- 131 -

TESTING FOR WEAK-FORM MARKET EFFICIENCY IN BSE AND

NSE USING VARIANCE RATIO TESTS
1
P Raja Lingam Goud, School of Economics, University of Hyderabad, Gachibowli,
Hyderabad-500046, A.P. can be reached at email: bond_raju19@yahoo.com
2
Anoop S Kumar, School of Economics, University of Hyderabad, Gachibowli, Hyderabad-
500046, A.P. can be reached at email: taichichuaan@gmail.com
3
Mahesh Nenavath, School of Economics, University of Hyderabad, Gachibowli,
Hyderabad-500046, A.P. can be reached at email: nmsnaik@gmail.com
ABSTRACT
This study attempts to analyze weak form market efficiency in two of the major
Indian stock markets BSE and NSE, employing variance ratio tests. Three individual
tests as well as three joint tests were used for obtaining a comprehensive result. Daily
values of 14 indices were selected from BSE and NSE over a period ranging from 01/
04/2004 to 20/11/2012.The test results show a mixed picture while considering the
individual return series. However, each series shows evidence rejecting weak-form
market efficiency thats captured by one or the other tests employed. To conclude, it
could be said that BSE and NSE markets are not weak form market efficient overall.
KEY WORDS
BSE, Indices, NSE, Variance ratio, weak form.
INTRODUCTION
In any country, capital market is an important body which plays a significant role in
the economic development. Further, a buoyant capital market is an indicator of an afferent
economy. The price for funds is set in the capital market and the efficiency of this pricing
process is essential for ensuring that these scarce resources (capital) are used optimally.
If there is any inefficient performance of the capital market in pricing the various instruments,
asset markets will become considerably speculative in addition to sub-optimal allocation of
funds for productive uses (CS Rao and Geetha, 1996).The expectations of the investors
regarding the future cash flows are translated or reflected on the share prices. The
accuracy and the quickness in which the market translates the expectation in to prices are
termed as market efficiency (Punithavathy Pandian, 2011)
There are three types of Market efficiencies:
1. Informational Efficiency: It measures how quickly and accurately the market responds
to new information.
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2. Operational Efficiency: It measures a market in which trading services to consumers
are provided with lowest transaction cost.
3. Allocational Efficiency: It ensures that the marginal rates of return on investment,
after being adjusted for risk are equal for all investors.
Among these efficiencies, informational efficiency is our focus point because
information is the key in determination of share prices and the key issue of the efficient
capital market (Keane, 1986). An efficient market is a market in which the market prices
of a security fully reflect all known information quickly and is thus an unbiased estimate of
its intrinsic value.
The phrase efficient market used to describe the market price that fully reflects all
available information was coined by Fama (1965). Furthermore, he classified the market
efficiency in to three forms on the basis of the information; weak form, semi-strong form
and strong forms.
Weak Form : This is also known as RandomWalk in which current prices reflect
all information found in past prices and trading data, in which an attempt is made to predict
the future on the basis of past history; which has no value because the future is complex
and dynamic.
Semi-Strong Form : In this, security prices reflect all publicly available information
such as Annual reports, corporate announcements, Forecast by experts. These public
information is quickly adjusted to stock price but it may not give much yields because
everyone has same information there is no scope for earning excess returns by predicting
the stock price
Strong-Form : Stock price reflects all public and non-public information (inside
information) on the basis of which investors can earn maximum yields by predicting the
stock price. In this form there are two versions, basic and extreme. The former is concerned
with the analysis of portfolio analysts and later deals with insider information, with this,
super profits can be earned by predicting the stock price.
In this study, 14 indices are taken fromthe two premier stock exchanges, i.e BSE and
NSE to examine the weak-form efficiency in Indian Stock market. An index is a
comprehensive measure of overall market trends basis on which, every investor takes his
decision regarding stocks.
REVIEW OF LITERATURE
Many studies have been conducted to test the efficiency of capital markets all over
the world. Here, some of the recent literature concerning about Indian Stock Markets are
reviewd.
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Sharma and Mahendru (2009) examined the efficiency of Indian Securities Market
with a sample of eleven securities listed on the Bombay Stock Exchange (BSE) by applying
runs and auto correlation tests and found that BSE is weak formefficient and they stressed
the need to strengthen the BSE regulatory capacity in order to boost investor confidence.
Hiremath and Kamaiah (2010) examined the stock return behaviour in BSE and
NSE with a sample of 14 indices relating to both exchanges between 02.06.1997 to
30.01.2009 period by using chow-Denning multiple variance ratio and Hinich bicorrelation
tests .They concluded that Indian Stock Markets are weak formefficient but not all the
time.
Sapate and Ansari (2011) tested the weak formefficiency of BSE by considering
BSE 200 index by using daily closing prices for ten years by applying auto correlation
analysis, Lung Box Q (LBQ) statistics and Runs test and finally they supported the weak-
form efficiency based on empirical evidences.
J oshi (2012) conducted a study to test the level of efficiency in Indian Stock Market
by considering 6 major indies (BSE 30, BSE 100, 200, 500, BSE small cap and BSE Mid
cap) and over the period from1
st
J an. 2011 to 31
st
Dec. 2010 by applying Run test .The
conclusion was that the Indian Stock market is inefficient in the long run but in short run it
is in efficient form.
DATA COLLECTION
Data used in this study are daily log returns of eight indices fromNational Stock
Exchange (NSE) and six indices fromBombay Stock Exchange (BSE). The data ranges
from 01-April-2004 to 20-November-2012. These indices are considered as they represent
the total market while considered together. The data related to NSE are collected from the
official website of NSE indices related to BSE are collected fromthe official website of
BSE.
METHODOLOGY
Among methodologies available to test RWH, variance ratio tests are considered
powerful tools. Lo and MacKinlay (1988) proposed the conventional variance ratio test.
Richardson and Smith(1991) proposed a joint test with a wald type statistic. Later, Chow
and Denning (1993) modified Lo-MacKinlays test(1988) to forma simple multiple variance
ratio test . Choi(1999) proposed a data-driven automatic Variance Ratio test. Wright (2000)
proposed a non-parametric ranks and signs based variance ratio tests to address the potential
limitation of Lo-MacKinlays(1988) conventional variance ratio test. Chen and Deo (2006)
proposed a test to take care of the small sample distribution problemassociated with Variance
ratio. Detailed descriptions about the tests are given in the following section
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LO AND MACKINLAY VARIANCE RATIO TEST (1988)
The maintained RWH for a time series X
t
can be given by the following equation:

t t t
X X + + =
1

.(1)
mu is an arbitrary drift parameter and eta is the randomdisturbance term.
The underlying assumption is that the disturbance terms are independently and
identically distributed normal variables with variance . This is the assumption according to
the traditional RWH.
Thus,
t
H :

i.i.d. ) , 0 (
2
o
N . (2)
According to the null hypothesis that the variance ratio should be unity for all levels of
aggregation, it can be described as follows;

1
) (
) (
1
) (
2
1
2
= =
q
q
q
q VR
q

... (3)
The test statistic that is developed by Lo and Mackinlay for the variance ratio is as
follows;
) 1 , 0 ( ) 3 / ) 1 )( 1 2 ( 2 )( ( ) (
2 / 1
1
N q q q q M nq q Z
a
r
~ =

(4)
Where the variance ratio is,
1
) (
) (
2
2

a
c
r
q
q M

.(5)
And where the variance estimators are;

=
nq
k
k k a
X X
nq
1
2
1
2
) (
1
1

.(6)
And,
) (
2
q
c
=
=


nq
q k
q k k
q X X
m
2
) (
1

.(7)
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Where,
m
=
) 1 )( 1 (
nq
q
q nq q +
.(8)
The tests are based on different aggregation levels, signalled by q.
Next to the homoskedastic test statistic, Lo and Mackinlay (1989) also developed a
test statistic that is robust to heteroskedasticity. They developed this test statistic with the
knowledge that volatilities change over time, and that the error terms of financial time series
are often not normally distributed.
Since still approaches zero, therefore we only have to calculate its asymptotic variance,
which is defined as .
The variance ratio estimate as defined before, is asymptotically equivalent to a weighted
sumof serial autocorrelation coefficient estimates, such that;

=
1
1
) (
) ( 2
) (
q
j
r
j
q
j q
q M
...(9)
Where is the estimator of the
th
autocorrelation factor.
Here, the asymptotic distribution of under the null hypothesis is defined as follows;
)) ( , 0 ( ) ( q V N q M nq
a
r
~
.(10)
Where is the asymptotic variance of and can be calculated as

=
=
1
1
2
), ( ) / ) ( 2 ( ) (
q
j
j q j q q V
(11)
Where
) ( j =
2
2
1
1
1
2
1
2
1
) (
) ( ) ( ) (
(

=

+ =

X X X
X X X X X X nq
nq
k
k k
nq
j k
j k j k k k
..(12)
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And ( j) o is the estimator for the weighted sumof the variances of
The standard normal Z-statistic under heteroskedasticity is computed as:
| |
a
1/2
2 r
Z ( q) nqM ( q) V(q) N( 0, 1) .

= ~ ..(13)
AUTOMATIC VARIANCE RATIO TEST UNDER CONDITIONAL
HETEROSKEDASTICITY OF CHOI (1999)
While implementing the VR tests, the choice of holding period k is important. However,
this choice is usually rather arbitrary and ad hoc. To overcome this issue, Choi (1999)
proposed a data-dependent procedure to determine the optimal value of k. Choi (1999)
suggested a VR test based on frequency domain since Cochrane (1988) showed that the
estimator of V(k), which uses the usual consistent estimators of variance, is asymptotically
equivalent to 2 times the normalized spectral density estimator at the zero frequency, which
uses the Bartlett kernel.
However, Choi (1999) employed instead the quadratic spectral (QS) kernel because
this kernel is optimal in estimating the spectral density at the zero frequency (Andrews,
1991).The VR estimator is defined as
. (14)
Where R(i) is the autocorrelation function, and h(x) is the QS window defined as
.(15)
The standardized statistic is
(16)
Under the null hypothesis the test statistic VR
f
follows the standard normal distribution
asymptotically. Note that it is assumed that T ! , k ! and T /k !.Choi (1999) employed
the Andrews (1991) methods to select the truncation point optimally and compute the VR
test. Note that the small sample properties of this automatic VR test under heteroskedasticity
are unknown and have not been investigated properly
- 137 -
NON-PARAMETRIC VARIANCE RATIO TESTS USING RANKS AND SIGNS
BY WRIGHT (2000)
As already noted, the LoMacKinlay (1988) tests, which are asymptotic tests whose
sampling distribution is approximated based on its limiting distribution, are biased and right-
skewed in finite samples. In this respect, Wright (2000) proposed a non-parametric alternative
to conventional asymptotic VR tests using signs and ranks. Wrights (2000) tests have two
advantages over the LoMacKinlay(1988) test when sample size is relatively small: (1) as
the rank (R1 and R2) and sign (S1 and S2) tests have an exact sampling distribution, there is
no need to resort to asymptotic distribution approximation, and (2) the tests may be more
powerful than the conventional VR tests against a wide range of models displaying serial
correlation, including fractionally integrated alternatives.
The tests based on ranks are exact under the i.i.d. assumption, whereas the tests
based on signs are exact even under conditional heteroskedasticity. Wright(2000), defined
the R1 and R2 statistics af follows
.(17)
...(18)
Given a variable in first differences , let r(x) be the rank of among
( , . . . , ). Under the null hypothesis that is generated froman i.i.d. sequence, r() is
a randompermutation of the numbers of 1, . . . , T with equal probability, giving the distribution
of the test statistics as stated in proposition 1.
Proposition 1:Under the assumption of iid returns, R1 and R2 have the same
distribution as
and
where the standardized ranks and are given by
- 138 -
..(19)
.(20)
Where,

-1
(k) is the inverse of the standard normal cumulative distribution function, and
is any permutation of 1, 2,..., T each with equal probability. So,the exact sampling distriubution
of R1 and R2 may be simulated to an arbitrary degree of accuracy.
Because this distribution is free of nuisance parameters, it could be used to construct
an exact test. Wright (2000) reports the 2.5and 97.5 percentiles of the null distribution of R1
and R2 for some values of T and k.,which could used to construct a two-sided equal-tailed
exact test. If is a martingale difference sequence, but is not iid, then r() is not just a
randompermutation of the integers from 1 to T in which each permutation has equal
probability. Therefore, Proposition 1 does not apply and the proposed tests are not exact
under conditional heteroscedasticity. Wright (2000) ,showed that the size distortions of these
tests under conditional heteroscedasticity are small.
The tests based on the signs of first differences are given by
..(21)
..(22)
Where (k) is defined as above , s
t
=2u(x
t
, 0), s
t
( )=2u(x
t
, ) and
- 139 -
{ 0.5 if
0.5 otherwise
Similar to R1 and R2 tests, the critical values of the S1 and S2 tests can be obtained by
simulating their exact sampling distribution. Note that S1 assumes a zero drift value.
WALD TEST OF RICHARDSON AND SMITH (1991)
Richardson and Smith (1991) suggested a joint test based on the following Wald
statistic:
...(23)
where VR is the (k 1) vector of sample k VRs, is the (k 1) unit vector and is the
covariance matrix of VR. The joint RS(k) statistic follows a 2 distribution with k degrees
of freedom. The usefulness of this test relies on the fact that, whenever the VR tests are
computed over long lags with overlapping observations, the distribution of the VR test is
non-normal; then, neither the LoMacKinlay(1988) test nor ChowDenning(1993) procedure
is valid for drawing inference.
CHOW AND DENNING MULTIPLE VARIANCE RATIO TEST(1993)
The test developed by Lo and Mackinlay (1988) uses the property of the RWH to test
individual variance ratios for different values of the aggregation factor q. Chow and Denning
(1993) recognized that the test lacks the ability to test whether all the variance ratios of the
different observation intervals are equal to 1, simultaneously. This is a requirement of the
RWH, and since Lo and Mackinlay(1988) overlooked this requirement, they used the standard
normal tables to test the variance ratios on significance. Failing to control for the overall test
size, leads to a large probability of a Type 1 error.
To circumvent this problem, Chow and Denning developed a test that controls for the
joint test size, and also provides a multiple comparison of variance ratios. They used the
Studentized MaximumModulus (SMM) critical values to control for the overall test size and
to create a confidence interval for the Variance Ratio estimates. They used the same test
statistic of the Lo and MacKinlay (1988) Variance Ratio test. Only now they are simply
compared to the SMM critical values, instead of the standard normal critical values to look
for significance.
Since Chow and Denning(1993) consider multiple comparisons of the variance ratio
estimates, and all variance ratio estimates should be above the SMM critical value, they use
the following largest absolute value of the two test statistics as defined before in the Lo and
MacKinlay(1988) procedure
- 140 -
(K) = ............... (24)
(K) = ............... (25)
Z
1
(q) and Z
2
(q) is calculated same as above
In which are the different aggregation intervals for . The decision about whether to
reject the null hypothesis or not can be based on the maximumabsolute value of individual
variance ratio test statistics.
JOINT VARIANCE RATIO TEST OF CHEN AND DEO (2006)
Chen and Deo (2006) suggested a simple power transformation of the VR statistic
that, when k is not too large, provides a better approximation to the normal distribution in
finite samples and is able to solve the well-known right-skewness problem. They showed
that the transformed VR statistic leads to significant gains in power against mean reverting
alternatives. Furthermore, the distribution of the transformed VR statistic is shown, both
theoretically and through simulations, to be robust to conditional heteroscedasticity.
They defined the VR statistic based on the periodogramas
..(26)
Where,
..(27)
..(28)
and
j
=2j/T; while W
k
()=k
1
{sin(0.5k)/sin(0.5)}
2
is a weighting function. Chen and
Deo (2006) found that the power-transformed statistic (k) gives a better approximation
to a normal distribution than VR
p
(k), where
..(28)
Let (k
1
,,k
l
) be a vector of holding periods satisfying the conditions given in Theorem
5 of Chen and Deo (2006). Conditions (A1) to (A6) in Chen and Deo(2006) allow the
innovations to be a martingale difference sequence with conditional heteroskedasticity. .
They are explained below.
- 141 -
A1) is ergodic and =0 for all t, where is a sigma field, is measurable
And for all t.
(A2)
(A3) For any integer q, 2 and for q non negative integers , E( =0
when at least one is exactly one and
(A4) For any integer r, 2 and for r non negative integers , E( =0
when at least one is exactly one and
(A5) uniformly in j for every j>0
(A6)
Under the assumption that given time series Y
t
follows a conditionally heteroskedastic
martingale difference sequence Chen and Deo Showed that
....................(29)
approximately follows N(

). The details of

and

are given in Chen and

Deo(2006). Based on this, Chen and Deo (2006) proposed a joint test statistic of the form

