodestinflationinspiteofspiralingglobalcrudeprices,

layingofsomeinstitutionalfoundationsforfasterdevelopmentofphysicalinfrastructureandprogressinfiscalconsolidation.

Services-led Growth

Traditionally,developingcountrieshavetransitionedfrombeingprimary

agriculture-basedtosecondarymanufacturing-basedandsubsequentlyto

tertiaryservices-basedeconomies.Indiahasleap-froggedastagethroughits

directtransformationfromaprimaryfocusedintoatertiaryservicesbased

economy.

Structural Change in the Indian economy

India-PoisedforGrowth

Source:IMFWorldEconomicOutlook,CIAWorldHandbook2007,DreamingwithBRICSPaperno.99,

GoldmanSachs,KPMGAnalysis

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Favourable Demographics: The Engine of Growth

AkeyfactordrivingIndiasgrowthisitslargeandyoungpopulation.Witha

medianageofaround24years 1 andover500millionIndiansbelowtheageof21

years2,alargepercentageofIndiaspopulationisexpectedtobeintheworking

ageevenin2025,whenthemedianageshallbe31years 3.Thislargeclassof

consumersisexpectedtodriveIndiasimpressivegrowth,makingittheworlds

fifthlargestconsumermarketby2025,4 surpassingGermany.

AccordingtoastudybytheMcKinseyGlobalInstitute,Indiasgrowthisexpectedtocreateavastmiddleclass(IncomeofUSD5,000USD25,000 5),biggerthan

thatofU.S.andEuropecombined.Thismiddleclass,numberingaround600

millionby2025,isexpectedtoaccountforover60percentofthetotalspending

inthecountry6.

Indiahasfastbecomeapreferredinvestmentdestinationforglobalinvestorsand

companiespropelledby:

Existenceofastabledemocracyandpoliticalsystem;

GlobalizationoftheIndianeconomy;

Favourableregulatoryreformsandinstitutionalframeworkleadingto

integrationwiththeglobaleconomy;

Emergenceasaglobalhubformanufacturing,softwareandBPOservices;

Robustearningsgrowthofthecorporatesectorand aboomingcapitalmarket;

Favourabledemographicswithagrowingconsumingandinvestingclass;and

Increasedsavingsintheeconomy,channelizedintothecreationofproductive

assets

1Source:AsianDemographics




5Source:McKinseyGlobalInstitute

6Source:McKinseyGlobalInstitute

7Source:ICRAreport

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TheIndianfinancialservicessectorisgraduallyemergingasamatureand

sophisticatedglobaleconomy.Reformsintroducedintheearly1990shave

positivelyimpactedtheproductivityandstabilityoftheIndianfinancialservices

sectorenablingittokeeppacewiththegrowingneedsofcorporatesandretail

borrowers.

Reforms and other developmentsFinancialsectorreformsconstituteanintegralpartoftheoveralleconomicpolicy

reforminIndia.Thereformshavebeendrivenmainlybyathrusttowardsliberalization.However,therehasalwaysbeenastrongemphasisonregulations

aimedatstrengtheningprudentialnorms,transparencyandsupervisionto

mitigatesystemicrisks.Today,theIndianfinancialstructureisfunctionallydiverse,

efficientandgloballycompetitive.

Nevertheless,somechallengescontinuetoimpactoldplayersandnew-some

keystructuralgapsincludethelackofaninter-bankinterestratebenchmark,an

inactivecorporatedebtmarketandanunder-developedderivativesmarket.

Notwithstandingthesegaps,thecumulativeeffectofallreformssince1991has

beenquiteencouraging.

Banking

ThebankingsectoristhemostdominantsectorinthefinancialsysteminIndia.

Postliberalization,thebankingsectorhaswitnessedseveralchanges.Therehas

beenaparadigmshiftinproducts,technology,operationsandcustomerservice.

Keyreforminitiativesincludedbankinglicensestonewprivatesectorbanks,de-

regulationofinterestrates,adoptionofBaselIInormsandaroadmapforforeign

banksentryunveiledbyRBIin2005.

Thefinancialhealthofcommercialbankshasimprovedmanifoldwithrespectto

capitaladequacy,profitability,assetqualityandriskmanagement.Further,

deregulationhascreatednewopportunitiesforbankstoincreaserevenueby

diversifyingintoinvestmentbankingandothersub-sectors.

Insurance

TheIndianinsuranceindustrywitnessedalandmarkeventwiththeenactmentof

theInsuranceRegulatoryandDevelopmentAuthorityActin1999toregulate,

promoteandensureorderlygrowthoftheinsuranceindustry.Underthenew

dispensation,privateandforeigninsurancecompanieshavebeenpermittedto

operateinIndiawithsomerestrictionsonFDIlimits(currentlyat26percent).

TheFinancialServicesSectorinIndia

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GiventhattheIndianinsurancemarketislargelyunderpenetratedespeciallyin

thenon-lifesegment,thereexistsahugepotentialforinvestmentduetothe

burgeoningmiddle-classthatcanaffordtobuylife,health,disabilityandpension

products.Therecentdetarifficationofkeynon-lifeinsurancecategoriesisalso

expectedtogiveafilliptomotor,fireandengineeringinsurance,whileincreasing

focusofallplayerstowardshealthinsurance.

Capital Markets

TheIndiancapitalmarketisoneoftheoldestcapitalmarketsinAsia(theMumbaistockexchangewasestablishedin1875).Postintroductionofreformsin1992,

whentheSecuritiesandExchangeBoardofIndia(SEBI)waselevatedtoafull-

fledgedcapitalmarketregulator,capitalmarketsinIndiahaveincreasingly

progressedtowardsbecomingmorestableandmature.Animportantpolicy

initiativein1993wastheopeningofcapitalmarketstoForeignInstitutional

Investors(FIIs).ToinjectaninternationalstandardtotheIndianstockmarket,the

NationalStockExchangewasstartedin1992whichhasincreasedtransparency.

Further,sharedematerializationsystemswerealsointroducedtoenhancethe

efficiencyofthetransactioncycle.

Future PotentialThefinancialservicessectorisintheprocessofrapidtransformationwith

structuralreformsaimedatimprovingproductivityintheeconomy.Financial

institutionshavecombatedmarginpressurebyconstantlyinnovatingand

targetingattractiveconsumersegments.Thesectorisexpectedtowitness

increasingconsolidation,sophisticationandmaturityinthefuture.