..(30)
It approximately follows a chi-squared distribution with l degrees of freedomunder
H
0
: V(k
1
)= =V(k
l
)=1 against H
1
: V(k
i
)1 for some i.
EMPIRICAL ANALYSIS
Here, we have conducted a battery of variance ratio tests to check the weak form
market efficiency in the NSE and BSE markets. 3 individual as well as 3 joint variance ratio
tests are applied on 14 indices (8 fromNSE and 6 fromBSE). Table 1 shows summary
statistics of the return series. The results of the same are shown fromtable 2 to 5. Table 2
shows the output of individual VR test results for various NSE indices whereas table 3
shows the results of joint variance ratio tests for NSE indices. Tables 4 and 5 presents the
output of individual as well as joint variance ratio tests for BSE indices. For CNX 100, the
test statistics couldnt be estimated for Chois test, Chen-Deo test, Chow-Denning test and
Richardsons test due to the return series being computationally singular.
- 142 -
Table 1: Summary Statistics of the Return Series
0.0866 0.00062 0.0024 -0.1084
BSE
SMALLCAP
0.1111 0.00051 0.0022 -0.1208 BSE MIDCAP
0.1462 0.00052 0.0018 -0.1244 BSE500
0.1511 0.00051 0.0015 -0.1264 BSE 200
0.5484 0.00053 0.0015 -0.5372 BSE100
0.1599 0.00054 0.0011 -0.1181 SENSEX
0.1633 0.00051 0.0010 -0.1305 CNX NIFTY
0.1896 0.00041 0.0013 -0.1411 CNX DEFTY
0.1503 0.00050 0.0016 -0.1288 CNX 500
0.1310 0.00038 0.0020 -0.1620
NIFTY
MIDCAP
0.0888 0.00065 0.0024 -0.1288
CNX
SMALLCAP
0.1383 0.00053 0.0018 -0.1313
NIFTY
JUNIOR
0.1548 0.00049 0.0016 -0.1302 CNX200
0.1594 0.00052 0.0014 -0.1305 CNX100
Maximum Mean Median Minimum Series
0.0866 0.00062 0.0024 -0.1084
BSE
SMALLCAP
0.1111 0.00051 0.0022 -0.1208 BSE MIDCAP
0.1462 0.00052 0.0018 -0.1244 BSE500
0.1511 0.00051 0.0015 -0.1264 BSE 200
0.5484 0.00053 0.0015 -0.5372 BSE100
0.1599 0.00054 0.0011 -0.1181 SENSEX
0.1633 0.00051 0.0010 -0.1305 CNX NIFTY
0.1896 0.00041 0.0013 -0.1411 CNX DEFTY
0.1503 0.00050 0.0016 -0.1288 CNX 500
0.1310 0.00038 0.0020 -0.1620
NIFTY
MIDCAP
0.0888 0.00065 0.0024 -0.1288
CNX
SMALLCAP
0.1383 0.00053 0.0018 -0.1313
NIFTY
JUNIOR
0.1548 0.00049 0.0016 -0.1302 CNX200
0.1594 0.00052 0.0014 -0.1305 CNX100
Maximum Mean Median Minimum Series
Table 2 : Individual Variance Ratio Test Result for NSE Indices
1.530 3.741** 4.676** 6.846** 6.673** 6.153**
4.4180
**
- 2,5,10
S1
2.277*** 2.976** 4.333** 7.502** 6.544** 6.694**
4.1523
**
2.835* 2,5,10
R2
2.362*** 3.050** 4.477** 8.003** 7.312** 7.033**
4.1527
**
3.106*
*
2,5,10
R1 Wright
1.195 2.214 3.140* 4.663* 4.234* 4.323* 2.830* - 2,5,10 AV(K) Choi
-0.120 0.805 1.084 2.296* 1.421 1.641 0.862 0.479 10
0.430 1.399 1.619 2.623* 2.616* 2.416* 1.398 1.534 5
1.428 1.934* 2.370* 3.134* 3.315* 3.135* 2.218* 3.347* 2 Z
2
-0.201 1.252 1.894 4.325* 2.566* 2.956* 1.501 0.28 10
0.751 2.250* 3.052* 5.581* 4.346* 4.773* 2.622* 0.852 5
2.627* 3.261* 4.796* 7.229* 6.674* 6.669* 4.458* 1.757* 2 Z
1
Lo-
MacKin
lay
CNX-
NIFTY
CNX-
DEFTY
CNX500
NIFTY-
MIDCAP
CNX-
SMALLCAP
CNX-
JUNIOR
CNX200 CNX100
HOLD
ING
PERIO
DS
STATIS
TICS
TEST
1.530 3.741** 4.676** 6.846** 6.673** 6.153**
4.4180
**
- 2,5,10
S1
2.277*** 2.976** 4.333** 7.502** 6.544** 6.694**
4.1523
**
2.835* 2,5,10
R2
2.362*** 3.050** 4.477** 8.003** 7.312** 7.033**
4.1527
**
3.106*
*
2,5,10
R1 Wright
1.195 2.214 3.140* 4.663* 4.234* 4.323* 2.830* - 2,5,10 AV(K) Choi
-0.120 0.805 1.084 2.296* 1.421 1.641 0.862 0.479 10
0.430 1.399 1.619 2.623* 2.616* 2.416* 1.398 1.534 5
1.428 1.934* 2.370* 3.134* 3.315* 3.135* 2.218* 3.347* 2 Z
2
-0.201 1.252 1.894 4.325* 2.566* 2.956* 1.501 0.28 10
0.751 2.250* 3.052* 5.581* 4.346* 4.773* 2.622* 0.852 5
2.627* 3.261* 4.796* 7.229* 6.674* 6.669* 4.458* 1.757* 2 Z
1
Lo-
MacKin
lay
CNX-
NIFTY
CNX-
DEFTY
CNX500
NIFTY-
MIDCAP
CNX-
SMALLCAP
CNX-
JUNIOR
CNX200 CNX100
HOLD
ING
PERIO
DS
STATIS
TICS
TEST
*** significant at 10% level * * significant at 1 % level * significant at 5 % level
- 143 -
Table 3: Joint Variance Ratio Test Result for NSE Indices
10.558
*
11.214* 23.615** 52.573** 46.132** 20.9688* 2,5,10 R1
Richar
dson
1.428 1.934 2.370*** 3.134* 3.247** 2.218** 2,5,10 CD2
2.627* 3.261* 4.796** 7.229* 6.149** 4.458** 2,5,10 CD1
Chow-
Denni
ng
3.216 3.810 5.505 9.077* 9.221* 5.006 2,5,10 QPn
Chen-
Deo
CNX-
NIFTY
CNX-
DEFTY
CNX500
NIFTY-
MIDCAP
CNX-
SMALLCAP
CNX200
CNX1
00
HOLDING
PERIODS
STAT-
ISTICS
TEST
10.558
*
11.214* 23.615** 52.573** 46.132** 20.9688* 2,5,10 R1
Richar
dson
1.428 1.934 2.370*** 3.134* 3.247** 2.218** 2,5,10 CD2
2.627* 3.261* 4.796** 7.229* 6.149** 4.458** 2,5,10 CD1
Chow-
Denni
ng
3.216 3.810 5.505 9.077* 9.221* 5.006 2,5,10 QPn
Chen-
Deo
CNX-
NIFTY
CNX-
DEFTY
CNX500
NIFTY-
MIDCAP
CNX-
SMALLCAP
CNX200
CNX1
00
HOLDING
PERIODS
STAT-
ISTICS
TEST
Table 4: Individual Variance Ratio Test Results for BSE Indices
198.384* 99.069* 26.847* 22.223* 89.867* 14.171* 2,5,10 R1
Richardso
n
7.445** 4.242** 2.587* 2.358* 0.900 1.776 2,5,10 CD2
13.334** 9.484** 5.151** 4.576** 9.460* 3.040* 2,5,10 CD1
Chow-
Denning
41.640** 16.538** 6.403 5.660 1.433 4.722 2,5,10 QPn Chen-Deo
BSE-
SMALL
CAP
BSE-
MIDCAP
BSE500 BSE200 BSE100 SENSEX HOLDING
PERIODS
STAT-
ISTICS
TEST
198.384* 99.069* 26.847* 22.223* 89.867* 14.171* 2,5,10 R1
Richardso
n
7.445** 4.242** 2.587* 2.358* 0.900 1.776 2,5,10 CD2
13.334** 9.484** 5.151** 4.576** 9.460* 3.040* 2,5,10 CD1
Chow-
Denning
41.640** 16.538** 6.403 5.660 1.433 4.722 2,5,10 QPn Chen-Deo
BSE-
SMALL
CAP
BSE-
MIDCAP
BSE500 BSE200 BSE100 SENSEX HOLDING
PERIODS
STAT-
ISTICS
TEST
Table 5: Joint Variance Ratio Test results for BSE Indices
13.173** 9.852** 5.327** 5.168** 4.168** 2.435* 2,5,10 S1
13.389** 9.621** 4.822** 4.268** 3.511** 3.029** 2,5,10 R2
13.352** 9.840** 4.999** 4.444** 3.915** 3.110** 2,5,10 R1
Wright
11.327* 7.306* 3.384* 2.874* -6.349 1.435 2,5,10 AV(K) Choi
7.254* 3.995* 1.310 0.868 -0.900 -0.130 10
7.445* 4.242* 1.844 1.462 -0.863 0.491 5
6.500* 4.155* 2.587* 2.358* -0.824 1.776 2
Z
2
11.937* 7.488* 2.277* 1.488 -5.553* -0.213 10
13.334* 8.901* 3.434* 2.665* -7.260* 0.816 5
12.501* 9.484* 5.151* 4.576* -9.460* 3.040* 2
Z
1
Lo-
McKin
ley
BSE-
SMALLC
AP
BSE-
MIDCAP
BSE500 BSE200 BSE100
SENSE
X
HOLDING
PERIODS
STAT-
ISTICS
TEST
13.173** 9.852** 5.327** 5.168** 4.168** 2.435* 2,5,10 S1
13.389** 9.621** 4.822** 4.268** 3.511** 3.029** 2,5,10 R2
13.352** 9.840** 4.999** 4.444** 3.915** 3.110** 2,5,10 R1
Wright
11.327* 7.306* 3.384* 2.874* -6.349 1.435 2,5,10 AV(K) Choi
7.254* 3.995* 1.310 0.868 -0.900 -0.130 10
7.445* 4.242* 1.844 1.462 -0.863 0.491 5
6.500* 4.155* 2.587* 2.358* -0.824 1.776 2
Z
2
11.937* 7.488* 2.277* 1.488 -5.553* -0.213 10
13.334* 8.901* 3.434* 2.665* -7.260* 0.816 5
12.501* 9.484* 5.151* 4.576* -9.460* 3.040* 2
Z
1
Lo-
McKin
ley
BSE-
SMALLC
AP
BSE-
MIDCAP
BSE500 BSE200 BSE100
SENSE
X
HOLDING
PERIODS
STAT-
ISTICS
TEST
*** significant at 10% level * * significant at 1 % level * significant at 5 % level
- 144 -
While analyzing the individual variance ratio test results for NSE indices, certain
trends are visible. The results of Lo-McKinley tests show that the return series rejects the
null of weak-formmarket efficiency at lower lags with or without the assumptions of
heteroskedasticity. However, as the lags are increased, the null cannot be rejected. The
results of Chois test indicate lack of weak formmarket efficiency for all the indices except
for CNX-Defty and CNX-Nifty. Wrights joint test of Rank and Signs also reject the null of
weak formmarket efficiency for all return series.
While considering the joint variance ratio test results for NSE, a mixed picture comes
forward. The results of Chen-Deo test shows that while the indices CNX J unior, CNX-
Smallcap and NIFTY-Midcap are not weak formefficient, the other indices i.e. CNX-200,
CNX-500, CNX-Defty and CNX nifty shows weak-from market efficiency. The results of
Chow-Denning test show the absence of weak-formmarket efficiency for all the indices
under consideration. Similarly, the results of Richardsons tests also reject the nation of
weak-formmarket efficiency for all the indices under consideration.
The results of individual variance ratio tests for BSE indices also give a mixed result.
The Lo-McKinley test rejects weak-formmarket efficiency for all the indices at all lags
except for SNSEX and BSE 200 while considering the statistic with the assumption of
homoskedasticity. While taking the statistic with heteroskedasticity assumption, weak form
market efficiency is visible for SENSEX and BSE100 for all lags, for BSE 200 and BSE
500, the market is weak formefficient at lags 5 and 10.BSE Midcap and BSE Smallcap
rejects weak-formmarket efficiency at all lags. Chois test indicates presence of weak-
form market efficiency for SENSEX and BSE 100 while rejecting the same for rest of the
indices. Wrights test also rejects weak formmarket efficiency for all the six indices at all
lags.
Considering the joint variance ratio test results for BSE indices, Chen-Deo test shows
the presence of weak-form market efficiency for all indices except BSE Midcap and BSE
Smallcap. However, the Chow-Denning and Richardson test statistics reject the null of
weak-formmarket efficiency for all the indices under consideration.
CONCLUSION
The study attempted to analyze weak form market efficiency in two of the premier
Indian stock markets i.e. BSE and NSE, using variance ratio tests. Three individual tests as
well as three joint tests were used for obtaining comprehensive results. The test results
show a mixed picture while considering the individual return series. But each series shows
evidence that rejects weak-formmarket efficiency thats captured by one or the other tests
employed. To conclude, it could be said that while considering the overall picture, BSE and
NSE markets are not weak formmarket efficient.
Note: The estimations in this study were carried out using the package vrtest in R software
- 145 -
REFERENCES
1. Andrews, D.W.K. (1991), Heteroskedasticity and autocorrelation consistent
covariance matrix estimation, Econometrica, Vol (58), No. 3, pp.817858.
2. Chen, W.W. and Deo,R.S. (2006), The variance ratio statistic at large horizons,
Econometric Theory, Vol(22), No. 2,pp.206234.
3. Choi, I. (1999), Testing the randomwalk hypothesis for real exchange rates, J ournal
of Applied Econometrics , Vol(14), No. 3, pp.293308.
4. Chow, K.V. and Denning, K.C. (1993), A simple multiple variance ratio test, J ournal
of Econometrics Vol (58), No .3, pp. 385401.
5. Cochrane, J .H. (1988), How big is the randomwalk in GNP?, J ournal of Political
Economy Vol(96), No .5,pp.893920.
6. Deo, R.S. and Richardson, M. (2003), On the asymptotic power of the variance
ratio test, Econometric Theory, Vol (19), No .2, pp. 231239.
7. Fama, E.F.(1965), The behavior of stock market prices, The J ournal of Business,
Vol(38), No .1, pp.34-105.
8. Hiremath, G.S. and Kamaiah, B. (2010) Some further Evidence on the behaviour of
stock returns in India, International J ournal of Economics and Finance, Vol.2 No.2,
PP 157-167.
9. J oshi, D.J (2012) Testing Market Efficiency of Indian Stock Market, International
J ournal of scientific and Research Publications Vol.2,Issue 6, PP. 1-4.
10. Lo, A.W. and MacKinlay, A.C. (1988), Stock market prices do not follow random
walk: evidence froma simple specification test Review of Financial Studies, Vol( 1),
No. 1,pp. 4166.
11. Lo, A.W. and MacKinlay, A.C. (1989), The size and power of the variance ratio
test in finite samples, J ournal of Econometrics Vol(40),No .2, pp. 203238.
12. Pandian, P. Securities Analysis and Portfolio Management, Vikas Publishing
House,2011.
13. Raghunathan, V. and Rajib, P.Stock Exchanges, Investments and Deruvatives, Tata
Mc Graw Hill publishing company,2009.
14. Rao, K.C. Geetha,T. Indian Capital Market (Informational Signalling and Efficiency),
A.P.H. Publishing Corporation, New Delhi ,1996.
- 146 -
15. Richardson, M. and Smith, T. (1991), Tests of financial models in the presence of
overlapping observations, Review of Financial Studies, Vol (4), No. 2,pp.227254.
16. Sapate, U. and Ansari, V.(2011) Testing weak form stock market efficiency on
Bombay Stock Exchange of India, ICOQM 10, PP. 229 233.
17. Sharma , G.D and Mahendru , M. (2009)Efficiency Hypothesis of the Stock Markets:
A case of Indian Securities, International J ournal of Business and Management,
Vol.4, No.3, PP. 136-144.
18. Wright, J .H. (2000), Alternative variance-ratio tests using ranks and signs, J ournal
of Business and Economic Statistics, Vol (18), No. 1,pp.19.
- 147 -
DOES INSTITUTIONAL PARTICIPATION IN AN INITIAL PUBLIC
OFFERINGS A BETTER SIGNAL FOR INVESTING?
1
S.Saravanan, Research Scholar, Sathyabama University,Chennai-119, he can be reached
at email: saravanan.sugumar@yahoo.in
2
Dr.R.Satish,
2
Associate Professor, SRR Engineering College, Padur, he can be reached
at email: dr.satishsrr@gmail.com
ABSTRACT
IPOs that debut in a bull market get premium valuations on high demand. But
post listing when market condition changes, the stocks get de-rated. Exit of the
institutional investors from the shares makes the stock underperform, in which case
the signaling of the IPO subscription made by institutional investors can be detrimental
for the investments made by other investors. This research is aimed at can their
participation be taken as a signal of a good stock, and what is level of participation
by rest of the investors and knowing the correlation of their interest with short and
long term gain. Test result shows that the active participation of the institutional investors
is cannot be taken as a healthy signal for the rest of investors to grow up their interest
in the said stock. Above research be done using data set of IPOs listed from Jan 2008
to Oct 2012.
KEY WORDS
Institutional Investors, IPOs, Subscription.
INTRODUCTION
Starting with the Rock (1986) model, institutional investors have played an important
role in the theoretical literature on the pricing and allocation of initial public offerings (IPOs).
Rock (1986) argues that these institutional investors with private information about the true
long-run value of the shares of firms going public bid only on undervalued shares, leaving
retail investors with a disproportionate share of overvalued IPOs. Thus, in the Rock (1986)
setting, IPO underpricing is a mechanismto mitigate the adverse selection faced by retail
investors, ensuring that they do not withdraw fromthe IPO market. A second strand of the
literature is the bookbuilding literature (e.g., Benveniste and Spindt (1989)), which builds on
the Rock (1986) assumption of informed institutional investors, and argues that the IPO
bookbuilding process is a mechanismfor extracting information fromthese institutional
investors in order to use it to price shares in the IPO at the appropriate level. In their setting,
underpricing is a means of compensating these institutional investors for truthfully revealing
all value-relevant information useful in pricing shares in the IPO. A third strand of the
literature (e.g., Chemmanur (1993)) views underpricing as a way of inducing information
- 148 -
production by institutional and other investors about the firmgoing public. This information
is reflected in the secondary market price of the firms equity as a result of post-IPO trading
by these informed investors, moving it closer to the firms intrinsic value.
Motivated by the above theoretical literature, in this paper we address the following
empirical questions for the first time in the literature. First, do institutional investors really
have private information about IPOs? Further, if indeed they possess private information, is
all their value-relevant information incorporated into the IPO offer price, or are institutional
investors left with residual information that they can profitably use in post-IPO trading?
Second, are institutional investors able to realize significant profits fromtheir participation in
IPOs, thus getting compensated for the role they play in the IPO process, as postulated by
the bookbuilding literature? While it has been documented (see, e.g., Aggarwal, Prabhala,
and Puri (2002), and Hanley and Wilhelm(1995)) that institutional investors receive significant
allocations in underpriced IPOs (where a considerable amount of money is left on the
table), the ability of institutions to fully realize this money left on the table has not been
studied. A related question is whether, even if institutions realize superior profits fromselling
their IPO allocations, they dissipate these profits (partially or fully) in post-IPO trading.2
Finally, how do institutions sell their IPO share allocations? While it has been documented
that institutions sell about 25.8 percent of the shares allocated to themduring the first two
days of post-IPO trading (Aggarwal (2003)), the selling of IPO allocations by institutions
beyond the immediate post-IPO period has not been studied. The answer to this question is
not only important in its own right (since it has implications for the desirability of institutions
as investors in IPOs), but is also essential to establish the amount of profits realized by
institutions fromtheir participation in IPOs.
OBJECTIVES
1. To analyze whether institutional investors interest in an IPO can be considered as a
sign for investment
2. To study the performance of the shares in which institutional investors shown more
interest
DATA ANALYSIS
1. Return is computed as the difference between the offer price and the closing price of
the day. Offer price and 1
st
day closing price is considered for listing day return and
for the next short termgain closing price of the said stock after one month is considered.
Return=(P1-P0)*P0/100
P1 =Price prevailing on the listing day/day that is considered
P0 =Issue Price
2. Participation/Interest is analyzed through the level of subscription made by the investors
- 149 -
METHODOLOGY OF THE STUDY
Study is conducted with the secondary data collected fromstock exchange websites.
Companies considered for the study falls in the time period of J an 2007 to Dec 2012 of
which the stocks listed through SME platformwas excluded.
HYPOTHESIS
Following hypothesis are formulated and tested:
H
1
: Relationship between current return and institutional investor interest
H
2
: Relationship between current return and non- institutional investor interest
H
3
: Relationship between current return and retail investors interest
H
4
: Relationship between QIBs interest and RIs interest
H
5
: Relationship between the all the investors interest
ANALYSIS AND INTERPRETATION
Table 1
8 22 12 Positive current Return among their subscription
6 39 20 Positive 1-Mon Return among their subscription
7 44 26 Positive Listing Gain among their subscription
19 73 41 No. Of IPO each investor highly subscribed
RI NII QIB Particulars
8 22 12 Positive current Return among their subscription
6 39 20 Positive 1-Mon Return among their subscription
7 44 26 Positive Listing Gain among their subscription
19 73 41 No. Of IPO each investor highly subscribed
RI NII QIB Particulars
Of the 41 IPOs in which Qualified Institutional Buyers shown more interest only 12
were trading at a positive returns which works out to approximately 30%, Similarly out of
the 73 stocks in which Non Institutional Investors shown more interest only 22 are trading
above the issue price which works out to 30% again and finally 19 IPOs in which retail
investors shown more interest, 8 are trading above the issue price which is approximately a
42% success.
Return fromstocks in which Qualified Institutional Buyers and Non Institutional
investors shown more interest have not performed well in long run compared to the retail
investors interested IPO stocks. Companies like J ubilant Foods in which Qualified Institutional
Buyers shown more interest has a return of around 800% now. And in the flip side stock like
NuTek India Ltd trades 99% below its issue price. Companies like Aanjaneya health in
which Non Institutional Investors shown more interest are trading at 216% higher than the
issue price. And in the flip side stock like Raj oil Mills trades 96% below its issue price.
- 150 -
Companies like One Life Capital in which Retail Investors shown more interest are trading
at 575% higher than the issue price. And in the flip side stock like Taksheel trades 93%
below its issue price.
Table 2: Descriptive Statistics
794.00 147.86 129.50 55.22 190.02 180.72 15199.44 Maximum
-99.00 -87.40 -68.72 .08 .02 .00 23.25 Minimum
893.00 235.26 198.22 55.14 190.00 180.72 15176.19 Range
.417 .417 .417 .417 .417 .417 .423 Std. Error of Kurtosis
17.208 1.876 1.395 15.610 6.563 17.094 47.337 Kurtosis
.210 .210 .210 .210 .210 .210 .213 Std. Error of Skewness
3.671 .795 .771 3.564 2.561 3.652 6.568 Skewness
125.664 40.85594 32.8610 8.1638 37.6135 26.1431 1774.994 Std. Deviation
-
35.0000
-2.0200 3.7240 2.6300 4.2100 1.7420 133.8700
Median
-5.2802 -2.4974 8.8467 5.3639 21.0115 13.1789 584.0283 Mean
0 0 0 0 0 0 4 Missing
133 133 133 133 133 133 129 Valid N
CURRE
NT
RETUR
N
1-MON
RETURN
LISTIN
G DAY
RETUR
N
RI
SUBSC
RIPTI
ON
NII
SUBSC
RIPTIO
N
QIB
SUBSC
RIPTIO
N
SIZE
794.00 147.86 129.50 55.22 190.02 180.72 15199.44 Maximum
-99.00 -87.40 -68.72 .08 .02 .00 23.25 Minimum
893.00 235.26 198.22 55.14 190.00 180.72 15176.19 Range
.417 .417 .417 .417 .417 .417 .423 Std. Error of Kurtosis
17.208 1.876 1.395 15.610 6.563 17.094 47.337 Kurtosis
.210 .210 .210 .210 .210 .210 .213 Std. Error of Skewness