Astudyofthevarioussub-sectorsintheIndianfinancialservicesspacefroma

perspectiveofthemarketandregulatoryenvironmentandtheSouthAfrican

companiescapabilitiesandstrengths,enablesidentificationofsectorswith

relativelyhighentrypotential.

Keysub-sectorshavebeenanalyzedinthefollowingsectiontoidentifyattractive

opportunitiesforinvestmentbySouthAfricanplayersusingamulti-pronged

approach.

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Consumer FinanceGrowthintheconsumerfinancesegmentinIndiaismainlydrivenbyanincrease

inthepercapitaincome,increaseinworkingpopulationvis--vispopulationbase

andincreasingconsumerism.Increasingcompetitionandshrinkingmarginsinthe

commerciallendingspacehasledtoashiftinfocustoretaillending.The

consumerfinancesectorreachedamarketsize~USD51billioninFY 2007,

registeringarobustCompoundedAnnualGrowthRate(CAGR)of29percent

between2002and2007.

Consumer Finance Disbursement trend (2000-2007)

TheaggressivegrowthplansofleadingIndianprivatesectorbanksandNBFCs

willleadtoarapidincreaseinassetpenetration,especiallyinthesemi-urbanand

rurallocationswherecompetitionisnotasintense.Thehighgrowthpotentialand

thefragmentednatureoftheIndianconsumerfinanceindustryareincreasingly

attractingglobalplayers.Stronggrowthdriversareexpectedtosustainthe

currentgrowthalbeittemperedbytheprevailinghighinterestrateinthemedium

term.

NewerNBFCs,suchasRelianceCapitalandFutureCapitalarealsorampingup

theiroperations.Consolidationisanticipatedintheconsumerfinancesectorin

thenexttwoyears,whichisexpectedtoresultinafewdominantplayers

emerginginthemarket.

InvestmentOpportunitiesinthe

IndianFinancialServicessector

Source:SSKIreport(NBFCReport)

12

Fy2000Fy2001Fy2002Fy2003Fy2004Fy2005Fy2006Fy2007


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SME FinanceSmallScaleIndustries(SSI)isoneofthesignificantsegmentsoftheIndian

economy,contributingabout30percent8 ofIndiasGDPacrosstrade,

manufacturingandservicesandisalsothelargestemploymentproviderinthe

country.IndiahasavibrantSMEsector,whoseroleintermsofemployment

creation,andupholdingtheentrepreneurialspiritandinnovation,hasbeencrucial

infosteringcompetitivenessintheeconomy.TheIndianSMEsectorcomprises

95percent9 ofalltheindustryestablishments.

SMElendingenableshigherspreadsvis--viscorporatebankingandalsohas

attractivefeeincomeopportunitiesforplayers.SMElendingalsohassignificant

potentialforwalletexpansionbybundlingtrade,cashandforeignexchange

productsandservices.PlayersareincreasinglyofferingadvisoryservicestoSME

customerstoemergeastheirpreferredfinancialsolutionsproviderandpartner

themingrowth.

TheSMEfundingopportunityisestimatedtobeaboutUSD45billion 10 currently

withoutincludingthebenefitsofcross-sellingretailfinanceproducts.Indian

SMEsrequireadvisoryservicesinseveralareassuchascountry/sectoranalysis;

capacitybuildinginareassuchasqualityandsafety;andfeebasedopportunities

suchasloansyndication.Theattractivefee-incomepotentialandhigher

profitabilityisexpectedtoresultinarapidgrowthoftheSMEfinancingmarketto

reachlevelscomparablewithcommerciallending.

Agri and Rural FinanceRuralIndiaishometomorethantwo-thirdsofIndiaspopulationandcontributes

almosthalfofIndiasGDP.However,thepenetrationofbankingservicesin rural

IndiaremainssignificantlylowerthaninurbanIndia.TheGovernmenthas

identifiedfinancialinclusionasakeypolicyobjectiveandhastakenseveral

initiativesinthisdirectionincludingprioritysectorlendingnorms,Kisan(farmer)

CreditCardsandNoFrillsbanking,amongothers.

Thekeychallengesinvolvedincateringtotheruralmarketincludetappingthe

heterogeneouscustomerbasedispersedacrosswideterritories,smallerticket

sizepertransaction,lowtechnologyawarenessandusage,largelycash-based

transactionsandlackofcreditinformation.Thesechallengesarebeingtackledby

innovativechannelsincludingtechnology-enabledkiosks,biometriccardsandSelf

HelpGroups(SHGs).SHGsarebeingincreasinglyusedasacreditdeliveryand

managementchannelbecauseoftheirefficiency,costeffectivenessand

specialized/localknowledge.

8Source:MinistryofSmallScaleIndustries

9Source:MinistryofSmallScaleIndustries

10Source:KPMGanalysis

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Astrongbalancesheetwithlowcostofcapital,soundprojectappraisal

capabilitiesandappetiteforIndiassovereigncreditriskarecriticalforsuccess.

TherecentupgradeofIndiassovereignratingtoinvestmentgradeisexpected

tosignificantlyeasesupplysideconstraintstoinvestment.

Life InsuranceTheIndianlifeinsuranceindustryhasexperiencedtremendousactivitysincethe

openingupoftheinsurancemarketin2000toprivateandforeigninvestments.

Thoughtheindustryisstilldominatedbythepublicsectorbehemoth,theLifeInsuranceCorporationofIndia(witha64percent 12 marketshareinFY2007),

privateplayersarecatchinguprapidly.Thenewentrantshavebeenabletogarner

marketsharebyaggressivelybuildingthedistributionnetwork(intheformof

agents)andreachingruralandsemi-urbanareas,totakeonthemarketleader.

Besides,theprivateplayersarefocusingonunit-linkedpolicies,whichhave

contributedtotheirincreasingmarketsharevis--visLICinvalueterms.

Thegrowthinthelifeinsurancesectorhasbeencatalyzedbyincreased

awarenessoftheneedforlifeinsuranceandintroductionofunitlinkedpolicies

andproductswhicharemoreacceptabletotheIndianmasses.Theinsurance

industryinIndiahastremendousgrowthpotential,duetoalargepopulation,fast

andrapidgrowingeconomyandconstantimprovementinthestandardofliving.

Besides,lifeinsurancepenetrationinIndiaislow,incomparisontoother

developednations.

LifeinsurancepenetrationinIndiaisslatedtogrowrapidlyduetotheincreasing

reachofplayersinTierIIandTierIIIcities.Micro-insuranceisexpectedto

significantlyincreasethesizeofthetargetpopulationasitincreasesthe

affordabilityoftheproduct.TheanticipatedincreaseinForeignDirectInvestment

(FDI)limitfromthecurrent26percentisexpectedtospurtheentryofglobal

playersintothissector.ThemarketsizeforFY2007wasUSD18.9billion,andis

projectedtogrowtoUSD41.1billionbyFY2010.

Life Insurance Market Size: Current and Projected

Source:IRDA

12Source:IRDAwebsite

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Non-life InsuranceTheIndianNon-lifeinsurancesectorwitnessedtheentryofseveralglobalmajors

afterthesectorwasopeneduptoprivatesectorplayersintheyear2000.The

entryofprivatesectorinsurersmarkedaparadigmshiftinthisindustryandhas

triggeredseveralchangesinproductfeaturesandservicelevels.However,the

growthpotentialwasnotfullyrealizedduetofixedtariffsandrelativelylowscope

forcustomization.

Indiahasanextremelylowinsurancepenetrationwithtremendousscopefor

improvementtoreachlevelscomparablewithotheremergingmarkets.Infact,

non-lifeinsurancedensityisverylowincomparisontoothernations,indicating

thetremendousopportunity.

Theentryofnewplayersandintroductionofnewproductscoupledwith

increasingdistributionreachishelpingincreaseawarenessamongcustomers.

Thechangingdemographicprofilewithrisingincomesandayoungpopulationis

alsoleadingtoincreasedpercapitaexpenditureoninsuranceproducts.

Withsaturatedmarketsinmostdevelopednations,globalinsurersare

increasinglyinterestedinIndiaforsustaininggrowth.Theanticipatedincreasein

theFDIlimitforforeigncompaniesandrecentde-tarifficationisexpectedto

significantlyincreaseglobalinterestinthissector.Thenon-lifeinsuranceindustry

iscurrentlywortharoundUSD6.1bnandisprojectedtogrowataCAGRof13

percentintheforeseeablefuture.

Growth in Non-Life Insurance: Actual and Projected

Source:IRDA,AsiaInsurancePost,KPMGResearch,CompanyReports

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Theinsuranceregulatorisencouragingtheentryofmoreplayerssothat

insurancepenetrationlevelscanfurtherincrease.Severalinitiativesarealsobeing

plannedtopromotetheestablishmentofstandalonehealthinsurancecompanies.

Therecentde-tarifficationofmotor,fire,engineeringandworkmencompensation

insurancesinceJanuary 2007,isexpectedtoresult inincreasingfocusonproduct

innovationandrisk-basedpricing.Healthinsurancehasbeenamongthefastest

growingmarketsegmentsinrecenttimesandisexpectedtocontinueshowinga

minimumgrowthof30percentgoingforward.

Asset ManagementTheIndianassetmanagementindustryhascomealongwayfrombeingasingle

playerindustry(UnitTrustofIndia)foralmost23yearstoafast-growingsector

with32players13 todayandseveralmorewaitinginthewings.Investorshavea

widevarietyofschemesaswellasfundhousestochoosefrom.

Atpresent,theindustrymanagesassetsamountingto approximatelyUSD97.8

billion14 (June2007)butisstillinitsinfancywhencomparedtoglobalstandards.

TheratioofAssetsUnderManagement(AUM)toGDPisjust6percentinIndia

comparedto20-85percentindevelopedeconomies.

AUM as a percent of GDP (2006)

Theassetmanagementsectoriswitnessinghighgrowthinrecenttimesdueto

severalfactorsincludingrisingincomes,increasingawarenessoffinancial

products,focuseddistributionefforts,strongequitymarketgrowthandrobust

performanceofleadingfunds.

Complex,innovativeandsophisticatedproductsformasmallpartoftheindustry

AUMatpresent.However,goingforwardwithrisinginvestorawareness,these

schemesareexpectedtoattractgreaterinvestment.

Source:CLSAAsiaPacificMarkets

13Source:AMFIwebsite

14Source:AMFIwebsite

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WiththeIndianeconomygrowingatarapidpaceandthecapitalmarkets

performingwell,theassetmanagementindustryinIndiaislikelytowitnesshigh

growthrates.Increasingretailparticipationandlargeamountofsurplusliquid

fundswithinstitutionalInvestors,theindustryisexpectedtogrowataCAGRof

25percent15 betweenFY2007andFY2010.

PensionsThecurrentdemographicdividendthatIndiaenjoysmaynotlastindefinitely.Asa

resultofdecliningbirthratesandlongerlifeexpectancy,theelderlywillconstitutealargeproportionofthetotalpopulation.Eventoday,whilethepopulationofthe

elderlyisproportionatelylower,inabsoluteterms,itistillaverysignificant

number.Thechangingdemographicdynamicscallsforacriticallookatthe

pensionsupportsysteminIndia.Lessthan10percent16 oftheestimated

workingpopulationinIndiaiscoveredunderformalold-ageincomesecurity

schemes.ThepenetrationbywayofthePublicProvidentFund(PPF)accountis

lessthan1percentoftheentireworkingpopulation.

Inthepastfewyears,therehavebeennumerousdiscussionsonpermitting

participationfromtheprivatesectorandforeignplayersintheIndianpensions

industry,poweredbytheproposedintroductionoffavorableregulatoryinitiatives.

Theregulationsplannedforthepensionandprovidentfundindustriesrequire

structuralandproceduralmodifications.

TheformationoftheinterimPensionFundRegulatoryandDevelopmentAuthority

(PFRDA)kicked-offthereformprocess.Thepensionreformsinthecountrythen

acquiredmomentumwiththeannouncementfromReserveBankofIndia(RBI)

regardingnormsformanagementofpensionfundsbybanks.