3.671 .795 .771 3.564 2.561 3.652 6.568 Skewness
125.664 40.85594 32.8610 8.1638 37.6135 26.1431 1774.994 Std. Deviation
-
35.0000
-2.0200 3.7240 2.6300 4.2100 1.7420 133.8700
Median
-5.2802 -2.4974 8.8467 5.3639 21.0115 13.1789 584.0283 Mean
0 0 0 0 0 0 4 Missing
133 133 133 133 133 133 129 Valid N
CURRE
NT
RETUR
N
1-MON
RETURN
LISTIN
G DAY
RETUR
N
RI
SUBSC
RIPTI
ON
NII
SUBSC
RIPTIO
N
QIB
SUBSC
RIPTIO
N
SIZE
Retail Investors participation is much lower in spite of many privileges given which is
evident from just a mean of 5.36 which is lower when compared with institutional and non-
institutional investors. Std deviation of 37 by Non-Institutional Investors show their selective
interest in the IPOs.
TEST OF CORRELATIONS
1. Correlation between Qualified institutional investors interest in an IPO and the current
return fromsaid stock stands out to be 0.076 which implies QIBs interest cant be a
signal for a sound stock
2. Correlation between non institutional investors interest in an IPO and the current
return fromsaid stock stands out to be 0.030 which implies NIIs interest cant be a
signal for a sound stock
3. Correlation between retail investors interest in an IPO and the current return from
said stock stands out to be 0.012. which is much less than the earlier tested correlations
4. Correlation between QIBs and RI interest is better with 0.628 which signals RI takes
QIBs interest as a criterion to invest
- 151 -
Table 3: Comparison between investors and the subscription
399 133 133 133 Total
133 64 50 19
RI
133 8 52 73
NII
133 61 31 41
QIB Investo
r
Comparativel
y low
Comparatively
Medium
Comparatively
High
Total
Rank
399 133 133 133 Total
133 64 50 19
RI
133 8 52 73
NII
133 61 31 41
QIB Investo
r
Comparativel
y low
Comparatively
Medium
Comparatively
High
Total
Rank
H
0
: There is no significant difference between the investors in the interest towards a
stock in an IPO
H
1
: There is significant difference between the investors in the interest towards a
stock in an IPO
Chi-Square Tests
399
N of Valid Cases
.061 1 3.516
Linear-by-Linear
Association
.000 4 99.176
Likelihood
Ratio
.000 4 84.090(a)
Pearson Chi-
Square
Asymp. Sig.
(2-sided) df Value
399
N of Valid Cases
.061 1 3.516
Linear-by-Linear
Association
.000 4 99.176
Likelihood
Ratio
.000 4 84.090(a)
Pearson Chi-
Square
Asymp. Sig.
(2-sided) df Value
a 0 cells (.0%) have expected count less than 5. The minimum expected count is 44.33.
Since the Significance isles than .05 we reject the null hypothesis and prove that there
is significantdifference between the investors in the interest towards a stock in an IPO.
- 152 -
Table 4: Mean return of the stock in which respective investors shown
more participation
74.12 -13.82 -4.18
RI
-26.35 -0.19 14.61 NII
-4.57 -1.37 4.62 QIB Investor
Current Return 1-Mon Return
Listing Day
Return
Investor
Mean Return
74.12 -13.82 -4.18
RI
-26.35 -0.19 14.61 NII
-4.57 -1.37 4.62 QIB Investor
Current Return 1-Mon Return
Listing Day
Return
Investor
Mean Return
Average returns made by the stocks in which QIBs and NIIs shown interest provided
only negative return in long run when compared with the stocks in which RI shown interest
making a positive return which implies the QIBs and NIIs participation cant be assign for
better fortune in a stock.
CONCLUSION
Almost 70% of the shares in which the qualified institutional investors shown more
interest have wiped put the money fromthe investors hand which implies that the interest of
the Institutional investors cannot be taken as a signal for a return on longer term. For an
institutional investor investment in an IPO is a part of their portfolio management strategy
which does not prove costlier when the said stock underperforms but in the case of individual
investors that does not works out since shares through IPO is almost not for a portfolio
management. So its better for the retail and other investors not to consider the interest of
Institutional participation as a the only signal for the investment.
REFERENCES
1. Dr Deepak Chawla & Dr Neena Sondhi ,Research Methodology-Concepts and
Cases, Vikas publishing house p ltd 2001
2. J anakiramanan, S. (2007), Under-Pricing and Long-Run Performance of Initial Public
Offerings in Indian Stock Market Research Work NSE India website.
3. K.Govindarajan, Investment in IPOs-A Boon or Bane, International research journal
for Finance and Economics, Issue 84 2012
4. Khurshed, Arif. , Pande, Alok. , Singh, AjaiK. (2006), Subscription patterns, offer
prices and the underpricing of IPOs: Evidence fromIndia, Working Paper Series,
University of Manchester.
5. Krishanmurti, Chanderashekhar. (2002), The Initial Listing Performance of Indian
IPOs,Managerial Finance, Vol.28, No.2, pp. 39-51
6. Ragupathy M B, Initial Public Offering: A critical review of Literature, The IUP
journal of Behavioral Finance, Volume VIII, No.1 , 2011
- 153 -
ROLE OF INDIAN MERCHANT BANKS IN MANAGING PUBLIC ISSUES
1
Mrs B. Anusha, MBA, (Ph.D), Academic Consultant, Satavahana University,
Karimnagar, A.P. Pin 505001. She can be reached at email: anusha.bmk@gmail.com
2
Dr. R. Sampath Kumar, Assistant Professor, Department of Business Management,
Osmania University, Hyderabad.
ABSTRACT
Financial system ensures that transactions are effected smoothly and quickly
on an ongoing basis and enables the financial agents to accelerate financial growth
and economic prosperity of the unit. The development activity through the country
had exerted excess demand on the sources of funds by the ever expanding industry
and trade which could not be met by the All India Financial Institutions. Merchant
banking help to coordinate the activities of various intermediaries to the share issue
such as the registrar, bankers, advertising agency, printers, underwriters, brokers,
etc. and to ensure the compliance with rules and regulations governing the securities
market. This study covers the role of merchant bankers in the management of public
issues with respect to study the rules and regulations of SEBI and to evaluate the
performance of merchant bankers. Merchant bankers have contributed positively for
the development of primary market in India by increasing the confidence of both
promoters as well as investors. More than 90% of amount of public issues of equity
shares was underwritten by merchant bankers. Apart from shouldering the responsibility
of management of public issues, merchant bankers have participated actively in the
underwriting of public issues.
KEY WORDS
Merchant Banking, Primary Market, Public Issues, SEBI.
INTRODUCTION
Financial systemof a country is the main motivating factor to run the economy. It
ensures that transactions are effected smoothly and quickly on an ongoing basis. It enables
the financial agents to accelerate financial growth and economic prosperity of the unit. The
announcement of the New Economic Policy in 1991, the India Financial Systemhas shown
quite flexibility in terms of transformation. The reformation process has been started in
order to remove the stagnation of growth described before and, till date, the response is
positive. This is the phase of liberalization and globalization of Indian economy following the
world trend which is duly supported by deregulation of Government Control. Market force
becomes dominant resulting in privatization of industries, emergence of new generation
financial institutions with competitive ability and introduction of computerized business
- 154 -
environment where information technology plays a vital role. The regulatory frame work
has been duly changed giving space to this reformprocess and one can say that the Indian
financial sector is gradually moving towards attainment of global standards.
NEED FOR THE STUDY
The development activity through the country had exerted excess demand on the
sources of funds by the ever expanding industry and trade which could not be met by the All
India Financial Institutions. In these circumstances, the corporate sector enterprises had the
only alternative to avail themselves of the capital market services for meeting the long-term
fund requirements through capital issues of equity and debentures. The growing demand for
funds fromcapital market has enthused many organizations to enter into the field of merchant
banking for managing the public issues.
SCOPE OF MERCHANT BANKS IN INDIA
Merchant banking activities help in channelzing the financial surplus of the general
public into productive investment avenues. They help to coordinate the activities of various
intermediaries to the share issue such as the registrar, bankers, advertising agency, printers,
underwriters, brokers, etc. and to ensure the compliance with rules and regulations governing
the securities market. This being the era where mergers and acquisitions are hot, the scope
of merchant banking has grown to a large extent.
OBJECTIVES
The present research work has been undertaken with the objective to study the role
of merchant bankers in the management of public issues with respect to study the rules and
regulations of SEBI and to evaluate the performance of merchant bankers in the recent
years. It further makes recommendations to merchant bankers for improving their
performance in primary market activities.
The liberalization and globalization of financial services has brought about drastic
changes in primary market and the intermediaries associated with it. Merchant banking is
one of the oldest and specialized financial intermediaries in the primary market in India. It is
basically a service activity concerned with providing non fund based services of arranging
funds for the corporate sector rather than providing funds.
LITERATURE REVIEW
VERMA (1990) conducted research on merchant banks in India with the purpose to
analyze their organization structure and management pattern and to assess their suitability
for mediumand small size corporate and non corporate enterprises. The information was
collected froma sample of 32 merchant bankers through questionnaire and the study covered
the period 1978 to 1984.The study revealed that 90 percent of the resources of all merchant
banks were devoted only to the management of public issues.
- 155 -
SRIVASTAVA (1995) in his paper highlighted the need for efficient marketing of
public Issues. According to him, the process of public issue marketing starts with the selection
of the issue by the merchant banker. Then the merchant banker plays the role of a guide for
the appointment of underwriters, brokers and an expert advertising agency.
SAHA (2006) in his paper reviewed the different aspects of book building process
of public issues and merchant banking activities relating to such process in the Indian primary
capital market. Dynamic, strategic and vigorous merchant bankers are required to meet the
challenges with a view to improve the corporate finance and to establish a healthy corporate
environment.
BARUA (2008) analyzed in his article the happenings in the secondary market, sub
prime crisis and the slowdown of the US economy as the major reasons for withdrawal of
a number of IPOs in India.
The author blamed the lead managers to the issue (Merchant Bankers) for their poor
professional judgment in pricing and advice to the issuer. The author did not see any structural
problemwith the Indian primary market.
SINGH (2009) conducted a study on equity issues and investors protection in India
by studying the disclosure practices in the offer documents of issuing companies and evaluating
the role of merchant bankers in pricing the equity issues on the basis of rate of return
obtained by investors at different points of time. The study concluded that no group of
merchant bankers could completely check the problemof negative return during the period
under study.
EVOLUTION OF MERCHANT BANKS
Merchant Banks originated and thrived in the London money market has become
increasingly popular in recent years. In India Merchant Banks started with the establishment
of the Merchant Bank division of Grindlays Bank in 1967, followed by City bank in 1970,
and State Bank of India in 1972. Later the ICICI set-up its Merchant Banking division,
followed by a few other banks like the Syndicate bank, the Bank of India, the Bank of
Baroda, the Chartered bank, the Merchantile Bank etc.
SECURITIES AND EXCHANGE BOARD OF INDIA (MERCHANT BANKERS)
RULES, 1992
A merchant banker has been defined as any person who is engaged in the business of
issue management either by making arrangements regarding selling, buying or subscribing
to securities or acting as manager, consultant, adviser or rendering corporate advisory services
in relation to such issue management. The SEBI (Merchant Banking) Regulations as amended
fromtime to time introduced a number of reforms for more transparency in disclosure
- 156 -
requirements in offer documents, abolished different categories of merchant bankers by
making it compulsory to register only category 1 merchant banker and limited the area of
merchant banking to non fund activities only.
FUNCTIONS OF MERCHANT BANKING IN ISSUE MANAGEMENT
Merchant banker as issue manager to the capital issues, plan, co-ordinate and control
the entire issue activities and direct different intermediaries to contribute to the success of
the issue. Issue management by merchant bankers mainly focuses on origination, underwriting
and distribution of securities. Management of issues refers to effective marketing of corporate
securities viz., equity shares, preference shares and debentures or bonds by offering them
to public. Merchant banks act as intermediaries to transfer capital fromthose who own it to
those who need it. The issue function may be broadly divided into pre- issue and post- issue
management. a. Issue through prospectus, offer for sale and private placement. b. Marketing
and underwriting. c. Pricing of issues.
Table 1
Merchant Banking Practices in India
3) Preparation of prospectus and liaison with
SEBI.
4) Pricing decisions.
5) Marketing in the capacity of lead
managers.
6) Underwriters to the issue.
7) Post issue management.
Equity raising
1) Project feasibility study.
2) Advice on capital structuring.
Business planning stage
3) Preparation of prospectus and liaison with
SEBI.
4) Pricing decisions.
5) Marketing in the capacity of lead
managers.
6) Underwriters to the issue.
7) Post issue management.
Equity raising
1) Project feasibility study.
2) Advice on capital structuring.
Business planning stage
Table 2
RESTRICTIONS ON ISSUE MANAGERS
SEBI regulations have prescribed restrictions on the number of issue managers (Lead
managers) who can be associated with the public issues.
Less than Rs.50 crores 2
Rs.50 croresLess than 100 crores 3
Rs. 100 croresbut Less than Rs. 200 crores 4
Rs. 200 croresbut Less than Rs. 400 crores 5
Rs. 400 croresand Above 5 (or) more
Issue Size Maximum number of Lead managers
Less than Rs.50 crores 2
Rs.50 croresLess than 100 crores 3
Rs. 100 croresbut Less than Rs. 200 crores 4
Rs. 200 croresbut Less than Rs. 400 crores 5
Rs. 400 croresand Above 5 (or) more
Issue Size Maximum number of Lead managers
Source: SEBI (Merchant Bankers) Rules & Regulations, 1992
- 157 -
REFORMS IN ISSUE PROCESS BY SEBI RELATING TO THE PRIMARY
MARKET
Lead managers mandated to submit compliance certificate in respect of news reports.
In order to ensure that the information that had appeared in the media is consistent
with the disclosures made in the offer documents, merchant bankers were mandated
to submit a compliance certificate as to whether the contents of the news reports that
had appeared after filing of the draft offer document till closure of the issue were
supported by appropriate disclosures in the offer document or not.
SEBI has been pursuing to its objectives of investor protection, investor education,
and market developments as part of its efforts to make the market more efficient and
transparent, SEBI take appropriate regulatory measures to make themdisclosing
track records of merchant bankers is being considered to help investor take an informed
decision.
SEBI decided to extend the ASBA facility to QIBs in all public issues opening on or
after May 1, 2010. Merchant Bankers are advised to ensure that appropriate
arrangements are made to accept ASBA forms from QIBs also in addition to the
existing categories of investors. Merchant bankers are getting a good response to
IPO Application Supported by Blocked Amount (ASBA) fromretail investors, as it
contributed to 10.61% of the total retail amount collection for 2009-10.
Merchant bankers in the concerned public issue can apply under Anchor Investor
category.
All banks are free to price their subsequent issues. Issue price should be based on
merchant bankers recommendation. There need be no reference to the CCI formula
for deciding on the pricing of such issues.
REGULATORY DEVELOPMENTS TAKEN BY SEBI FOR PUBLIC ISSUES:
The issuer shall appoint one or more merchant bankers, at least one of whomshall be
a lead merchant banker and shall also appoint other intermediaries, in consultation
with the lead merchant banker, to carry out the obligations relating to the issue.
The issue shall be 100 percent underwritten, the responsibility for which is on the
merchant banker. The merchant banker/s must underwrite at least 15 percent of the
issue size.
All the underwriting and subscription arrangements made by the merchant banker
shall be disclosed in the offer document.
The merchant banker may do the market making itself or under an agreement with
nominated investor.
The merchant banker shall submit a periodic report in such manner as may be specified
by the Board fromtime to time.
- 158 -
The lead merchant banker has to exercises due diligence and satisfy himself about all
aspects of issue including offering, veracity and adequacy of disclosures in the offer
document.
Each company issuing securities through public issue has to enter into a Memorandum
of Understanding with the lead merchant banker, which specifies their mutual rights,
liabilities and obligations.
The merchant banker should be associated with allotment, refund and dispatch and
also monitor the redressal of investor grievances arising there from.
Table 3
Registered Merchant bankers from March 31
st
2007 to March 31
ST
2011
192 164 137 155 152
As on
March 31
st
2011
As on
March 31
st
2010
As on
March 31
st
2009
As on
March 31
stt
2008
As on March
31
st
2007
Merchant
Bankers
192 164 137 155 152
As on
March 31
st
2011
As on
March 31
st
2010
As on
March 31
st
2009
As on
March 31
stt
2008
As on March
31
st
2007
Merchant
Bankers
Source: SEBI &RBI
Table 4
YEAR WISE PUBLIC ISSUES UNDERWRITTEN BY INDIAN LEAD MERCHANT BANKERS
65455.85 Total
1574.35 2008-09
25558.87 2007-08
9282.03 2006-07
11082.45 2005-06
7859.30 2004-05
7039.67 2003-04
107.85 2002-03
74 2001-02
1308.47 2000-01
1264.22 1999-00
103.60 1998-99
201.00 1997-98
Amount
(Rs. In Crore)
Years
65455.85 Total
1574.35 2008-09
25558.87 2007-08
9282.03 2006-07
11082.45 2005-06
7859.30 2004-05
7039.67 2003-04
107.85 2002-03
74 2001-02
1308.47 2000-01
1264.22 1999-00
103.60 1998-99
201.00 1997-98
Amount
(Rs. In Crore)
Years
Source:- Compiled from offer documents of companies, Prime Directories of various years.
- 159 -
Table 4 provides year wise information on the amount and percentage share of total
amount underwritten by Indian based merchant bankers. A total of 65455.85 crore of equity
amount was underwritten by lead merchant bankers in India during the period of 1997-2009.
An aggregate amount of Rs. 65,455.85 crore was underwritten by Indian merchant bankers,
as visible fromthe table; Indian merchant bankers were providing underwriting services in
public issues during first four years of period under study. However, from2001-02 onward,
proportionate share of Indian merchant bankers declined The Indian merchant bankers
again dominated in the year 2007-08 and 2008-09.
Total amount of public issues underwritten by top Indian merchant bankers during the
period under review has also been shown in Table 5 and chart 1.
Table 5
Public Issues Underwritten by Indian Merchant Bankers from 1997-2009
4.44 6,301.97 Other public sector banks
0.36 511.55 IDBI Ltd
0.37 528.15 UTI securities
0.57 823.53 AnandRathi Securities
0.58 832.53 Karvy Investors
0.81 1,159.87 Edelweiss
0.94 1,340.61 Allianz Securities
1.02 1456.38
IL&FS Merchant Banking
Services Ltd
3.6 5,111.24 SBI Capital Markets Ltd
9.38 13,317.98 ICICI Securities Ltd
9.4 13,346.35 Enam Financial Services Ltd
14.47 20,544.73
Kotak Mahindra Capital Co. Ltd
Percentag
e
Amount (In
crores)
Merchant Bank Name
4.44 6,301.97 Other public sector banks
0.36 511.55 IDBI Ltd
0.37 528.15 UTI securities
0.57 823.53 AnandRathi Securities
0.58 832.53 Karvy Investors
0.81 1,159.87 Edelweiss
0.94 1,340.61 Allianz Securities
1.02 1456.38
IL&FS Merchant Banking
Services Ltd
3.6 5,111.24 SBI Capital Markets Ltd
9.38 13,317.98 ICICI Securities Ltd
9.4 13,346.35 Enam Financial Services Ltd
14.47 20,544.73
Kotak Mahindra Capital Co. Ltd
Percentag
e
Amount (In
crores)
Merchant Bank Name
Source: - Compiled from offer documents of companies,
Prime Directories of various companies
- 160 -
Chart: 1
Amount Underwritten by Indian MBs
0.00
5,000.00
10,000.00
15,000.00
20,000.00
25,000.00
K
o
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a
k

E
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a
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I
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I

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I

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I

O
t
h
e
r

Merchant banks
A
m
o
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n
t
i n
C
r
o
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e
s
Table 5 exhibits year wise amount of public issues underwritten by individual lead
managers. As revealed in the table, Kotak Mahindra Capital Co. Ltd has underwritten
maximumamount of public issues floated in each year. It has been on the top of the list by
performing aggregate underwriting obligations to the tune of Rs. 20,544.73 crore during the
period under review. This amount stood at 14.47 % of the total amount underwritten. Enam
Financial Services Ltd followed Kotak Mahindra by underwriting Rs. 13,346.35 crore
(9.40%). Other prominent lead managers who actively participated in equity share
underwriting included ICICI Securities Ltd with Rs. 13,317.98 crore (9.38%), SBI Capital
Markets Ltd underwrote Rs. 5,111.24 crore (9.40%), IL&FS Merchant Banking Services
Ltd. with Rs. 1456.38 crore (1.02%), Allianz Securities Rs. 1,340.61 crore (0.94%), Edelweiss
Rs. 1159.87 crore, Karvy Investors (Rs. 832.53 crore) and Anand Rathi Securities with a
total amount of Rs. 823.53 crore UTI securities 528.15 crore (0.37%), of public issues
amount floated during the period of study. Similarly, IDBI Ltd remained active during the
initial years only and was able to underwrite an amount of Rs. 511.55 crore (0.36%). A large
number of merchant bankers fromthe category of other merchant bankers have been involved
in the underwriting of a very tiny amount of public issues. These merchant banks underwrote
a total sumof Rs. 6,301.97 crore (4.44%) during the entire period of study which stood at
just 4.44% of the total amount of equity issues underwritten during this period.
CONCLUSIONS
Top ranking Indian merchant bankers which included Kotak Mahindra Capital Co.,
Enam Financial Services and ICICI Securities Ltd together contributed 33.25% of the total
- 161 -
amount underwritten. Among the public sector banks and their subsidiaries, SBI Capital
Markets Ltd has actively participated in the underwriting of public issues. To sumup,
underwriting of public issues by merchant bankers has assumed a great significance and
urgency in primary market in India. Even after October, 1994, when underwriting of public
issues were made non mandatory by SEBI, its role has not come down in Indian capital
market. It has contributed positively for the development of primary market in India by
increasing the confidence of both promoters as well as investors. More than 90% of amount
of public issues of equity shares was underwritten by merchant bankers. So it may be
concluded that apart fromshouldering the responsibility of management of public issues,
merchant bankers have participated actively in the underwriting of public issues.
REFERENCES
1. Aggarwal, Madhu (1996), An Appraisal of the Working Of Merchant Banking in
India, Ph.D. Thesis, Department of commerce, Delhi School of Economics, University
of Delhi.
2. Dr.G.Rameshbabu and Prof. A.Dhanalaxmi, Evaluation of financial services industry
in India, International J ournal of Research in Finance & Marketing, Volume 2, Issue
2, 2012
3. Dr.S.Guruswamy, Financial Services and Markets, Thomson, Chennai.
4. Gupta K.C. (2002), An Appraisal of the Working Performance of Merchant Bankers
in India, J ournal of Accounting and Finance, Oct.2004-March 2005, The Research
Development Association, J aipur.
5. M.Y. Khan (2005), Financial Services (3/e), Tata Mcgrawhill, New Delhi.
6. Machiraju, H.R., Merchant Banking- Principles and Practice, New Age International,
New Delhi, 2004.
7. National Stock Exchange India (nseindia.com)
8. Prime Database
9. SEBI Annual reports
10. Shah Ajay (1995), the Indian IPO Market: Empirical Facts.
11. V.K.Bhalla, Management of Financial Services Mnmol, New Delhi 2001
- 162 -
IMPACT OF FINANCIAL SERVICES IN THE ECONOMIC GROWTH
IN THE DEVELOPING COUNTRIES
1
D.Chaithanya, Asst Prof in Alluri Institute of Management Sciences she can be reached
on chaithanya. Can be reached at - deeconda4@gmail.com
2
K.Samatha, Student of MBA IV semester in AIMS Warangal.
3
K.Anusha Student of MBA IV semester in AIMS Warangal.
ABSRACT
Developing countries affix great importance to financial sector development
and deepening in the occupation of their poverty reduction goal by mobilizing savings,
facilitating payments and trade of goods and services, and promoting efficient
allocation of resources. The financial sector is seen as playing a critical role in
facilitating economic growth and, directly through broadening access to finance and
indirectly through growth, contributing to poverty reduction. Financial sector
development should be sequenced in developing countries, particularly the relative
importance of financial services. The paper highlights several areas where more
research is urgently needed in particular, how to sequence financial services in the
growth of Indian economy.
KEY WORDS
Economic Growth, Financial Services, Savings, Poverty.
INTRODUCTION
The economic development of any country depends upon the existence of a well
organized financial systemwhich supplies the necessary financial inputs for the production
of goods and services which in turn promote the well and standard of living of the people of
a country. Thus the financial system is a broader termwhich brings under its fold the
financial markets and the financial institutions which support the system. The major assets
traded in the financial systemare money and monetary assets. The responsibility of the
financial systemis to mobilizing the savings in the formof money and monitory assets and
invests to productive ventures. An efficient functioning of the financial systemfacilitates the
free flow of funds to more productive activities and thus promotes investment. Thus the
financial systemprovides the intermediation between savers and promoters faster economic
growth.
Financial services are fundamental to economic growth and development. Banking,
savings and investment, insurance, and debt and equity financing help private citizens save
money, guard against uncertainty, and build credit, while enabling business to start up, expand,
- 163 -
increase efficiency, and compete in local and international markets. For the poor, these
services reduce vulnerability and enable people to manage the assets available to themin
ways that generate income and options ultimately creating paths out of poverty. The financial
services sector is the largest in the world in terms of earnings, comprised of a wide range of
business including merchant banks, credit card companies, stock brokerages, and multinational
commercial banks. these large firms have the expertise, reputation, and geographic reach to
have significant direct impact and, through engagement and example, to expand economic
opportunity through business models that serve poor individual and SMEs as clients. They
are also developing initiatives to build human and institutional capacity and using their
experience and influence to shape policy framework in the regions in which they work.
LITERATURE REVIEW
Economists believe that the most important role of the sector in facilitating growth is
to reduce information, enforcement, and transaction costs. This is achieved through a number
of specific functions that the financial sector performs. On the basis of an extensive survey
of the literature, Levine (2004) identified and summarizes these as follows: i)countries with
better functioning banks and financial markets grow faster; ii) simultaneity bias (i.e., the
reverse causality ) does not seemto drive this conclusion ; and iii) better functioning
financial systemease the external financing constraints that that impede firmand industrial
expansion, suggesting that this is one mechanismthrough which financial development matters
for growth. Nobel Laureate Robert Lucas (1988) also dismiss finance as an over-stressed
determinant of economic growth. On the other hand, Nobel Laureate Merton Miller (1988)
argues that the financial markets contribute to economic growth. is a proportion too obvious
for serious discussions scholar (2009), while agreeing that a competitive banking sector
plays an important role in facilitating firmgrowth and competition, and that (public) equity
markets can at best constitute a small fraction of overall financing in developing countries,
questions promoting small banks as a solution. Thoma (2009) agree that developing countries
need small banks and microfinance to meet many of basic financial needs, but also need
more sophisticated financial products and services, such as hedging price risks through
futures markets, insuring against crop failures, purchasing farm equipment through pooling
arrangements, and managing the problembrought about by seasonality.
OBJECTIVES OF THE STUDY
The main objectives of the study are as follows:
1. To study the new innovations and expanding financial services sector in developing
countries.
2. To know the impact of financial sector reforms on economic development.
- 164 -
NEW AND EXPANDING MARKETS
Shareholder value is determined in part by expectations about growth. While developing
economies continue to grow, many developing economies will, as a group, grow faster on
average than developed ones for at least the next 25 years. This growth can be expected to
bring hundreds of thousands, even millions of people onto the formal financial sector for the
first time. Inclusive business models could increase the potential even further.
SMALL AND MIDIUM-SIZED ENTERPRISE FINANCE
In many developing countries, SMEs with fewer than 50 employees constitute 95%
of all businesses. And yet, SMEs in those countries contribute far less to GDP and employment
than their developed country counterparts: 17% and 30% respectively, compared with 50%
and 60% in developing countries. Part of the problemin informality, which limits SME
access to productivity tools and market opportunities. However with increasing attention to
this topic including the World Banks annual doing business rankings incenting countries
progress is taking place. With key bottlenecks being lifted, the SME sector could experience
significant growth and development, offering new and expanded markets for financial services
firms. Within the donor and investor communities, the focus on smaller, newer, and otherwise
higher- risk SMEs is intensifying, with pointed discussion of what is required to generate
attractive commercial returns?
INNOVATION IN THE FINANCIAL SERVICES SECTOR
Financial services firms have traditionally paid little attention to the poor because, by
definition, the poor have limited assets. Informality, insufficient information, inadequate
infrastructure and other barriers have reinforced the belief that serving the poor cannot be
commercially viable, much less a driver of innovation. New, lower-cost business models
have begun to challenge this conclusion, relying for instance on innovations in technology
and utilization of existing retail channels. A wide range of examples shows the power of
information and communications technology to reduce distribution and customer service
costs, including the village ATMs of Citibank and ICICI Bank in India, and the mobile
transactions services of Wizzit and MTN Banking in South Africa, SMART Communications
and Globe Telecomin the Philippines, Celpay in Zambia and the Democratic Republic of
Congo, and Vodafone and Safaricomin Kenya. Indeed, a recent study by the Consultative
Group to Assist the Poor (CGAP) found that 62 financial institutions in 32 countries report
using technology-based channels, ranging fromATMs, point of sale devices, and mobile
phones, for transactions with low-income clients.23 Interestingly, Wizzit and Globe Telecom
provide financial services without associating with a bank or other financial institution, thus
eliminating the need for the poor to hold bank accounts in order to pay bills, transfer funds,
and deposit or withdraw cash. Another emerging low-cost business model for providing
financial services to low-income clients can be found in the retail sector in Mexico, where
- 165 -
Wal-Mart is providing deposits, withdrawals, transfers, and payments going beyond
consumer credit. Domestic retail chain Elektra and its banking armBanco Azteca have
already been in this business for a number of years. A significant share of this innovation is
originating outside the traditional financial services sector. As World Bank economists Mohsen
Khalil and Charles Kenny have predicted, the technologies driving change in the next
decade may well encourage a further blurring of the line between access, industries and
applications. There is a crucial opportunity for commercial financial institutions to become
involved now, particularly while banking regulation in many countries favors partnership, as
opposed to facilitating the efforts of telecommunications, retail, and other firms to go it
alone.
CREATING INCLUSIVE BUSINESS MODELS
As defined in the United Nations Development Programmes forthcoming Growing
Inclusive Markets report, inclusive business models include the poor whether as employees,
entrepreneurs, suppliers, distributors, retailers, customers, or sources of innovation and
are or have the potential to become financially viable. In the financial services sector, most
inclusive business models to date have included the poor as customers and entrepreneurs.
These have included:
MICRO CREDIT
Nearly all multinational commercial banks are now involved in microfinance in some
capacity. Most do not provide micro-credit directly to clients, but rather invest in or structure
deals on behalf of established microfinance institutions. For example, Deutsche Bank, in
collaboration with the US Agency for International Development (USAID), the UKs
Department for International Development (DfID), and a group of philanthropists and socially
responsible investors, has created a new investment facility called the Global Commercial
Microfinance Consortium. The Consortiumleverages participating donors as the first bearers
of risk to generate investment from commercial investors; so far demand has exceeded
expectations. Citigroup underwrote a $45 million bond offering for Mexican microfinance
institution Compartamos in 2004 that was so successful that its second issuance in 2005 was
oversubscribed by 300%.
MICRO SAVINGS
While the poor are often precluded fromopening traditional bank accounts due to
high transaction fees, required deposit minimums, and the physical distance between the
client and the bank, the poor still find ways to save, often through traditional networks and
institutions. In Ghana, Barclays works with traditional Susu collectors, who act as walking
savings accounts. By offering a range of services via the Susu collectors, Barclays has
raised awareness of formal savings mechanisms, given clients greater security, and enabled
- 166 -
them to build their credit profiles. Barclays anticipates replicating the model elsewhere in
Africa. Savings groups, in various forms, are common in many parts of the developing
world.
SME FINANCE
Though to date it has been overshadowed by microfinance, SME finance is critical in
helping entrepreneurs and small businesses reach sizes where it is possible to take advantage
of economies of scale and create jobs in significant numbers. To date, much of the innovation
has been outside the commercial banking sector. In South Africa, for instance, Anglo Zimele
makes debt and equity investments in small and mediumblack economic empowerment
(BEE) enterprises connected with the mining industry, sometimes facilitating linkages between
its portfolio companies and its parent Anglo American. With support fromthe Shell Foundation,
GroFin, a pan-African investment firm, provides debt and equity along with business
development services to SMEs in South Africa, Kenya, Uganda, Tanzania, Rwanda, and
Nigeria.
SMALL ENTERPRISE ASSISTANCE FUNDS (SEAF)
SEAF is a global investment firm that provides growth capital and operational support
to small enterprises in emerging markets. Initially established as a private investment subsidiary
of CARE, the international development NGO, SEAF now operates for-profit investment
funds in more than 20 countries. It counts among its investors international finance institutions,
pension funds, insurance companies, banks, and foundations. In 2003, SEAF launched an
initiative to explore the impact of its investments on local communities. The first study
released concluded that every dollar invested in local small enterprises generated an additional
10 dollars in the local economy.
INSURANCE
The poor operate on razor-thin margins, and without significant savings, insurance, or
government social safety nets to rely on, they are extremely financially vulnerable. TATA-
MG originally entered the micro-insurance market in India as a condition for business licensing,
and has since developed a model that uses community members referred by credible NGOs
as salespeople. For the millions in the developing world who rely on agriculture for their
livelihoods, weather is a particularly important source of risk. In addition, constant uncertainty
about future earnings prevents farmers frominvesting too heavily in their farms, which
limits productivity growth. In India, ICICI Lombard Insurance has teamed up with the
microfinance institution BASIX to provide crop insurance for rain-fed farmers. Payments
are made if rain falls below a certain amount, or if certain other weather patterns occur; this
weather-indexed model has eliminated much of the cost associated with indemnity-based
insurance. ICICI Lombard projects that the business, first piloted in 2003, will become
profitable by the end of 2008.
- 167 -
COMMODITY PRICE HEDGING TOOLS
In the developed world, farmers have access to a variety of price hedging products to
protect themselves in case of price instability in world commodity prices. Farmers in the
developing world have few such options. Rabobanks has worked in East Africa to develop
affordable hedging products for cotton and cocoa farmers.
THE INTERNATIONAL APPROACH TO FINANCIAL SECTOR REFORM
Developing countries have made important progress toward improved financial
supervision in the past few years. Reforming financial sectors is a lengthy and complex
process of institution building and incentive reorientation, whose success requires full
ownership of, and participation in, the process by society and its government. Beginning in
the early 1980s, financial sector reforms in developing countries were rooted in the premise
that liberalized economic relationships, macroeconomic stability, and competitive price setting
would lead to high and stable economic growth. While most people understood that there
was a crucial role for government (prudential supervision of the financial system, for instance),
it was not seen as coincidence that, in the countries that pursued strong macroeconomic
adjustment and financial liberalization, growth improved markedly. Since the early 1 990s,
market volatility and crises, as well as a better understanding of how financial markets
work, have led economists and policymakers to re-examine their policy framework. Those
financial crises were costly and the risk of systemic repercussions is seen to have risen
sharply in recent years. Greater emphasis is now placed on market rule- making that should
be consistent across national boundaries. Also, more international policy cooperation is required
for managing rules effectively in the new global marketplace. Financial sector reformrequires
writing effective rules and addressing the question of how to make financial market
participants and supervisors respond to those rules adequately, in a timely fashion, and
consistently with the objective of maintaining efficiency. A strong emphasis must be placed
on the microeconomic and institutional dimensions of financial systems, which are linked.
Competition and prudential supervision need to be consistently integrated into financial sector
reforms. Redressing structural weaknesses relating to distorted incentives, inadequate