Implementationofpensionsectorreformsisexpectedtohaveasalutaryimpact

ontheIndianpensionandprovidentfundsector.PFRDAhasalreadylaiddown

theeligibilitycriteriaforpensionfunds.ThoughtheRBInormsintendto

eventuallypermitprivateandforeignbankstoenterthebusinessofpension

fundsmanagement,thedefinitionoftheroadmapforfuturegrowthisstill

awaited.

Investment BankingInthelastfewyears,thenumberofinvestmentbanksoperationalinIndiahas

increasedsignificantly,becauseoftheriseinthenumberofglobalmergerand

acquisition(M&A)dealsinvolvingIndiancompanies.High-valuedealssuchasthe

Tata-CorusdealandtheHutchison-Essarstakesaleiscreatingfurtherinterest

amongstglobalplayers,withrespecttotheIndianinvestmentbankingspace.

15Source:KPMGanalysis

16Source:KPMGPensionreport

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M&AAdvisoryhasbeenthemostsignificantcontributortoInvestmentBanking

revenues.WithanincreasingnumberofIndiancompanieslookingatoverseas

acquisitions,thisactivityislikelytoincreaseinprominence.

Thestrongregulatorymechanismandcapitalmarketenvironmenthasattracted

theinterestofleadingWallStreetinvestmentbanks,whoarefocusingontheir

Indiaoperations.Deregulationhasalsoopenedopportunitiestooffermore

serviceslikeriskmanagement,distresseddebt,proprietaryinvestingand

leveragedfinance,apartfromotherconventionalofferings.

Investmentbankingisapeople-drivenbusinessandrequireshumanresources

withexperienceintheindustry,trackrecordofsuccess,abilitytowinand

executedeals,strongnegotiationskillsandexcellentrelationshipmanagement

skills.Goingforward,playersneedtofocusonskilledprofessionalshaving

domainexpertise,giventhatincreasedactivityintheinvestmentbankingspace

hasresultedinatalentcrunch.

Securities BrokingTheIndianstockbrokingindustryiswitnessingincreasedglobalattentionwith

increaseinnumberofmergersandacquisitionsandrisingtradingvolumes.The

continuedForeignInstitutionalInvestor(FII)interestintheIndiancapitalmarkets

androbuststockmarketperformanceisfuelingretailinvestorinterestinequity

products.Theimmensepotentialofferedbyleveragingthelatentdemandinsemi-

urbanandruralmarketsisdrivingaggressiveexpansionplansofleadingIndian

brokinghouses.

TheIndianbrokingindustrycurrentlyincludesanumberofplayerswitharegional

orsectoralfocus.Largebrokeragehousesaregrowingandscalingupthrough

geographicalexpansion.Thisprocessisexpectedtocontinuewiththeentryof

globalmajorsintotheindustry.However,increasingcompetitionisexpectedto

reducemarginsintheindustrytherebyimpactingprofitability.

TheentryofaggressiveplayerssuchasRelianceCapitalthroughitsportal

RelianceMoneyisexpectedtosignificantlyincreasethereachandpenetration

ofsecuritiesbrokingservicesinIndia.Severallargeglobalplayersarealsomulling

anentryintotheIndianmarketinthenearfuture.

Thissectoristhereforesettowitnessincreasingactionwithintensifyinglevelsof

competitionamongexistingplayersandnewentrantsleadingtotheemergence

oflargeplayerswithapan-Indiapresenceandasignificantshareinthetotal

marketvolumes.Playersarealsopositioningthemselvesasretailfinancial

servicesbrandstoimproveshareofwalletandenhancecustomerretention.

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Wealth ManagementTheboomingIndianeconomy,risingstockpricesandincreaseinsalarieshas

turnedthespotlightontheWealthManagementsector.Keyproductsand

servicesincludeinvestmentadvisory-indebt,equity,mutualfundsand

derivatives;besidestaxadvisory;estateplanning;andinsuranceadvisory.

Thewealthmanagementspacewashithertoconsideredthepreserveofsome

foreignbanks,whichofferedexclusiveservicestoselecthighnetworth

customers.Today,severalprivatebanksoffertheseservices,whilethereisvirtuallynoparticipationfromthelargenationalizedbanks.Further,international

playersareincreasinglyofferingdedicatedwealthpropositionswithmoreevolved

productsthantheirIndiancounterparts.

ThegrowingnumberofaffluentIndianscoupledwithincreasingawarenessof

financialplanninghasresultedinexpandingthebaseofpotentialwealth

managementcustomers.

Liquid Assets of HNIs

Source:DatamonitorReportsonWealthManagement

Source:DatamonitorreportsonWealthManagement

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Structured FinanceTheIndianStructuredFinancemarketisdominatedbysecuritizationingeneral

andAssetBackedSecuritization(ABS)inparticular.Securitizationwasintroduced

in1992;sincethen,volumeshavebeenscalingnewpeakseveryyearwitha

cumulativegrowthrateofnearly100percentbetween2002and2005.

Structured Finance Market Volumes

BaselIIcapitalconstraintsareexpectedtoresultinincreasingparticipationby

publicsectorbanksandnewNBFCspursuingaggressivegrowthstrategies.The

lowsizeofretailsecuritizationinrelationtotheunderlyingretailfinancemarket

highlightsthetremendousgrowthpotentialinthissector.

Giventherapidincreaseincreditoff-takeandtheproliferationofNBFCs,

securitizationwouldactasanincreasinglyimportantfundingtoolinthefuture.

TheexpectedlaunchofRealEstateMutualFunds(REMFs)inthenearfuturemay

alsofacilitateinstitutionalizationoftherealestatesectorandencourage

ResidentialMortgage-BackedSecurity(RMBS)andCommercialMortgage-Backed

Security(CMBS)issuance.Withincreasingregulatoryclarityandmovesto

enhanceliquidityofsecurityreceipts,thissectorisonthecuspofrapidgrowth

andisattractinginterestfromglobalplayers.

Private EquityInthepastfewyears,IndiahasbecomeoneofthetopfivePEdestinationsinthe

AsiaPacificregionwithPEfundsconstitutingover25percentofFDIinflowsinto

India.Liberalforeigninvestmentpolicyencouragingforeignparticipationand

availabilityoftargetsatattractivevaluationsrelativetootheremergingmarkets

haveresultedinarapidgrowthofprivateequityinvestmentsinthecountry.