information, inappropriate allocation of responsibilities, and poor market infrastructures is
now regarded as a prerequisite to achieve good governance of financial institutions and
establish a solid credit discipline across the markets. The international community recognizes
the need for arrangements that minimize moral hazard, sequencing liberalization consistently
with the overall pace of market development, and supporting liberalization with policies
aimed at ensuring that there are appropriate incentives and effective market discipline.
Another distinctive feature of international strategy is recognition that financial stability
requires strong market regulation and supervision of financial institutions. Current strategy
seeks to strike a balance between principles to ensure good institutional governance,
mechanisms for inducing effective market discipline, and regulatory and supervisory regimes
that are market-friendly and mimic the market in driving agents action through incentives.
- 168 -
FINANCIAL SECTOR REFORM
To make financial markets stronger and more efficient (and therefore less vulnerable
to systemic crises), emphasis must be placed on incentive-based financial sector reforms,
that is, on setting up a systemof rewards and penalties such that market participants perceive
(correctly) that it is in their own best interest to behave in efficient and prudent ways. To
support such a system, infrastructure (including the legal, regulatory, and supervisory
frameworks) should be the responsibility of government. Reform will be lengthy, however,
and require input fromboth the private and the public sectors, and policy choices involving
tradeoffs of one kind or another will be necessary along the way. The reformprocess
described in this paper broadly covers three areas the competitive environment, including
issues of franchise value and reputational capital of banks and building capital markets and
the non-bank investor base; prudential regulation and supervision, safety nets, and self-
regulating mechanisms; and, fundamentally, information, including its production and
dissemination and the role of informal finance. Specific recommendations include:
1. BALANCING COMPETITION IN BANKING WITH INCENTIVES TO
CREATE FRANCHISE VALUE
Financial sector reformshould induce financial institutions to invest in reputational
capital. Given that many markets in developing countries are emerging fromlong
periods of underdevelopment and state controls, measures are probably needed to
increase the value of bank franchises. Some mild restraints could be used to balance
competition with incentives to induce domestic institutions to accumulate sufficient
capital (including reputational capital) before being exposed to further financial
liberalization.
2. DEVELOPING CAPITAL MARKETS AND AN INVESTOR BASE
An important medium- term objective of financial sector reform is to endow the
economy with a modern capital market and to increase participation by institutional
investors. Mature financial markets reduce transactions costs associated with limited
knowledge and incomplete trust, and thus help allocate savings to the best investment
opportunities.
3. STRENGTHENING PRUDENTIAL REGULATION AND SUPERVISION
Governments should complement the creation of franchise value by adopting a
regulatory regime based on rules designed to align the private incentives of market
players with the social goal of financial stability, and by strengthening supervision.
4. ADOPTING INCENTIVE-BASED SAFETY NETS
Safety-net arrangements to reduce the risk of a systemic crisis should minimize moral
hazard by limiting risk protection or making the cost of protection sensitive to the risk
covered.
- 169 -
Table 1
COMPONENTS OF FINANCIAL SERVICES AND THEIR GROWTH
1106.89 67609 1196.58 68,39,084 1018.87 67,02,616 617.67 13772.88 9530.77 88,59,515
2010-
11
942.29 57555 1078.75 61,65,619 913.46 60,09,173 509.76 11366.76 10778.13 10,019,023
2009-
10
265.55 16220 539.95 30,86,075 440.25 28,96,194 404.05 9009.67 5837.49 54,26,353
2008-
09
1424.84 87029 898.96 51,38,014 738.49 48,58,122 346.34 7722.82 4802.63 44,64,377
2007-
08
548.59 33508 620.25 35,45,041 511.87 33,67,350 301.11 6714.25 2085.37 19,38,493
2006-
07
448.30 27382 528.77 30,22,191 427.64 28,13,201 257.93 5751.30 1181.35 10,98,149
2005-
06
462.61 28256 297.16 16,98,428 241.03 15,85,585 205.67 4586.18 903.33 8,39,708
2004-
05
381.01 23272 210.17 12,01,207 170.40 11,20,976 172.83 3853.69 634.91 5,90,190
2003-
04
66.63 4070 100.11 5,72,198 81.65 5,37,133 139.73 3115.65 338.55 3,14,706
2002-
03
123.49 7543 107.12 6,12,224 96.81 6,36,861 125.17 2791.07 176.99 1,64,523
2001-
02
100 6108 100 5,71,553 100 6,57,847 100 2229.82 100 92,957
2000-
01
Growth Primary
Markets
Growth Bse Growth Nse Growth Commerci
al Banks
Growth Mutual
Funds(In
Crores)
Year
1106.89 67609 1196.58 68,39,084 1018.87 67,02,616 617.67 13772.88 9530.77 88,59,515
2010-
11
942.29 57555 1078.75 61,65,619 913.46 60,09,173 509.76 11366.76 10778.13 10,019,023
2009-
10
265.55 16220 539.95 30,86,075 440.25 28,96,194 404.05 9009.67 5837.49 54,26,353
2008-
09
1424.84 87029 898.96 51,38,014 738.49 48,58,122 346.34 7722.82 4802.63 44,64,377
2007-
08
548.59 33508 620.25 35,45,041 511.87 33,67,350 301.11 6714.25 2085.37 19,38,493
2006-
07
448.30 27382 528.77 30,22,191 427.64 28,13,201 257.93 5751.30 1181.35 10,98,149
2005-
06
462.61 28256 297.16 16,98,428 241.03 15,85,585 205.67 4586.18 903.33 8,39,708
2004-
05
381.01 23272 210.17 12,01,207 170.40 11,20,976 172.83 3853.69 634.91 5,90,190
2003-
04
66.63 4070 100.11 5,72,198 81.65 5,37,133 139.73 3115.65 338.55 3,14,706
2002-
03
123.49 7543 107.12 6,12,224 96.81 6,36,861 125.17 2791.07 176.99 1,64,523
2001-
02
100 6108 100 5,71,553 100 6,57,847 100 2229.82 100 92,957
2000-
01
Growth Primary
Markets
Growth Bse Growth Nse Growth Commerci
al Banks
Growth Mutual
Funds(In
Crores)
Year
INTERPRETATION
Table 1 depicts the growth of the various components of financial sector such as
Mutual funds, Commercial Banks, NSE, BSE and Primary Markets. Fromthe above analysis
it is clear that Mutual funds turnover have grown from92,957 crores in 2001 which is taken
base year as 100 points grown to 9530 points. This is a remarkable growth. In the commercial
banks turnover was 2229 crores in 2001 and grown to 13772 crores by 2012. and NSE
turnover from657847 crores in 2001 to 6702612 crores and BSE from571553 crores to
6839084 crores and primary markets from6108 crores to 67609 crores.
- 170 -
Table 2
CO-EFFICIENT OF CORRELATION OF COMPONENTS OF
FINANCIAL SERVICES WITH GDP
0.73 35855.2 PRIMARY MARKETS
0.76 3245163.4 BSE
0.75 3118506 NSE
0.69 7091.409 COMMERCIAL BANKS
0.52 3380799.4 MUTUAL FUNDS
Co-Efficient Of
Correlation With GDP
Average Of Components
Of Financial Services
Components Of Financial
Services
0.73 35855.2 PRIMARY MARKETS
0.76 3245163.4 BSE
0.75 3118506 NSE
0.69 7091.409 COMMERCIAL BANKS
0.52 3380799.4 MUTUAL FUNDS
Co-Efficient Of
Correlation With GDP
Average Of Components
Of Financial Services
Components Of Financial
Services
INTERPRETATION
Table-2 is an attempt to analyse the co-efficient of correlation of various components
of financial services with GDP. it clearly depicting that the components of financial services;
Viz Mutual funds and GDP as 0.52, Commercial Banks and GDP as 0.69, NSE and GDP as
0.75, BSE and GDP as.76 and Primary Markets and GDP as 0.73 which clearly shows that
there is positive impact of the growth of Components of financial services and growth of
GDP.
Thus it can be concluded that financial services play an important role in the economic
development.
CONCLUSION
Financial sector development plays a vital role in facilitating economic growth. A
sound financial systemsupports growth through mobilizing and pooling savings; producing
information about possible investments and allocating capital; monitoring investments and
exerting corporate governance; facilitating the trading, diversification, and management of
risks; and facilitating the exchange of goods and services. The effects of financial sector
development on growth in developing countries are more persistent and larger than those in
developed countries. The industries composed of smaller firms grow faster in countries with
a better-developed financial sector, suggesting that financial development is particularly
important for the growth of industries that are naturally composed of small firms.
- 171 -
REFERENCES
1. Available: http://www.economist.com/blogs/freeexchange/lin_roundtable.
2. Available: http://www.economist.com/blogs/freeexchange/lin_roundtable.,
www.rbi.comwww.sebi.org ,BSE and NSE web sites.
3. Calderon, C. and L. Liu. 2003. The Direction of Causality Between Financial
Development and Economic Growth. J ournal of Development Economics 72(1 ):
32134.
4. Thoma, M. 2009. Lin Roundtable: Small Banks Need Help. Free Exchange,
Economist.comblogs.
5. Zingales, L. 2009. Lin Roundtable: Leave Room for Growth. Free Exchange,
Economist.comblogs.
- 172 -
A STUDY ON VENTURE CAPITAL INVESTMENT IN INDIA
J.Madhavi, Associate Professor, R.G.Kedia college, she can be reached at Mobile:
9959811174
ABSTRACT
Venture capital investment is one of the most flexible form of financing technology
based or innovative business firms.It is a more wider way of getting finance for
investment in business enterprises which hold a bright future in terms of profits and as
well as growth. Venture capital in India was known since nineties era. It is now that it
has sussfully emerged for all the business firms that take up risky projects and have
high growth prospects as well. Venture capital in India is provided as risk capital in
the firm of shares, seed capital and other similar means. Today India has becoming a
viable market for venture capital investment most of enterpreneures are interested to
infuse their capital in private equity provided to start up companies with high growth
potentials. This paper is based on the study of venture capital investment in India for
the year 2012. Venture Capital (VC) investment activity across sectors declined by
7.2% in 2012 compared with 2011, VC firms invested about $762 million over 206
deals in India during the twelve months ended December 2012, compared with $1,094
million being invested across 222 deals in 2011. The amount invested declined by
30%.
KEY WORDS
Growth, Investment, Private Equity, Venture Capital Investment.
INTRODUCTION
The termVenture Capital is understood in many ways. In a narrow sense it refers
to, investment in new and tried enterprises that are lacking a stable record of growth. In a
broader sense, venture capital refers to the commitment of capital as shareholding for the
formulation and setting up of small firms specializing in new ideas or new technologies. The
emerging scenario of global competitiveness has put an immense pressure on the industrial
sector to improve the quality level with minimization of cost of products by making use of
latest technological skills. The implication is to obtain adequate financing along with the
necessary hi-tech equipments to produce an innovative product which can succeed and
grow in the present market condition.
Venture Capital is money provided by professionals who invest and manage young
rapidly growing companies that have the potential to develop into significant economic
contributors.
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According to SEBI regulations, venture capital fund means a fund established in the
form of a company or trust, which raises money through loans, donations, issue of securities
or units and makes or proposes, to make investments in accordance with these regulations.
The funds so collected are available for investment in potentially highly profitable enterprises
at a high risk of loss.
VENTURE CAPITALIST
A Venture Capitalist is an individual or a company who provides, Investment Capital,
Management Expertise, Networking & marketing support while funding and running highly
innovative & prospective areas of products as well as services. Thus, the investments made
by Venture Capitalists generally involves Financing new and rapidly growing companies,
purchasing equity securities, taking higher risk in expectation of higher reward, having a
long frame of time period, generally of more than 5 - 6 years. Actively working with
management to devise strategies pertaining for overall functioning of project. Networking
and marketing of the product /service being offered
VENTURE CAPITAL FINANCING
It generally involves start up financing to help technically sound, globally competitive
and potential projects to compete in the international markets with the high quality and
reasonable cost aspects. The growth of South East Asian economies especially Hong Kong,
Singapore, South Korea, Malaysia along with India has been due to the large pool of Venture
Capital funds fromdomestic / offshore arenas. Venture Capitalists draw their investment
funds from a pool of money raised from public and private investors. These funds are
deployed generally as equity capital (ordinary and preference shares) and some times as
subordinated debt which is a semi secured investment in the company (through debenture)
ranking below the secured lenders that often requires periodic repayment. Today, a VC deal
can involve common equity, convertible preferred equity and subordinated debt in different
proportions.
The Venture Capital funding varies across the different stages of growth of a firm.
The various stages are
1. PRE SEED STAGE: Here, a relatively small amount of capital is provided to an
entrepreneur to conceive and market a potential idea having good future prospects.
The funded work also involves product development to some extent
2. SEED STAGE: Financing is provided to complete product development and
commence initial marketing formalities.
3. EARLY STAGE / FIRST STAGE: Finance is provided to companies to initiate
commercial manufacturing and sales.
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4. SECOND STAGE: In the Second Stage of Financing working capital is provided
for the expansion of the company in terms of growing accounts receivable and
inventory.
5. THIRD STAGE: Funds provided for major expansion of a company having increasing
sales volume. This stage is met when the firmcrosses the break even point.
6. BRIDGE / MEZZANINE FINANCING OR LATER STAGE FINANCING:
Bridge / Mezzanine Financing or Later Stage Financing is financing a company just
before its IPO (Initial Public Offer). Often, bridge finance is structured so that it can
be repaid, fromthe proceeds of a public offering.
There are basically four key elements in financing of ventures which are studied in
depth by the venture capitalists. These are:
1. MANAGEMENT: The strength, expertise & unity of the key people on the board
bring significant credibility to the company. The members are to be mature,
experienced possessing working knowledge of business and capable of taking
potentially high risks.
2. POTENTIAL FOR CAPITAL GAIN: An above average rate of return of about
30 - 40% is required by venture capitalists. The rate of return also depends upon the
stage of the business cycle where funds are being deployed. Earlier the stage, higher
is the risk and hence the return.
3. REALISTIC FINANCIAL REQUIREMENT AND PROJECTIONS: The
venture capitalist requires a realistic view about the present health of the organization
as well as future projections regarding scopenature and performance of the company
in terms of scale of operations, operating profit and further costs related to product
development through Research & Development.
4. OWNERS FINANCIAL STAKE: The financial resources owned & committed
by the entrepreneur/ owner in the business including the funds invested by family,
friends and relatives play a very important role in increasing the viability of the business.
It is an important avenue where the venture capitalist keeps an open eye.
VENTURE CAPITAL INDUSTRY IN INDIA
HISTORICAL EVOLUTION
The development of the organised venture capital industry in India, as is in existence
today, was slow and belaboured, circumscribed by resource constraints resulting from the
overall framework of the socialistic economic paradigms. Although funding for new
businesses was available frombanks and government owned development financial institutions,
it was provided as collateral-based money on project-financing basis, which made it difficult
- 175 -
for most new entrepreneurs, especially those who were technology and services based, to
raise money for their ideas and businesses. Most entrepreneurs had to rely on their own
financial resources, and those of their families and well wishers or private financiers to
realise their entrepreneurial dreams.
Early Beginnings
In 1972, a committee on Development of Small and MediumEnterprises highlighted
the need to foster venture capital as a source of funding new entrepreneurs and technology.
This resulted in a few incremental steps being taken over the next decade-and-a-half to
facilitate venture capital funds into needy technology oriented small and mediumEnterprises
(SMEs), namely:
1. Risk Capital Foundation, sponsored by IFCI, was set-up in 1975 to promote and support
new technologies and businesses.
2. Seed Capital Scheme and the National Equity Scheme was set up by IDBI in 1976.
3. Programme for Advancement of Commercial Technology (PACT) Scheme was
introduced by ICICI in 1985.
These schemes provided some succour to a limited number of SMEs but the activity
of venture capital industry did not gather momentumas the funding was based on investment
evaluation processes that remained largely collateral based, rather than being holistic, and
the policy framework remained unaltered, without the instruments to inject dynamismin the
VC industry. Also, there was no policy in place to encourage and involve the private sector
in the venture capital activity.
SETTING-UP OF TDICI AND REGIONAL FUNDS: 1987-1994
For all practical purposes, the organised venture capital industry did not exist in India
till almost 1986. The role of venture capitalists till then was played by individual investors
and development financial institutions. The idea of venture capital gained momentumafter it
found mention in the budget of 1986-87. A 5% cess was levied on all know-how imports to
create the corpus of the venture fund floated by IDBI in 1987. Later, a study was undertaken
by the World Bank to examine the possibility of developing venture capital in the private
sector, based on which the Government of India took a policy initiative and announced
guidelines for venture capital funds (VCFs) in India in 1988.
Soon many other funds followed. The pioneers of the Indian venture capital industry
were largely government-owned banks and financial institutions, with some contribution
from the financial services companies in the private sector.
- 176 -
ENTRY OF FOREIGN VENTURE CAPITAL FUNDS: 1995-1998
Thereafter, the Government of India issued guidelines in September 1995 for overseas
investment in venture capital in India. For tax-exemption purposes, guidelines were also
issued by the Central Board of Direct Taxes (CBDT) and the investments and flow of
foreign currency into and out of India was governed by the Reserve Bank of Indias (RBI)
requirements. Further, as a part of its mandate to regulate and to develop the Indian capital
markets, the Securities and Exchange Board of India (SEBI) framed the SEBI (Venture
Capital Funds) Regulations, 1996. These guidelines were further amended in April 2000
with the objective of fuelling the growth of venture capital activities in India.
With globalisation policies and practices resulting in India getting increasingly linked
with the world, the policy framers realised the tremendous potential of venture capital activity
and its resultant impact on the countrys growth. In his 1999 budget speech, the finance
minister of India announced that for boosting high-tech sectors and supporting first generation
entrepreneurs, there is an acute need for higher investment in venture capital activities. He
also announced that the guidelines for registration of venture capital activity with the Central
Board of Direct Taxes would be harmonized with those for registration with the Securities
The Government of India constituted a SEBI committee headed by K. B.Chandrasekhar to
make recommendations to facilitate the growth of VC industry in India. This committee
submitted its report in J uly 2000 with the following salient recommendations, all of which
were accepted and implemented:
1. SEBI should be the nodal regulator for VC funds in India providing a smooth, single
window, problem-free regulatory framework for quick and efficient flow of money
into VC funds in India.
2. Tax pass-through status should be granted to all regulatory compliant VC funds, similar
to that which is provided to mutual funds, ensuring that at the pool-level (VC Fund)
profits are tax exempt.
3. Foreign venture capital investors (FVCI) should also be registered with SEBI. This
registration should enable themto have the same facilities as the foreign institutional
level of easy investments and disinvestments without any FIBP/RBI approvals.
VENTURE CAPITAL COMPANIES IN INDIA.
Aavishkar India
Accel Partners India
Artheon Ventures
Artiman Ventures
August Capital Partners
- 177 -
BlueRun Ventures
DFJ India
Epiphany Ventures
Helion Venture Partners
IFCI Venture Capital Funds
India Innovation Investors
Inventus (India) Advisory Company
J AFCO Asia
Netz Capital
Nexus India Capital
Ojas Venture Partners
Reliance Venture
SAIF Partners
Sequoia Capital
Trident Capital
Veddis Ventures
VentureEast
VENTURE CAPITAL INVESTMENT IN INDIA IN 2012
Venture capital firms have invested around $762 million over 206 deals in India during
the 12 months ended December 2012. While investment activity declined by 7.2% over
2011 (which had witnessed $1,094 million being invested across 222 deals), the amount
invested declined by 30% suggesting a marked preference for small ticket investments.
According to a study by Venture Intelligence, with 133 investments worth about $381
million, the Information Technology and IT-Enabled Services (IT & ITES) industry retained
its status as the favorite among VC investors during 2012 accounting for 65% of the
investments (50% in value terms). The volume of investments in IT & ITES rose by eight%
over that in 2011
The decline in the value of VC investments in IT & ITES investments year-on-year
by 32% - in 2012 is more owing to definition as some of the formerly VC-backed IT start-
ups graduated to receive significant sized PE rounds during 2012, commented Arun Natarajan,
founder & CEO of Venture Intelligence.
- 178 -
The list of such companies included e-commerce firmFlipkart that raised a $150
million round led by South Africa-based Naspers with participation from Iconiq Capital and
existing investors Tiger Global and Accel Partners; local search firmJ ustDial that raised
$60 million fromSequoia Capital India; online advertising firmPubmatic that raised a $45
million round led by US-based August Capital with participation fromexisting investors
(Helion Ventures, Nexus Ventures, DFJ and SVB) and online classifieds firm Quikr that
raised a $32-M round led by Warburg Pincus.), he added.
Healthcare & Life Sciences industry emerged as the second favorite destination for
VC investors, attracting 18 investments worth $98 million during the year. Education industry
came in third attracting 14 investments worth $53 million. Financial services and Energy
industry were the fourth and fifth favorite industries attracting 10 investments (worth $55
million) and 9 investments ($62 million) respectively.
Venture capital investment in India slowed in the J anuary-J une period but
entrepreneurial activity continued to be robust as the number of transactions didnt drop.
Venture capital investments have contracted by 30% to $762 million across 206 deals in
2012, creating a vacuumfor startups wanting to shape their growth strategies. VCs invested
$1,094 million spread across 222 deals in 2011, says VC/PE tracker Venture Intelligence.
Venture capital firms invested $363 million across 100 deals in the six months ended
J une compared with 103 deals worth $520 million in the same period. last year, according to
a study by Venture Intelligence, a research service focused on private equity, venture capital
and mergers and acquisitions transaction activity in the country.
For the three month ended J une, venture capital firms invested $186 million over 55
deals, compared with $281 million being invested across 59 deals in the year earlier but
higher $177 million across 45 deals in the preceding quarter, the report said. The number of
deals have not shown a sharp fall, which means that entrepreneurial activity is robust and
thats attracting investment.
Key deals in the quarter included the $20 million investment led by Everstone in salon
chain firmYLG Salon & Spa, with participation fromexisting investor Helion Ventures.
Peepul Capitals investment of $16.2 million in medical devices firmCura Healthcare was
the second-largest deal.
Among early-stage deals, Russian venture capitalist firmru-Net Holdings invested
$9 million in Sequoia Capital-backed online apparel brand Freecultr and $8 million in online
shoe retailer BeStylish. Fidelity Growth Partners India led a $6.3 million round for MineralTree,
a US-based secure payments provider for small and mediumentreprises.
The overall sluggish business environment has perhaps prompted entrepreneurs to be
more circumspect about expansion plans and consequently raise less capital.
- 179 -
Venture capital firms such as Sequoia Capital, which invested in growth-stage
companies a couple of years ago, have now refocused on early stage segment., Similarly,
other funds such as Matrix Partners and SAIF among others are also looking more toward
early stage investments, while continuing to be focused on growth investing.
Investments in IT/ITeS companies led the deal table accounting for $381 million across
133 deals last year, but dropped from$558 million in 2011. The value of deals in healthcare
and life sciences dipped to $98 million from$120 million.
The sharp decline in venture money is attributed to slower pace of investments in
Series A and B rounds compared to early-stage funding. Though VCs pumped in a lot of
seed money, the pace of subsequent rounds of funding slowed down last year. Cheques
over $1 million are not easy to come by, said Shekhar Kirani, partner in VC firmAccel
Partners.
E-commerce saw a sharp decline in number of deals in 2012, partly because the
previous year had seen a significant number of deals in this space. Online retailer Flipkart
raised $150 million fromTiger Global and Accel Partners in 2012, Yebhi.com raised $18
million from Fidelity Growth Partners and Nexus Venture Partners. E-commerce saw 31
PE and VC deals in 2012 translating into $298 million compared to 36 PE/VC deals worth
$328 million in 2011, says Venture Intelligence. In 2011, daily deal website Snapdeal raised
$40 million fromBessemer Venture Partners along with existing investors Nexus Venture
Partners and IndoUS Venture Partner. Travel portal YatraOnline raised $45 million from
Intel Capital, Norwest and Valiant Capital.
Group-buying sites that raised $66 million across four deals in 2011, did not see a
single round of fund-raising in 2012. People took a breather to consolidate their investments
in 2012. Startups are beginning to experience what is called a Series A crunch. This is
expected to worsen in 2013-14. Companies need growth capital which is becoming increasing.
In 2011, VCs sunk a lot of money in e-commerce ventures that showed tremendous
revenue traction. They showed 30-50% growth month-on-month within a few months of
operations. Other companies into cloud infrastructure, software-as-a-service and mobile
apps didnt demonstrate such high growth rates in their initial days. Last year, VCs felt
pumping huge monies into e-commerce was not sustainable anymore,, said Mukund Mohan,
CEO-in-residence of Microsoft Accelerator, a startup accelerator programme.
Few secondary deals and the absence of no IPOs of VC-backed ventures have
reduced enthusiasm among investors. Exit options for VCs have dried up.
An Ernst & Young report titled Globalizing Venture Capital said IPOs and secondary
sales to other PE/VC funds have been few in number. In 2011, there were no VC-backed
IPOs, while in 2010, there were VC-backed IPOs worth a total of $46 million. Thus exit
preparedness is expected to account for a significant part of Indian fund managers time as
they exit their 2005-08 vintage investments, the report added.
- 180 -
INVESTMENTS BY STAGE & REGION
Early Stage investments accounted for 82% of all VC investments in volume terms
and 58% in value terms during 2012. Companies based in South India accounted for 45% of
all VC investments (56% by value) during 2012. Their peers in Western India accounted for
25% of the pie in 2012 (12% by value). Companies based in North India accounted for 23%
of the investments in 2010 (22% by value).
Among cities, companies headquartered in Bangalore were the favorite among VC
investors during 2012 attracting 62 investments, followed by National Capital Region (including
New Delhi, Gurgaon and Noida) based companies that accounted for 45 investments and
Mumbai based companies with 39 investments. Chennai and Hyderabad followed with 14
deals and 12 deals.
CONCLUSIONS
LLP and the National Venture Capital Association was released, which showed a
10% decline in venture capital invested in 2012 vs. 2011, a shortfall of nearly $3 billion. The
pain was spread across almost every industry, with software being one of only two industries
of the 17 tracked to experience growth in 2012 (albeit the largest industry receiving 31% of
venture financing. In 2012 venture investment appears to have softened considerably and
may be in a state of transition with the funding environment less robust. The VC industry is
undergoing profound changes and seed/angel funds have become more active than ever
before. A panel of expert angel and venture capital investors take a look at early stage
investing during the past year and what the future investment environment holds.
REFERENCES
1. NVCA and Venture Economics - National Venture Capital Yearbook.,1999
2. I M Pandey, Venture Capital Development Process in India, Technovation, Vol.18,
1998.
3. I M Pandey , Venture Capital: The Indian Experience, New Delhi: Prentice Hall,
1996.
4. McKinsey US Venture Capital Industry Industry Overview and Economics
(Summary Document), September, 1998.
5. Indian Venture Capital Association - IVCA Venture Activity 1997
6. Steven P. Galante, The Private Equity Analyst newsletter - An Overview of the
Venture Capital Industry and Emerging Changes
7. The Securities and Exchange Board of India - SEBI (Venture Capital Funds)
Regulations, 1996
8. Mr. Sudhir Sethi, India - Accessing Venture Capital Funds, Walden, J une 1999.
- 181 -
E-GOLD: A NEW PERSPECTIVE
1
Mohd Mujahed Ali, Asst Prof of Finance and Accounting in Alluri Institute of Management
Sciences Warangal. He can be reached on 9849891687 and Mubarak_mujahed@yahoo.co.in
2
K. Saichand, Student of MBA IV Semester in Alluri Institute of Management Sciences.
He can be reached on saichand1023@gmail.com
3
V. Ashwini, Student of MBA IV Semester in Alluri Institute of Management Sciences.
She can be reached on ashwinivelpula14@gmail.com
ABSTRACT
Gold Exchange Traded Funds (G-ETF) is an exchange traded fund with gold
being the principle and only commodity being traded. Investing in a gold exchange
traded funds provides the benefit of liquidity which is limitation in owning physical
gold. India is one of the largest gold consuming nations in the world. Gold ETF is an
emerging option of the various investment alternatives available to the investor.
Allocation of a small portion of investment in Gold ETF would diversify the portfolio
risk. The investment in the Gold ETF is low due to the lack of much awareness among
the investors and the sentimental attachment of the investors towards holding gold in
physical form. If the uncertainty over the global economies and volatility in the equity
markets are to continue for some more time, Gold ETFs are bound to find not only
more number of investors, but also more number of Mutual Fund players to launch
them in the coming future. However, initiatives are to be taken by the Mutual Funds
offering Gold ETFs, Govt. SEBI and Members of the Stock Exchanges for creating
awareness among the investors.
KEY WORDS
E-Gold, G-ETF, Investment, Rate on Return.
INTRODUCTION
Gold has historically served as both a legitimate hedge against inflation and as an
integral part of a diversified investment portfolio. But how can individual investors participate
in the resurgence of gold and use gold as a vehicle for investing, preserving and increasing
ones wealth. Today, more than any other time in history, active investors have available to
them a variety of ways to invest in the performance of gold. Fromgold bars to mining stocks
or derivatives, individuals have flocked into gold-related investments in an attempt to benefit
from the renewed interest in gold. Two of the more popular gold investments chosen by
professional money managers are Gold futures and exchange traded funds based on gold.
- 182 -
`E-gold is the electronic mode of investing in gold. Investors across the country now
have another investment option where they can buy exchange traded funds of gold, the
returns generated correspond to the domestic price movement of physical gold.
ETFs are similar to mutual funds, except that shares in an ETF can be bought and
sold throughout the day and ETFs do not sell or redeemtheir individual shares at net asset
value. Instead, financial institutions purchase and redeemETF shares directly fromthe ETF
in large blocks, called creation units. ETFs generally provide the easy diversification, low
expense ratios transparent portfolios and tax efficiency as index funds, while still maintaining
all the features of ordinary stock, such as limit orders, short selling, and options. ETF funds
also do not have to maintain a cash reserve for redemptions or pay brokerage expenses so
do not charge a load. EFT prices are set by markets and not based on day-end asset values.
If there is strong investor demand for an ETF, its share price will rise above its net asset
value per share, giving arbitrageurs an incentive to purchase additional creation units from
the ETF and sell the component ETF shares in the open market. The additional supply of
ETF shares increases the ETFs market capitalization and reduces the market price per
share, generally eliminating the premiumover net asset value. ETFs are dependent on the
efficacy of the arbitrage mechanismin order for their share price to track net asset value.
Gold-ETF is a financial product that is listed on a stock exchange and represents
ownership of underlying gold asset. Gold-ETFs are exchange traded funds that are meant to
track closely the price of physical gold. It is an open ended mutual fund whose units represent
physical gold that is 99.5% pure. Gold-ETF provided investors a means of participating in
the gold bullion market without the necessity of taking physical delivery of gold, and to buy
and sell that participation through the trading of a security on stock exchange. Gold-ETFs
enable investors to invest funds where the gold is the underlying asset. Millions of investors
are doing so across the globe, and at a burgeoning clip. Exchange Traded Funds (ETFs) are
one of the fastest growing areas of investing and have significantly changed investor behavior,
yet there is limited academic research on ETFs, with minimal on commodity based ETFs.
REVIEW OF LITERATURE
Aggarwal & Soenen (1988) examines gold market efficiency vs the S&P 500. They
argue that the strong movement in gold prices offer an opportunity for strong returns even
risk adjusted, though there was significant positive skewness and daily changes was
leptokurtic. However the inefficiencies diminished under the CAPM model and that when
filter tests were applied the excess return likewise evaporated.
Solt & Swanson (1981) note the importance of including gold and silver in a risk
return framework and note that gold and silver returns show a low correlation to the market.
They thus conclude that gold and silver have a speculative rather than investment value.
- 183 -
Fama & Blume (1973) developed filter trading rules and examined the returns of 24
filters concluding that the evidence indicated trading rules do not consistently earn returns
greater to those of a simple passive (buy and hold) approach. The filter trading rules are
x%; if daily closing price (of gold or silver) increases x% , buy and hold the commodity, until
its price moves down at least x% fromthe subsequent high, at which time the investor
should simultaneously sell and go short. The short position is maintained until the daily close
price rises at least x% above the subsequent low at which time the investors buys.
De J ong & Rhee (2008) found that ETFs in general provide abnormal risk adjusted
returns based on Fama and French 3 factor model exceed transaction costs. De J ong &
Rhee do not however distinguish commodity ETFs fromother ETFs.
Buyuksahin, Haigh, and Robe (2008) examined the S&P Goldman Sachs Commodities
Index (S&P GCSI) weekly return data and revealed no correlation between commodity and
equity returns, with commodity returns being lower and no sustained pricing relationship
over the long-run. Nor was evidence found of an increase in co-movement between equities
and commodities during a period of extreme returns.
Engle & Sarkar (2006) found that where an arbitrage opportunity exists between the
price of a given ETF and its Net Asset Value (NAV), this will be minor and quickly exploited
eliminate any premiums/discounts. Miffre (2007).
OBJECTIVE OF THE STUDY
Gold ETFs are becoming more and more popular because investing in precious metals
such as gold is getting quite popular due to the high gold prices. But investing in gold requires
special attention, to understand the dynamismof performance of G-ETF, Investing in gold is
a hedging mechanismagainst to volatility in financial market investments, inflation and passive
investment strategy with electronic mode of reserve and safe of investment in gold.
The objective of the study to evaluate the performance of G-ETFs with select five
benchmark securities in terms of risk-return analysis, which are traded in NSE India Ltd,
and how for G-ETF are best instrument for hedging mechanismto financial securities.
METHODOLOGY
The data collected fromthe secondary source of stock exchanges, scope of study is
limited to the period of 1 year fromjan1st 2012 to December 31
st
2012 and has done on the
5 selected scripts namely: Kotak gold, Sbigets, goldbees, idbigold, Relgold respectively.
The analysis is made through the risk-return analysis of selected schemes, correlation
analysis with bench mark index S&P Nifty, Sharpe, Treynor, J ensen and Fama model applied
for performance analysis of select schemes
- 184 -
THE RATE OF RETURN
The rate of return of the fund can be measured through the changes in Net Asset Value
(NAV) of the fund over a period of time. The NAV calculated in the form of dividend
income, capital gain, bonus shares income from the investment in the securities by the
funds. Hence it is computed through, the following formula
r
it
= (EP
it
+Div
it
+Cap.Dist
it
- BP
it
)/ BP
it
Where:
r
it
=the total rate of return on fund i during month t
EP
it
=the ending price for fund i during month t
Div
it
=the dividend payments made by fund i during month t
Cap.Dist
it
=the capital gain distributions made by fund i during month t
BP
it
=the beginning price for fund i during month t
The market returns are computed on similar lines with NSE S&P Nifty as benchmark.
The return on the market portfolio is computed as:
r
m
= ln (ending S&P Nifty / beginning S&P Nifty )
Risk Standard deviation: Measure of Total Risk
Financial analysts and statisticians prefer to use a quantitative risk surrogate called
the variance of returns; the standard deviation and the variance are equally acceptable and
equivalent quantitative measures of an assets total risk. The variance and standard deviation
are computed fromlogarithmic annual returns
r
p
)
Where r
p
=return on individual mutual fund unit. r =mean rate of return
Sharpes Portfolio Performance Measure
The Sharpe portfolio performance measure uses the standard deviation of returns as
the measure of total risk. It evaluates the portfolio manager on the basis of both rate of
return performance and diversification. The Sharpe measure of portfolio performance
(designated S) is stated as follows:
rp- rf
SM =