Source:ICRAreport

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Private Equity Market Size

Privateequitycapitalisbeingpreferredovertraditionalsourcesoffundsto

leveragetheirbrandequity,sectorknowledgeandrelationships.

PEinvestmentinIndiawasearlierlimitedtotheITandITESindustrywithafocus

onearlystageventures.However,inrecenttimes,PEinvestmenthasextendedtoalargenumberofsectorsbesidesITandITES.PEplayersareincreasingly

focusingonattractiveopportunitiesinrealestate,mediaandentertainment,

telecom,financialservicesandmanufacturingandautoindustry.With

investmentsofoverUSD20-2517 billionneededbyIndiaintheinfrastructure

sectoralone,thecurrenthighgrowthtrajectoryintheprivateequitysectoris

expectedtocontinueinthemediumterm.

Distressed AssetsIndiahasanestimatedstockofUSD40billion 18 innon-performingassets,

includingsouredcreditsatcooperativelenders,non-bankingfinancecompanies

andloanswrittenoffbybanks,asperARCIL,theleadingIndianasset

reconstructioncompany.FollowingthelandmarkenactmentoftheSARFAESIAct

(SecuritisationandReconstructionofFinancialAssetsandEnforcementof

SecurityInterestAct)in2002,investorappetiteforIndianassetsaswellasnon-

performingloansisgrowingastheeconomyexpandsatarecordpace.

Thecountry'sgrowthhaspushedupthevalueoftheplants,machinery,landand

buildingsusedascollateralbyborrowersnowindefault,makingthetaskof

recoupingloanseasier.RegulatorymeasuresbywayofrecognitionofPass-

ThroughCertificates(PTCs)assecuritiescouldprovideasignificantboosttothe

marketbyallowingFIIinvestmentintothemarket.

Source:Evalueserve,IVCA,GTandVentureIntelligenceIndia

17Source:BusinessWorldandKPMGanalysis

18Source:RBI,ARCIL

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Globalplayersarethereforecontemplatingentryintotheassetreconstruction

space,giventheattractivenessoftheopportunity.Theentryofmoredomestic

andforeignplayersintothisspaceinthefutureisalsoexpectedtoresultin

heightenedactivity,therebyenhancingpricingandrecovery.

Real Estate FinanceTherealestateandconstructionsectorinIndiahaswitnessedanunprecedented

boominrecenttimes.Strongresidentialandcommercialdemandinmajorcities

hasresultedinrapidprojectdevelopmentandcapacitycreation.

Inthepastfewyears,realestatefundingwitnessedadramaticchangewiththe

automaticapprovalof100percentFDIinvestment.Theincreasingtransparency

andhighreturnsoftheIndianrealestatesectorhaveattractedstrongforeignand

domesticinvestorstoIndianrealtyfirms.Indianrealestatemajorshavealsobeen

abletoleveragethecapitalmarketsandoverseas(AIM)routestoraisecapital.

Therealestatefinancesectorisanticipatedtobeveryactiveinthenearfuture

withseveralanticipateddevelopmentswhichinclude:

InfluxofforeignfundsThefundsavailableforrealestateinvestmentis

expectedtoexceedUSD12billion.Globalfundshavealreadyraisedover

USD12-15billion19 forinvestmentinIndianrealestateinthenextfiveyears.

IntroductionofREMFsTheanticipatedintroductionRealEstateMutual

Funds(REMFs)intheIndianmarketisexpectedtosignificantlyincreasethe

availabilityoffundingfromretailinvestors

Regulations-FDIinrealestateissettowitnessincreasedregulatory

scrutinytocontaintheassetpricebubble.Thepreferentialequityand

convertibledebenturerouteshavebeenvirtuallyclosedduetonew

regulations.FIIinvestmentinrealestateislikelytohavesimilarrestrictionsin

thefuture.

Leveraged FinanceIndiancorporatesarealsoincreasinglyusinganacquisition-ledinorganicgrowth

strategytoexpandtheircapabilitiesandassets.Thekeydriversforthegrowthof

leveragedfinanceinIndiaincludetheincreasingglobalambitionsofIndian

corporatesaspartoftheirgeographicaldiversificationstrategy.

IntheIndiancontext,LeveragedBuy-outs(LBOs)havebeenmorecommonin

themanufacturingsector.Thisisduetothepresenceofcollaterals,intheformof

fixedassets,aswellassuccessfultrackrecords.Further,technologyandservice

companiesentailhigherbusinessriskandalsohaveminimalfixedassetsas

security.

19Source:ICICISecuritiesReport

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Theleveragefinancesectorissettowitnesscontinuedgrowthowingtoa

favorableeconomicenvironment,highbusinessconfidence,andeasing

regulatoryrestrictionswithcorporates.Aspertherecentregulations,corporates

areallowedtofundupto200percentoftheirnetworthtooverseassubsidiaries

toacquireoverseastargets.Risingprivateequityinflowsandimprovementin

Indiassovereigncreditratingareenablingincreasedaccesstoforeigncapitalat

competitiverates.Itisexpectedtofuelthegrowthofthissectorinthemedium

term.

Non-Recourse LendingTheIndianGovernmentsCommitteeonInfrastructurehasenvisagedmassive

infrastructurerelatedinvestmentsduringtheseventhplanperiod(2007-2012).

Givengovernmentalprioritiestoreininthefiscaldeficitandincreasespendingin

thesocialsector,publicinvestmentmustbesupplementedbyPublic-Private

Partnerships(PPPs).Inmanycases,investmentmayhavetobemadeexclusively

bytheprivatesector.

Thepoliticalconsensusoninfrastructuredevelopment,coupledwithacceptance

ofuserchargesandeaseoffinancing,isnowattractingprivateplayerstothe

Indianinfrastructuresector.

Theinfrastructuresectorisexpectedtowitnesshighgrowthwithinvestments

estimatedatUSD500billioninthenextfivetosevenyears.Power,roadsand

non-residentialrealestateareexpectedtobethekeysectorsforthenon-

recourselendingneededtosupportthis.

Thenearfuturecouldalsomarktheculminationofseveralinnovationsin

financingmodelsandthecreationofalternativesourcesofcapital,spurringthe

developmentofthissector.

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Inthelastdecade,Indiahasemergedasapreferreddestinationforforeign

capitalflows.PrivateequityinvestorsandFIIshavecontributedtothe

strengtheningoftheIndiancapitalmarkets.

AsoundregulatorymechanismhasplayedanimportantroleinshapingtheIndian

FinancialServicessector.InIndia,certainagenciesareresponsibleforthe

regulationandsupervisionoftheinstitutionsandmarketparticipantsinthe

financialsector.

TheregulatoryframeworkforinvestmentinIndiaissummarizedinthefollowing

sections.

Regulators in Financial ServicesTheReserveBankofIndia(RBI),thecentralbank,regulatesandsupervisesa

majorpartofthefinancialsystem.ItssupervisorydomaincoversCommercial

Banks,Non-BankingFinancialCompanies(NBFCs),UrbanCooperativeBanks

(UCBs),someoftheAll-IndiaFinancialInstitutions(AIFIs)andAsset

ReconstructionCompanies(ARCs).SomeAIFIs,inturn,regulateand/orsupervise

otherinstitutionsinthefinancialsector.Accordingly,theRegionalRuralBanks

(RRBs)andCentralandStateCooperativeBanksaresupervisedbytheRBI

throughtheNationalBankforAgricultureandRuralDevelopment(NABARD),and

theHousingFinanceCompaniesthroughNationalHousingBank(NHB).

EntitiesintheinsurancesectorareregulatedbytheInsuranceRegulatoryand

DevelopmentAuthority(IRDA).Theapexregulatorybodyforpensionfundsisthe

PensionFundRegulatoryandDevelopmentAuthority(PFRDA).

TheSecuritiesandExchangeBoardofIndia(SEBI),thecapitalmarketregulator,

regulatesthecapitalmarketsandsupervisesseveralinstitutionsincludingthe

stockexchanges,mutualfunds,assetmanagementcompanies,securitiesdealers

andbrokers,merchantbankers,creditratingagencies,FIIs,venturecapitalfunds,

etc.

RegulatoryFrameworkfor

FinancialServicesinIndia

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Foreign Investment in India

Theregulatoryapprovalprocesshasbeensubstantiallyliberalizedtofacilitate

investmentintoIndia.TheforeigninvestmentintoIndiaisdepictedinthechart

below:

Complete Rangeof commercial

banking

activities

Diversified withregards to

products as also

footprint ofoperations

Comprise :

Public Sector

Banks

Old Private

Sector Banks

New Private

Sector Banks India Branches

of foreignbanks

Developmentfinance

institutions

sponsored byState or Cenral

Goverments

Role largely to

develop marketsthrough

refinance and

developmentactivities

Comprise :

Development

Finance

Institutions

SpecializedFinance

Institutions

Investment

Institutions

Refinance

Institutions

Regional/Community/orie

nted Banks

Perform role of

regionalaggregate is in

semi urban &

rural areas

Extensivecoverage with a

developmental

role infamiliarizing the

economically

backwardsections with

banking habits

Financialintermediaries

involved in

equipmentleasing, hire

purchase,

lending andinvesting

Two broad

categories :

Deposit taking

Non-deposit

taking

SARFAESIRegistered

Companies

Life Insurance

Non-lifeInsurance

AssetManagement

Broking

Wealth

Management/Po

rtfolioManagement

Services

Venture capital

Fll

FVCI

MerchantBankers

Unde writers

Custodians &Depositaries

Regulatory roleincludes

designing of

basic

Products, andfixing auennes

for investment

Scheduled

CommercialBanks

Financial

Institutions

Co-operative

Banks

NonBanking

Finance

Companies

(NBFC)

Asset

Reconstruction

Companies

Insurance

Companies

Capitalmarket

intermediaries

PensionFund

Managers/Inter

mediaries

Reserve Bank

of India

(RBI)

InsuranceRegulatory &

Development

Authority India

(IRDA)

Securitiesand

Exchange

BoardofIndia

(SEBI)

Pension FundRegulatory &

Development

Authority of India

(PFRDA)

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RBIpermitsanyforeignbankwithpresenceinIndiatoholdsharesinanyother

privatesectorbankonlyupto5%ofthepaidupcapitaloftheinvesteebank.In

theinterestofdiversifiedownershipofthebanks,nosingleentityorgroupof

relatedentities(exceptforeignbankandprivatesectorbank)arepermitted

shareholdingorcontrol,directlyorindirectly,inanybankinexcessof10%ofthe

paidupcapitaloftheprivatesectorbank.Anyhigherlevelofacquisitionwillbe

withpriorapprovalofRBI.

FDIininsurancesectorispermissibleupto26%oftheIndianjointventurecompanyundertheautomaticroute,subjecttoIRDAapproval.

Investment with prior approval of the Government

UnderthepriorGovernmentapprovalroute,investmentinactivities/industriescan

bemadebyseekingapproval,wheretheautomaticrouteisnotavailableor

previousventureinIndiainthesamefieldorifinvestmentinexcessof24%in

smallscaleunitisrequiredorifinvestmentexceedssectoralcaps.Suchapproval

isgrantedbytheForeignInvestmentandPromotionBoard(FIPB).

Policy on FVCI Investment

AForeignVentureCapitalInvestor(FVCI)isonethatisincorporatedand

establishedoutsideIndia,isregisteredundertheFVCIRegulations,2000laid

downbySEBIandproposestomakeinvestmentsinaccordancewiththem.

Theregulationsstipulateinvestmentofatleast66.67percentoftheinvestible

fundsintounlistedequitysharesofaVentureCapitalUndertaking(VCU).AVCUis

definedasadomesticcompanywhosesharesarenotlistedandonethatis

engagedinthebusinessofprovidingservices,productionormanufactureof

articlesorthingsbutdoesnotincludeactivitieswhicharespecifiedinthe

negativelist(sectorsinwhichforeigninvestmentisnotcurrentlypermissible).