i
- 185 -
Where:
r
p
= the average rate of return for portfolio i during a specified time period
r
f
= the average rate of return on risk-free assets during the same time period

i
=the standard deviation of the rate of return for portfolio i during the time period
TREYNORS PERFORMANCE MEASURE
Treynors portfolio performance measure hypothesize on two components of risk: (1)
risk produced by general market fluctuations and (2) risk resulting fromunique fluctuations
in the portfolio securities. It is compute through
rp- rf
TM =
p
|
Where:
r
p
=the average rate of return for portfolio i during a specified time period
r
f
=the average rate of return on a risk-free investment during the same time period
|
p
=Theslopeofthefundscharacteristiclineduringthattimeperiod(thisindicates
the portfolios relative volatility)
JENSEN PORTFOLIO PERFORMANCE MEASURE
The J ensen measureis based on the Capital Asset Pricing Model (CAPM). All versions
of the CAPM states that the realized rate of return on a security or portfolio during a given
time period should be a linear function of the risk-free rate of return during the period, plus
a risk premiumthat depends on the systematic risk of the security or portfolio during the
period plus a randomerror term(e
jt
). It shows that risk premiumearned on the j
th
portfolio
is equal to
j
times a market risk premium plus a random error term.
E (r
p
) =r
f
+|
j
[E(r
m
) r
f
]+e
jt
Where:
E (r
p
) =the expected return on security or portfolio j
r
f
=the one-period risk-free interest rate
|
j
=thesystematicrisk(beta)forsecurityorportfolioj
E (r
m
) =the expected return on the market portfolio of risky assets
e
jt
=randomerror term
- 186 -
FAMAS MEASURE
J ensens measure computes excess returns over expected returns based on premium
for systematic risk. Eugene F Fama (1972) goes a step ahead, he suggests to measure fund
performance in terms of excess returns over expected returns based on premiumfor total
risk.
In other words, the excess returns are computed based on Capital Market Line (CML).
Fama breaks down the observed return into four components:
i) Risk-free return r
f
ii) Compensation for systematic risk (r
m
- r
f
)
iii) Compensation for inadequate diversification (r
m
- r
f
){(
p
/
m
)-()}
iv) Net superior returns due to selectivity (r
p
- r
f
.)-(p/m) (r
m
- r
f
)
The second and third measures indicate the impact of diversification and market risk.
By altering systematic and unique risk a portfolio can be reshuffled to get the desired return.
Fama says the portfolio performance can be judged by the net superior returns due to
selectivity. His performance measure denoted by F
P
is
F
p
= Portfolio turn Risk free return - returns due to all risks
F
P
= (r
p
- r
f
) {
p
/
m
} [r
m
- r
f
]
Where F
P
=Famas measure for portfolio,
r
P
=portfolio return,
r
f
=risk free return,

P
=standard deviation of the portfolio returns &

m
=standard deviation of the market returns.
A positive value for F
P
indicates that the fund is earned returns higher than expected
returns and lies above CML, and a negative value indicates that the fund is earned returns
less than expected returns and lies below CML. These measures identify the mistakes and
suggest a direction for the correction in portfolio of funds. A comparison of Sharpes and
Treynors ratios will help the fund managers to correct their actions fromrisk angle and
comparison of J ensens and Famas measures will help fromreturn angle.
- 187 -
DATA ANALYSIS
To analyse the importance of gold ETF and its performance and attempt has been
made by selecting some gold securities which are widely traded in the market. The selected
gold securities are Kotak Gold, SBIGETS, GOLDBEES, IDBIGOLD and RELGOLD. The
Risk and Return of these gold securities have been calculated and measured with the
performance of the Market. In our analysis we have taken NIFTY return and Risk as
Market Risk and Market Return. the performance of Market and gold securities is evaluated
with Sharpes evaluation method and interpreted.
Market Return = 2.09 (Expected Monthly return on Nifty J an 2012-Dec 2012)
Market Risk = 4.92 (Monthly Risk on Nifty J an 2012-Dec 2012)
1. Return and Risk calculations. CORRLEATION BETWEEN GOLD ETFS
AND NIFTY
TABLE: 1
GOLD ETF ANALYSIS
0.171 0.52 1.603 1.1301 RELGOLD
0.147 0.35 2.056 0.955 IDBIGOLD
0.119 0.34 1.719 1.094 GOLDBEES
0.051 0.17 1.52 1.074 SBIGETS
0.159 0.46 1.691 1.212 KOTAKGOLD
BETA CORRELATION RISK RETURN SECURITIES
0.171 0.52 1.603 1.1301 RELGOLD
0.147 0.35 2.056 0.955 IDBIGOLD
0.119 0.34 1.719 1.094 GOLDBEES
0.051 0.17 1.52 1.074 SBIGETS
0.159 0.46 1.691 1.212 KOTAKGOLD
BETA CORRELATION RISK RETURN SECURITIES
INTERPRETATION
1. Kotak gold having the risk of 1.691 and return is 1.212 ; SBIGOLD ETF risk is
1.52, return is 1.074 ; GOLDBEES risk is 1.719, return is 1.094; IDBIGOLD
risk is 2.056 ,return is 0.955; RELGOLD risk is 1.603 ,return is 1.1301. By
considering the above table G-ETFs having the good returns greater than the
market returns.
2. The Gold ETFs performance is very well than the market performance in terms
of returns and comparison to risk.
3. The relationship between the NIFTY and GOLD ETF are positively correlated
fromthis we can understand if NIFTY is increasing the GOLD ETF also increases
vice versa.
- 188 -
2. Comparision of Actual Returns and Expected Return through CAPM
approach of Gold ETFs
TABLE: 2
0.899 1.130 RELGOLD
0.865 0.955 IDBIGOLD
0.824 1.094 GOLDBEES
0.727 1.074 SBIGETS
0.882 1.212 KOTAKGOLD
CAPM ( Expected Return) ACTUAL RETURN SECURITIES
0.899 1.130 RELGOLD
0.865 0.955 IDBIGOLD
0.824 1.094 GOLDBEES
0.727 1.074 SBIGETS
0.882 1.212 KOTAKGOLD
CAPM ( Expected Return) ACTUAL RETURN SECURITIES
INTERPRETATION
Table 2 depicts the expected return on Gold etfs through CAPM model and the actual
returns of these securities. by observation it is clear that Gold ETFs have performed above
the expected returns. KOTAK GOLD expected return is 0.882 but we earned more than
that of expected returns i.e., 1.212; SBIGETF expected return is 0.727 actual return is
1.074;gold bees expected return is 0.824, actual return is 1.094; IDBIGOLD expected return
is 0.865, actual return is 0.955; relgold expected return is 0.899 ,actual return is1.130,
3. PERFORMANCE EVALUATION OF GOLD ETFS
TABLE : 3
+0.01 0.231 2.783 0.296 RELGOLD
-0.269 0.09 2.047 0.153 IDBIGOLD
-0.06 0.131 2.512 0.255 GOLDBEES
-0.023 0.347 8.235 0.276 SBIGETF
+0.07 0.33 3.509 0.330 KOTAKGOLD
FAMA JENSENS TREYNORS SHARPE SCRIPNAME
+0.01 0.231 2.783 0.296 RELGOLD
-0.269 0.09 2.047 0.153 IDBIGOLD
-0.06 0.131 2.512 0.255 GOLDBEES
-0.023 0.347 8.235 0.276 SBIGETF
+0.07 0.33 3.509 0.330 KOTAKGOLD
FAMA JENSENS TREYNORS SHARPE SCRIPNAME
INTERPRETATION
An attempt is made to study the performance of Gold Etfs with the help of evaluation
techniques like Sharpes measure, J ensens Measure, Treynors Measure and Fama Measure.
it is clear fromthe above analysis that the performance of the selected gold etfs is good.
- 189 -
4. Comparision of Gold ETFS Returns with Market Returns
TABLE : 4
0.291 0.296 RELGOLD
0.291 0.153 IDBIGOLD
0.291 0.255 GOLDBEES
0.291 0.276 SBIGETS
0.291 0.330 KOTAKGOLD
NIFTY (SHARPE) SHARPE MEASURE G-ETFS
0.291 0.296 RELGOLD
0.291 0.153 IDBIGOLD
0.291 0.255 GOLDBEES
0.291 0.276 SBIGETS
0.291 0.330 KOTAKGOLD
NIFTY (SHARPE) SHARPE MEASURE G-ETFS
INTERPRETATION
From table-4 it is vivid that the performance of Gold ETFS is better than the
performance of Market. it is proved fromSharpes Evaluation Measure where Kotakgold,
SBIGETS, GOLDBEES and Relgold value is greater that Niftys Evaluation measure
CONCLUSION
E-gold is the electronic mode of investing in gold. Investors across the country now
have another investment option where they can buy exchange traded funds of gold, the
returns generated correspond to the domestic price movement of physical gold. The above
analysis has proved that gold etfs have performed well by yielding good return with low
risk. Comparatively gold etfs have performed better that the market return. Thus it is an
opportunity for the investors to invest in gold and earn high returns out of it.
REFERENCES
1. Aggarwal, R., and Soenen, L., (1988). The nature and efficiency of the gold market,
2. J ournal of Portfolio Management, 1988, Spring, Vol 14, no.3 page 18 to 21
3. Anderson, S., Born, J ., and Schnusenberg, O., (2010). Closed-End Funds, Exchange
Traded Funds and Hedge Funds. Springer: New York.
4. Fama, E., (1970). Efficient Capital Markets: A Review of Theory and Empirical
Work. J ournal of Finance, May 1970, pp. 383-417
5. J ensen, Michael C. (1968), Problems in Selection of Security Portfolios - The
Performance of Mutual Funds in the Period 1945-1964, J ournal of Finance, Vol. 23
Issue 2, p389-416.
- 190 -
6. Murphy, Rob and Wright, Colbrin, (2010) An Empirical Investigation of the
Performance of Commodity-Based Leveraged ETFs Available at SSRN
7. Sharpe, WilliamF. Alexander, Gordon J . Bailey J effery V. (2003), Investments, 6th
edition, Prentice Hall of India Pvt. Ltd., New Delhi, ISBN-81-203-2101-4.
8. Sharpe, WilliamF. (1966), Mutual Fund Performance, J ournal of Business, Part 2
of 2, Vol. 39 Issue 1.
9. www.moneycontrol.com
10. www.nseindia.com
11. www.sebi.gov.in
- 191 -
EMERGING MERCHANT BANKS
Rahela Thanveer, Student M.B.A, School of Management Studies, J NTUH, Hyderabad,
A.P. she can be reached at email: rahelathanveer@yahoo.com
ABSTRACT
Merchant bankers play a vital role in financial system by providing their services.
In doing so, they face some issues and challenges. This paper presents the need for
merchant banking and its growth, particularly in India. It also includes their registration
under SEBI guidelines and their responsibilities. The services provided by the merchant
bankers affects the economy of the country. Corporate sectors need such services to
raise capital. Services of the merchant bankers in the Indian scenario are explained.
However, Indian economy is definitely having an impact by emerging merchant banking.
KEY WORDS
Financial System, Merchant Banking, SEBI
INTRODUCTION
Merchant bank is an Organization that underwrites corporate securities and advises
clients on issues like corporate mergers involved in the ownership of commercial ventures.
Merchant banker is a person who is engaged in the business of issue management either by
making arrangements regarding selling, buying, or subscribing to securities as manager,
consultant, advisor or rendering corporate advisory service in relation to such issue
management. They render all these services for a fee.
ORIGIN: The termmerchant banking originated from the London who started
financing foreign trade through acceptance of bills. Later they helped government of under
developed countries to raise long termfunds. Later these merchants formed an association
which is now calledMerchant Banking and Securities House Association.
In 1967, National Grindlays started merchant banking services followed by Citi bank
in 1970. The first Indian bank to set up merchant banking division is SBI in the year 1972.
Later, other commercial banks followed.
The need for specialized merchant banking service was felt in India with the rapid
growth in the number and size of the issues made in the primary market.
FUNCTIONS OF MERCHANT BANKERS: Merchant bankers assist mergers
and acquisitions on transaction structure, timing, pricing and funding options. They assess
potential targets and provide analysis. Merchant bankers assist with necessary documentation
to execute a successful capital rising. They advise on real estate opportunities in the public
and private market.
- 192 -
SERVICES OF MERCHANT BANKERS: Merchant bankers provide services
in project counseling, loan syndication, management and marketing of new issues, underwriting
of public issues, portfolio management, NRI investment, advisory service relating to mergers
and takeover, offshore finance, promotional activities, leasing and finance, servicing issues
and other specialized issues.
MERCHANT BANKING REGULATIONS
According to Securities and Exchange Board of India (Merchant Bankers) Rules,
1992, it is mandatory for a merchant banker to hold a certificate of registration granted by
the Securities and Exchange Board of India, no person can act as a merchant banker. If a
person/organization wants to carry or undertake any of the authorized activities, has to get
registered under the regulations. To obtain the certificate of registration, one has to apply in
the prescribed formand fulfill two set of norms
(a) Operational capabilities and
(b) Capital adequacy norms.
Merchant bankers are classified as four categories:
Category I to carry on the activity of issue management and to act as adviser,
consultant, manager, underwriter, portfolio manager.
Category II - to act as adviser, consultant, co-manager, underwriter, portfolio manager.
Category III - to act as underwriter, adviser or consultant only.
Category IV to act only as adviser or consultant to an issue of capital.
The minimum net worth requirement for acting as merchant banker is given below:
Category I Rs. 5 crores
Category II Rs, 50 lakhs
Category III Rs. 20 lakhs
Category IV Nil
A merchant banker has to pay to SEBI: Applicant fee of 25000, registration of Rs
10 lakh and renewal fee of Rs 5 lakh 3 years fromthe 4
th
year fromthe date of initial
registration.
GUIDELINES FOR MERCHANT BANKERS
SEBIs authorization is a must to act as merchant bankers. Authorization criteria
include: Professional qualification in finance, law or business management, infrastructure
like office space, equipment and man power, capital adequacy and past track of record,
experience, general reputation and fairness in all transactions.
- 193 -
Every merchant banker should maintain copies of balance sheet, Profit and loss account,
statement of financial position. Half-yearly unaudited result should be submitted to SEBI.
Merchant bankers are prohibited frombuying securities based on the unpublished price
sensitive information of their clients. SEBI has been vested with the power to suspend or
cancel the authorization in case of violation of the guidelines. Every merchant banker shall
appoint a Compliance Officerto monitor compliance of the Act.
SEBI has the right to send inspecting authority to inspect books of accounts, records
etc., of merchant bankers. Inspections will be conducted by SEBI to ensure that provisions
of the regulations are properly complied. An initial authorization fee, an annual fee and
renewal fee may be collected by SEBI. A lead manager holding a certificate under category
I shall accept a minimumunderwriting obligation of 5% of size of issue or Rs.25 lakhs
whichever is less.
CODE OF CONDUCT
According to the 13 Regulation of the SEBI of 1992 merchant bankers should protect
the interest of investors. They deliver best possible advice to their clients without any
discrimination among them. They should maintain high standards of integrity, dignity and
fairness in conduct of business. They should fulfill all obligations in a professional and ethical
manner. At the time of issue it is ensured that prospectus and letter of offer is made
available to investors. Any penal action taken by SEBI should be informed to its clients.
Merchant banks should informthe board about any legal proceedings initiated against it.
They should abide by the rules of Securities and Exchange Board of India Regulations,
2003 . They should ensure that any person it employs should have the capacity to be a
merchant banker. It is responsible for the act of its employees and agents and should not
create false market.
OBLIGATIONS AND RESPONSIBILITIES
Merchant bankers have the following obligations and responsibilities:
Merchant banker should maintain proper books of accounts, records and submit half
yearly/annual financial statements to the SEBI within stipulated period of time. No merchant
banker should associate with another merchant banker who is not registered in SEBI.
Merchant bankers should not enter into any transactions on the basis of unpublished information
available to themin the course of their professional assignment. Every merchant banker
must submit himself to the inspection by SEBI when required for and submit all the records.
Every merchant banker must disclose information to the SEBI when it requires any
information fromthem. All merchant bankers must abide by the code of conduct prescribed
for them. Every merchant banker who acts as lead manager must enter into an agreement
with the issuer setting out mutual rights, liabilities, obligations, relating to such issues with
particular reference to disclosures allotment, refund etc.
- 194 -
ROLE OF MERCHANT BANKERS IN THE PRIMARY MARKET ISSUE
MANAGEMENT
Merchant banker is the intermediary appointed by companies in the primary market
issue. It has to look at the entire issue management and work as the Manager to the Public
Issue. In includes vetting of prospects, appointment of underwriters, appointment of bankers,
appointment of registrars, appointment of brokers and principal brokers, printing and dispatch
of prospectus and application form, filing of initial listing application, promotion of the issue,
promotion of the issue, collection of applications, processing of applications, establishing the
liability underwriters, allotment of shares, listing of the issue, cost of public issue.
SOME PROBLEMS OF MERCHANT BANKERS
SEBI guidelines have authorized merchant bankers to undertake issue related activities
only with an exception of portfolio management these guidelines have made the merchant
bankers either to restrict their activities or think of separating these activities fromthe
present one and float new subsidiary and enlarge the scope of its activities. SEBI guidelines
stipulate a minimum net worth of Rs 1 crore for authorized of merchant bankers. Small but
professional and specialized merchant bankers who dont have a net worth of Rs 1 crore
may have to close down their business the entry is denied to young specialized professional
into merchant banking business. Non- co operation of the issuing companies in timely allotment
of securities and refund of application money is another problemof merchant bankers. The
guidelines have put the responsibility on the merchant bankers. They have to seek the co-
operation of the issuing company to shoulder the responsibility.
FACTORS ON WHICH GROWTH OF MERCHANT BANKING DEPENDS
In India growth of merchant banking depends upon planning and industrial policy of
the country. It also depends upon regulatory systemof the market and economy prevailing
in India. The confidence of the people, traders, buyers, marketers, business houses, financial
institutions etc go hand in hand with merchant banking. The economic environment of the
outside world is another factor on which its growth depends. There is always competition
among the existing players and the upcoming entrants. It also has an impact over merchant
banking.
SCOPE OF MERCHANT BANKING IN INDIA
The scope of merchant banking in India can be seen by growth of new issue market,
entry of foreign investors, changing policy of financial, institutions, development of debt
market, innovations in financial investments, corporate restructuring, disinvestment. Indian
market is growing. In fact India is one of the largest emerging markets. Public issues, FDI,
debt raising are on rise. Merchant bankers assist in decision making and hence their scope
increases. With significant market freedom, merchant bankers work has increased many
- 195 -
folds. RBI prefers that commercial banks do not indulge in merchant banking business
directly. They should setup a subsidiary for the purpose. This limits scope of commercial
banks and gives space to merchant bankers. This policy also results in fair business practices.
Some countries allow commercial bankers to get involved in IPOs, placement of debentures,
etc. Indian scenario is favorable to merchant bankers. Corporate can do project appraisal,
strategic restructuring in house as well. If the corporate prefer third-party independent
assessment, then only they will engage merchant bankers. Otherwise merchant bankers
role is only statutory as in issue management. Mergers, takeover acquisition, new projects,
fund raising for government institutions, active money market are all providing better business
prospectus to merchant bankers.
REFERENCES
1. Financial Services by Eric Banks
2. http://www.sebi.gov.in/acts
3. Manual of merchant banking by Dr. V.C.Verma
4. Merchant Banking Principles and Practices by H.R. Machiraju
5. Sebi manual
- 196 -
EQUITABLE HEALTH CARE FINANCING AND PRIMARY
HEALTHCARE INFRASTRUCTURE DEVELOPMENT
CHALLENGES IN THE INDIAN CONTEXT
1
Nenavath Sreenu, Assist Professor, Department of business management, Indira Gandhi
National Tribal University, Amarkantak. MP, INDIA. Reach me at: sri_cbm@yahoo.com.
Contact: 9966483998.
ABSTRACT
The issue of appropriate mechanisms for mobilising health care financing
resources and primary healthcare infrastructure development is a high on the policy
agenda of India governments. The objectives of this paper is to critically evaluate
how health services are currently funded, explore recent trends in health care financing
and primary healthcare infrastructure development in India. The paper shows that
even though the government sources of financing are mildly progressive, the large
proportions spent by the household on health care makes it overall regressive. Both
government and private expenditures are higher for higher income quintiles and for
people living in urban areas and working in organized sector. On the other hand,
people in lower income quintile and in rural areas bear higher burden of health
expenditure as a proportion of their income. Delivery of health care is also found to
be biased in favor of urban areas.
There is an urgent need to improve infrastructure at the health centres by mapping
the available services and supporting infrastructure for providing accessible and
affordable service in rural areas and reduce the load on district hospitals. Sanctioned
posts of medical and para-medical staff should be filled on priority basis. MMU should
be provided in every district to ensure outreach medical services in remote/ difficult
areas. Completion of construction projects should be ensured within the prescribed
timeframe, to avoid Escalation of cost.
The findings suggest that at state level governments have target of allocating
only about 0.43 per cent of SGDP to health and medical care. This does not include
the allocations received under central sponsored programmes such as family welfare.
Given this level of spending at current levels and fiscal position of state governments
the goal of spending 2 to 3 per cent of GDP on health looks very ambitious task. The
analysis also suggests that elasticity of health expenditure when SGDP changes in
only 0.68 which suggest that for every one percent increase in state per capita income
the per capita public healthcare expenditure has increased by around 0.68 per cent.
Health Financing and Management must be considered together to address issues of
equity, efficiency and effectiveness in health care services.
- 197 -
KEY WORDS:
Expenditure And Public Healthcare, Financing, Infrastructure, Medical Services,
Phcs.
INTRODUCTION
The health systemin India has considerably improved during the past five decades
with the spread and accessibility of modern medicine and considerable improvements in two
important indicators of health status i) the life expectancy at birth and ii) infant mortality
rates. However, compared with other developing countries, the health status in India is not
only below the level for all developing countries but has also shown a lower level of
improvement. The life expectancy at birth in 1993 was 60.7 for India which is below 61.5
for all developing countries, and infant mortality rate for the same period was 81 which is
much higher than 70 for all developing countries. At the same time, the percentage decrease
in infant mortality rate in 1993 over 1960 was 51 per cent in case of India against 71 per cent
in China, 76 percent in Sri Lanka and 82 percent in Malaysia (UNDP, 1996) The health
status in India is low despite a significant amount of resources spent on health as compared
with similar income countries. According to the World Development Report (1993), India
spent 6 percent of its GDP or about $17,750 million on health in 1990 which is larger than the
expenditures in China, Sri Lanka and Indonesia (not only in absolute terms but also per
capita terms) but achieved a lower health status as compared to these countries.
The major objective of this paper is to study the financing of health care system and
PHCs infrastructure development fromthe viewpoint of equity. Equity in health care can be
examined with respect to i) equity in health care finance and ii) equity in the delivery of
health care. While former deals with the impact that health care financing and delivery
arrangements have on distribution of income, the latter deals with the impact that health
care and financing arrangements have on distribution of health care utilization (Doorslaer
and Wagstaff, 1998). In India, since financing of health is done fromboth private and public
sources, the progressivity of health care financing in public sector will have to be assessed
for different financing sources like direct tax, indirect tax, local tax, social insurance premiums
and for private payments like direct payments for fees and medicines or private insurance
premiums. In order to understand the redistributive effect, it is not only important to understand
the financing mix, that is the relative shares of taxes, social and private insurance premiums
and direct payments, but also find out to what degree a financing scheme is horizontally or
vertically equitable The paper is organized in three major sections i) financing of health care
ii) provision or delivery of services, and iii) primary healthcare Infrastructure. The paper
finally discusses the main findings and conclusion.
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LITERATURE REVIEW
Julian Schweitzer (2008). This study views the public healthcare finance and
decentralization as central to resolving Indias systemic public health crisis. However, some
states and districts have achieved success despite serious financial and administrative
constraints. This suggests that factors such as political commitment, community participation,
human resource management, womens empowerment, and governance may be as are
more important. The success of the national rural health mission will depend on state and
local institutional capacity, including strong partnerships with civil society organisations and
private-sector actors. Increased resources and decentralization will not be sufficient by
themselves. An examination of the failing districts will most likely reveal some systemic
failures in developing the institutions and systems needed to ensure delivery of an integrated
package of health services.
Ravi Duggal (2007). The author posits that the way in which healthcare is financed
is critical for equity in access to health-care. At present, the proportion of public health-care
resources committed to health-care in India is one of the lowest in the world, with less than
one-fifth of health expenditure being publicly financed. India has large-scale poverty. Yet,
the main source of financing health-care is out-of-pocket expenditure. This is a cause of the
huge inequities we see in access to health-care. The paper argues for strengthening public
investment and expenditure in the health sector and suggests possible options for doing this.
It also calls for a reformof the existing health-care system by restructuring it to create a
universal access mechanism which also factors in the private health sector. The paper
concludes that it is important to over-emphasize the fact that health is a public or social good
and so cannot be left to the vagaries of the market.
Stijn Claessens (2006). In this study, the author has reviewed the evidence on the
importance of rural health-care finance for economic well-being. It provides data on the use
of basic health-care financial services by households and firms across a sample of countries,
assesses the desirability of universal access, and provides an overview of the macro-level,
legal, and regulatory obstacles to access. Despite the benefits of health-care finance, the
data show that use of rural health-care financial services is far fromuniversal in many
countries, especially developing countries. Universal access to health-care financial services
has not been a public policy objective in most countries and would probably be difficult to
achieve. Countries can, however, facilitate access to financial services by strengthening
institutional infrastructure, liberalising markets and facilitating greater competition, and
encouraging innovative use of know-how and technology. Government interventions to directly
broaden access to rural health-care finance, however, are costly and fraught with risks;
among others, the risk of missing the targeted groups. The study concludes with
recommendations for global actions aimed at improving rural health-care data on access
and use and suggestions on areas of further analysis to identify constraints to broadening
access.
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K. Kananatu (2000). This review presents an overview of the India health-care
systemand its method of financing. The development of the health-caredelivery systemin
India is commendable. However, the strengthand weaknesses of the public health-care
systemand the financingproblems encountered are also discussed. Cost of health-careand
funding of both the public and private sectors were alsorevealed. One must optimise the
advantages of operating a healthfinancing scheme which is affordable and controllable
whichcontribute towards cost-containment and quality assurance. Thus,