Further,notmorethan33.33percentoftheinvestiblefundsmaybeinvested

towardsthefollowingpurposes:

SubscriptiontoanInitialPublicOffering(IPO)ofaVCU

Anydebt/debtinstrumentofaVCUinwhichtheFVCIhasalreadymade

equityinvestments

Preferentialallotmentofsharesofalistedcompanysubjecttoalock-in

periodofoneyear

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Policy on FII Investment

ForeignInstitutionalInvestors(FIIs)aregovernedbySEBI(FII)Regulations,1995.

ThefollowingentitiesareeligibletobeclassifiedasFIIs:

Pensionfunds,Mutualfunds,Investmenttrusts,Assetmanagement

Companies,Banks,Insurancecompanies,Re-insurancecompanies,Institutional

portfoliomanagers,InvestmentManagers,InvestmentAdvisors,Foreign

GovernmentAgencies,ForeignCentralBanks,InternationalorMultilateral

OrganizationsorAgenciesthereof,TrusteesorPowerofAttorneyholdersand

entitiesthathaveexistedforatleastfiveyears(Universityfunds,Endowments,Foundations,CharitabletrustsorCharitablesocieties).

Whenabankactsonbehalfofanintermediary,asubaccountisopenedforeach

oftheintermediaries'clients,toholdtheirfundsintheirname.Theaccountcan

onlybeoperated,andthefundscanonlybeused,accordingtothetermsofa

writtenagreement(PowerofAttoney)thatisgivento,andapprovedby,thebank.

EligibleentitiesforSub-accountsare:

Broadbasedfunds;proprietaryfunds;foreigncorporatesandforeignindividuals

(otherthanNon-ResidentIndiansandOverseasCorporateBodies)

FIIsarecategorizedaccordingtothepercentageofequityinvestments:

100percentequityFII-Investmentinequityandequity-relatedsecurities

shouldbeatleast70percentoftotalFIIinvestments

100percentdebtFIIlimitoninvestmentindebttobeapprovedbySEBI

Noforeigncorporateorforeignindividualtoinvestthrough100percentdebt

sub-accountroute.

TheInvestmentframeworkspecifiesthesecuritieseligibleforFIIinvestment.

Theseare:

Shares,debentures,warrantsofunlisted,listedortobelistedcompanieson

recognizedstockexchanges(otherthanAssetReconstrutionCompanies(ARCs)),securityreceipts,mutualfundunits(listedorotherwise),dated

governmentsecuritiesincludingtreasurybills,derivativestradedonrecognized

stockexchange,commercialpaper.

Investment restrictions

InvestmentbyFIIontheirownaccountorbehalfofsub-accountcannotexceed

10percentofthepaid-upequitycapitalofinvesteecompanyandincaseof

foreigncorporateorindividual,theceilingis5percentofthepaid-upequity

capitaloftheinvesteecompany.

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Further,allFIIsandtheirsub-accountstakentogethercannotacquiremorethan

24percentofthepaidupequitycapitalofanIndiancompany.Theinvestment

canbeincreaseduptothesectoralcap/statutoryceiling,asapplicabletothesaid

company.ThiscanbedonebypassingaresolutionbytheBoardofDirectors,

followedbythepassingofaspecialresolutiontothateffectbyitsGeneralBody.

Also,allFIIs/sub-accountscantransactindematerializedformthrougha

recognizedstockbrokerandonarecognizedstockexchangeandarerequiredto

giveortakedeliveryofsecurities.

Investment Vehicles for Foreign InvestorsDependingupontheirrespectivebusinessneeds,foreigncompaniesconsidering

abusinesspresenceinIndiacanchoosebetweensetting-upaliaisonoffice,

branchoffice/projectofficeorincorporatingacompany.Thiscouldbeeithera

whollyownedsubsidiaryorajointventurewithanotherperson.

Liaison office

Aliaisonoffice(LO)issetuptoactasachannelofcommunicationinIndiafor

theheadoffice.Itisnotpermittedtoundertakeanycommercial/trading/

industrialactivity,directlyorindirectly.EstablishinganLOrequirestheapproval

fromRBI,whichalsomonitorsitsactivities.

ForeigninsurancecompaniessettingupanLOinIndiawouldrequireapproval

fromtheIRDA.

Branch office/Project office

ForeigncompaniesundertakingprojectsinIndiacansetupproject/siteoffices

(POs).ThesettingupandoperationoftheseofficesisregulatedbytheRBI.Prior

approvaltosetupaPOisnolongerrequired(subjecttocertainconditions).APO

canonlyundertakeactivitiesrelatedtoandincidentaltotheexecutionofspecific

projectsinIndia.

Companiesengagedinmanufacturingandtradingactivities,ontheotherhand

maysetupBranchOffices(BO).ForeignBankscanpresentlyset-upoperationsin

IndiaasBOwithpriorapprovaloftheRBI.ABOcancarryoutactivitiespermitted

byRBI;however,theactivitiesgenerallydonotincludemanufacturing(unlessset

upinanSEZ)andretailtrading.

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Local subsidiary or Joint Venture Company

Asubsidiaryorajointventurecompanycanbeformedeitherasaprivatelimited

companyorapubliclimitedcompany(exceptinsurancejointventurewhichcan

beonlypubliccompany).Acompanyisregulatedinteralia(amongstotherthings)

bytheRegistrarofCompanies(ROC)undertheCompaniesAct,1956.

Thekeydifferencesbetweenaprivatecompanyandapubliccompanyhavebeen

setoutinthetablebelow:

Statutory requirements for formation of companies

Typically,theincorporationprocessenvisagesfilingofvariousdocuments/

informationwiththeROC.Afterverifyingthedocuments,theROCissuesa

CertificateofIncorporation,whichistheproofofincorporation.Aprivate

companycancommencebusinessimmediatelyafterobtainingthiscertificate.A

publiccompanyisrequiredtoobtainaCertificateofCommencementof

BusinessbyfilingadditionaldocumentswithROC.

Sr. No. Particulars Private Company Public Company

1. M inimumnumber ofshareholders Two Seven

2. Maximum numberof shareholders Fifty Unlimited

3. Minimumnumberofdirectors Two Three

4. Maximumnumberofdirectors Seven

Twelve(canbeincreased

withGovernment

approval)

5.Minimumpaid-upcapital

requirementINR1,00,000(Approx.USD2200)

INR5,00,000(Approx.USD11000)

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AboutKPMG

KPMGistheglobalnetworkofprofessionalservicesfirmsofKPMGInternational.

Ourmemberfirmsprovideaudit,taxandadvisoryservicesthroughindustry

focussed,talentedprofessionalswhodelivervalueforthebenefitoftheirclients

andcommunities.Withnearly1,13,000peopleworldwide,KPMGmember

firmsprovideservicesin148countries.

KPMGsmemberfirmsinIndiawereestablishedinSeptember1993.As

membersofthecohesivebusinessunit,theyrespondtoaclientservice

environmentbyleveragingtheresourcesofagloballyalignedorganizationand

providingdetailedknowledgeoflocallaws,regulations,marketsandcompetition.

InIndia,KPMGsrangeofservicesincludesAudit,Tax,andAdvisoryservicesto

over2,000internationalandnationalclients.Clientsrangeacrossfivesectors

namelyfinancialservices;consumermarkets;industrialmarkets;information,

communicationandentertainment;andinfrastructureandgovernment.KPMG

hasofficesinIndiainMumbai,Delhi,Bangalore,Chennai,Hyderabad,Kolkata,

andPune.ThefirmsinIndiahaveaccesstomorethan2,200Indianand

expatriateprofessionals,manyofwhomareinternationallytrained.KPMG

providesrapid,performance-based,industryfocusedandtechnologyenabled

services,whichreflectasharedknowledgeofglobalandlocalindustriesand

experienceoftheIndianbusinessenvironment.

KPMGalsooperatesIndiaDesksinafewcountriesaroundtheworld.TheobjectiveoftheIndiaDeskistohelpclientsonIndiarelatedissuessuchas

conductingindustryreviews;developingbusinessstrategiestoinvestinnew

projects;identifyingopportunitiesforpartnershipsandacquisitions;rendering

transactionadvisory,andprovidingadvisoryoninvestmentstructuresfroma

regulationandtaxperspective.

KPMG'sFinancialServices(FS)practicehasundertakenanumberofpioneering

projectsinsectorssuchasconsumerbanking,creditcards,SMEbanking,agri&

ruralbanking,lifeinsurance,generalinsurance,assetmanagementandwealth

managementamongstothers.Theseprojectscoversolutionssuchasmarket

assessment,strategyformulation,businessplanning,policyformulation,demand

assessment,partnerselection,processdesign,businesscontinuityservicesand

programmanagement.

KPMGassistscompaniesinthefinancialservicessectorwhoareexploringentry

intoIndia.

SuccessfulimplementationofanIndiaentrystrategyrequiresastructured

approachrightfromthestrategydevelopmentstagethroughimplementation.

Thisapproachencompassesawiderangeofservicesfromassessingmarket

potentialtodefiningthestrategyandmakingitoperational.

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SuccessfulimplementationofanIndiaentrystrategyrequiresastructured

approachrightfromthestrategydevelopmentstagethroughimplementation.

Thisapproachencompassesawiderangeofservicesfromassessingmarket

potentialtodefiningthestrategyandmakingitoperational.

Market Assessment andBusiness case

Inlinewithyourglobalpositioningandstrategy.Thisincludesanassessment

ofvariousrelevantaspectsmarketsizing,growthpotential,customer

segments,products,competitors,regulatoryissuesandfuturetrends

Evalution of marketentry options

Evaluatingtherightapproach(whollyownedsubsidiary,JVandacquisition)

forenteringtheIndianmarket

JV Partner / AcquisitionTarget Strategy and Search

Developmentofkeyselectioncriteriaandassessmentofpotentialpartners/

acquisitiontargets(forJV/acquisitionentryroute)basedonstrategicfit,

brand,financialstrength,distributioncapabilities,customerbaseetc.

Negotiationsofenterprisevalueandclosedealwithstructureandtransaction

terms

Capital Structuring andTax Advice

Assistingnewentrantsontaxandregulatorycompliancearoundentity

structuring,companyregistrationanddraftingtheJVandShareholdersAgreements

Business strategyand planning

Developmentofabusinessstrategyandfinancialplan,drivenbythe

strategicvisionoftheJVpartners.Theplanincludesstrategiesfortarget

segmentsproducts,distribution,geographies,operations,andcustomer

services

Operation set up

Designinganoperatingandreportingstructure,organizationmodel,

performancemanagementframework,informationtechnologystrategyand

applicationselection

Implementation androll-out

Programmanagementservicestosupporttheplanning,prioritising,monitoringandreportingofallimplementationactivities.KPMGsleverages

itsunderstandingofrisk,toassessandmitigateprogramrisks,thusenabling

thesuccessful,time-boundimplementationofthenewventure.

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KPMGinIndiaMumbai

KPMG House, Kamala Mills Compound

448, Senapati Bapat Marg,

Lower Parel, Mumbai 400 013

Tel: +91 22 39896000

Fax: +91 22 39836000

Delhi

4B, DLF Corporate Park

DLF City, Phase III

Gurgaon 122 002

Tel: +91 124 2549191

Fax: +91 124 2549101

Pune

703, Godrej Castlemaine

Bund Garden

Pune 411 001

Tel: +91 20 30585764/65

Fax: +91 20 30585775

Bangalore

Maruthi Info-Tech Centre

11-12/1, Inner Ring Road

Koramangala, Bangalore 560 071

Tel: +91 80 39806000

Fax: +91 80 39806999

Chennai

Wescare Towers

16 Cenotaph Road,Teynampet

Chennai 600 018

Tel: +91 44 24332533

Fax: +91 44 24348856

Hyderabad

II Floor, Merchant Towers

Road No. 4, Banjara Hills

Hyderabad 500 034

Tel: +91 40 23350060

Fax: +91 40 23350070

Kolkata

Park Plaza, Block F, Floor 6

71 Park Street

Kolkata 700 016

Tel: +91 33 22172858

Fax: +91 33 22172868

in.kpmg.com

ContactUs:

Pradeep Udhas

Head - Markets, KPMG in India

Tel: +91 22 3983 5400

email: [email protected]

Sanjay Aggarwal

National Industry Director

Financial Services

Tel: +91 22 3983 5102


Ravi Trivedy

Executive Director

Advisory Services

Tel: +91 22 3983 5604


Narayanan Ramaswamy

Director

Advisory Services

+91 44 3984 4900


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