there is a need for
the establishment of a national healthcarefinancing, a mechanismto sustain the health-care
delivery networkand operate it as a viable option. A model of the national healthfinancing
has been proposed.
Saltman and Ferroussier-Davis (2000). This study examines the determinants of
financial protection, health, and social inclusions supply in health systemand related sectors.
There is a hierarchy of interest fromnon-health sector factors in improving financial protection.
These factors include: GDP, prices, inflation, availability of insurance markets, effective tax
systems, credit, and savings programmes to more traditional parts of the health system (a)
preventive and curative health services, (b) health financing, (c) input markets, and (d)
access to effective and quality health services (preventive, ambulatory, and in-patient). In
respect to the latter, organisational and institutional factors contribute to the incentive
environment of health-financing and service delivery systems in addition to the more commonly
examined determinants such as management, the health-care policy actions by governments,
civil society, and the private sector. Finally, through their stewardship function, governments
have a variety of policy instruments that can be used to strengthen the health system, the
financing of services, and the regulatory environment within which the system functions.
These include: regulation, contracting, subsidies, direct public production, and ensuring that
information is available. In countries with weak government capacity, civil society and donors
can be encouraged to play a similar role.
STUDIES RELATED TO HEALTH FINANCING IN INDIA
In India there are few studies which have touched upon the issue of healthcare financing
and its nature. First study was R.B. Lals Singpur study of private household expenditure,
which talked about private expenditure on health in Singpur area and also what was the
government healthcare expenditure for the same area (GOI, 1946). The Indian Institute of
Management, Ahmedabad had carried out a study of health finance covering all the levels
of health expenditure state, municipal, corporate and household (IIM, 1987). Another
study of state health financing in India is that by Roger J efferey. He looked at state health
expenditure fromthe perspective of planning the administrative process involved in making
allocations and in context of policy changes. Tulasidhar and Sarma (1993) did a comparative
study of different states of India with respect to public expenditure, medical care at birth
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and infant mortality. They found that in all the states per capita real public spending grew
faster than real per capita state domestic product. Recently a number of studies have been
done on the healthcare financing in India. Duggal (1996) discusses the public-private
participation in health sector and how this can be optimised for best results. Bhat (1996,
2000) discusses about the importance of regulating the private sector in India and how
publicprivate partnership can bring needed resources while also taking care that the vulnerable
groups the poor and rural populations have access to health facilities. These studies
suggest that Indias dependence on private sector in healthcare is very high. Utilisation
studies show that a third of in-patients and three fourths of outpatients utilise private healthcare
facilities (Duggal and Amin 1989; Yesudian 1990; Visaria and Gumber 1994).
In another study Mahal et al. (2000) tried to find the distribution of public health
subsidies in India in different states. Despite a considerable desire for equity in public
policy documents, they found that public subsidies on health are distributed quite unequally
across different socio-economic groups in India. At the all-India level, the share of the
richest 20 per cent of the population in total public sector subsidies is nearly 31 per cent,
nearly three times the share of the poorest 20 per cent of the population. In rural areas this
inequality was much greater where the share of the top 20 per cent in public subsidies was
nearly four times that of the poorest 20 per cent. Mahal et al. (2000) find that 31 per cent of
public subsidies on health accrued to urban residents, somewhat higher than their share in
the total population of about 25 per cent. If we look at the state level then there also they
found substantial differences in the degree of inequality, with southern states such as Kerala,
Tamilnadu and Andhra Pradesh, and the western states of Maharashtra and Gujarat enjoying
a much more equal distribution than the north Indian states. Some of this inequality in the
allocation of public health subsidies can be explained by income-related differences in
utilisation patterns of public facilities, with the rich using more care, if health care is a normal
good. But if, however, promoting equity is a key objective of the state, there is no doubt that
substantial scope for improvement remains, whether in terms of interstate equity, or within
state distributions of public subsidies.
SOURCES OF DATA
The Primary source of data has been collected through survey method with the help
of a questionnaire. The questionnaire included the question drafted for the enquiry about the
beneficiaries and the level of satisfaction. The questionnaire was structured. The question
selected was open ended and close ended. The Secondary data was taken fromthe literature
available on the subject, information available on internet, published articles and different
books on healthcare reports.
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STATISTICAL TOOLS & HYPOTHESIS
Relevant statistical and analytical tools of ANOVA, Correlation and multi-regression
other tools appropriate for the study was used. Appropriate hypothesis relevant with the
objectives of the study were formulated and tested for significance.
HEALTHCARE FINANCING IN INDIA
The study examines the health-financing scenario in India. According to him, India
spends only 1.5 per cent of GDP on health as against the recommended 5 per cent by
W.H.O. for equity and universal coverage. He opines that (i) States have a high share
(89%) of funding their health care activities as against 9 per cent by the centre and 2.8 per
cent by the Union Territories; (ii) Increasing proportion of health expenditure on salaries
(60%-90%) and a markedly reduced (29%-5%) proportion on non-salary components is
reflected in low-level of utilization of health services; (iii) Committed involvement by others
in selected crucial areas is lacking; (iv) Health financing seems to be directed towards the
urban sector with maximumoutlays to curative care; (v) There are high inter-State variations
in health expenditure and health status; (vi) Higher share of SDF on public health does not
guarantee a better health status; (vii) Health services sectors urgently and legitimately need
additional resources; (viii) There is a need to set up technical committees and research cells
to sensitize policy makers, academicians and others; and (ix) Health Financing and
Management must be considered together to address issues of equity, efficiency and
effectiveness in health care services.
The WHO in its Alma Ata Declaration had recommended that public health care
expenditures should be at least 5 per cent of GDP if equity and universal coverage are to be
realised. Most socialist countries spend 3.5 per cent while OECD countries spend over 6
per cent of GDP on health care. In India 1.5 per cent of GDP is spent on health and family
welfare (excluding water supply and sanitation, nutrition, etc.) which includes health
expenditure by municipal bodies. At the State level, departments of health (excluding family
welfare and water supply) are spending around 5 per cent of the total government expenditure,
plan and non-plan on revenue account on medical and public health programme. While
health sectors share in the major States is around 3 per cent of the total plan outlay. CSSR-
ICMR has recommended that a minimumof 6 per cent should be spent on health services in
India. However, the Central Council of Health and Family Welfare in 1989 had recommended
seven per cent of the total plan funds for health sector.
Health care is in need of additional resources due to increasing need and expectation
of the user while increasing the efficiency and effectiveness of the existing resources. In
1989, the Planning Commission constituted a working group on health financing and
management for better utilisation of funds in the eighth Five-Year plan. The working group
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observed that (i) the efficiency of health services in India is low; (ii) there is a need for
careful scrutiny of existing allocation of resources; and (iii) health services sector legitimately
needs additional resources which must be planned in a scientific manner.
STRUCTURE OF HEALTHCARE FINANCING IN INDIA
Public spending in health care is very low at 17 percent and the National Health
Policy has stressed upon this issue. More than 86 percent of healthcare financing is through
unplanned (out-of-pocket) spending. The majority of healthcare services in India are provided
by the private sector. Private sector comprises of around 80 percent of healthcare
expenditure, with various levels of government covering the remaining 20 percent. In the
government sector, the states provide the bulk of healthcare services. The scope for higher
public spending on healthcare will be limited, as long as Indias combined central and state
government deficit remains at around 7 percent of GDP. The healthcare spending will be
sustained by two demographic trends: increase life expectancy and an ageing population.
Life expectancy which averaged 66.5 years in 2002-06, is expected to increase to an average
of 70 years in 2007-11. The proportion of the population aged 65 years and over is also rising
and will increase from4.9 percent in 2006 to 5.4 percent in 2011. These levels are far lower
than most of the developed countries. Medical tourism characterized by patients traveling to
India for medical treatment, will continue to grow. India has established as a leading destination
for medical tourismand expected to grow by 30 percent a year over the next 5 years and
will be a market of around US $2 billion by 2012. Many private hospitals in India, today, have
the medical technology to match the standards of US and UK hospitals. India will continue
to offer high levels of personal medical care and significantly cheaper costs than hospitals in
the US and Western Europe.
CURRENT STATUS OF HEALTH FINANCING-ISSUES
The review of the present situation reveals multiple sources of financing of health
care in India. The Central Government assists the States in the delivery of health care by
giving 100 per cent financial support to family welfare, maternal and child health, immunisation
and some of the national health programmes. However, the main financial responsibility for
the health services rests with the States. Another source of health financing is fromvoluntary
organisations and professional bodies. In urban areas, the municipal corporations and
municipalities are manning a network of health care services. There are urban based schemes
such as ESIS and CGHS. Large government establishments like defence, railways and
organised public and private sector institutions have their own separate financing of health
care. It is very difficult to estimate the aggregate expenditure because of numerous sources
of health financing which is complex and intricate. The plan investments on health and
family welfare sector have increased considerably over the successive plan periods. In the
first Five Year plan, investment was of Rs. 98 crore, which increased to Rs. 6,700 crore in
the seventh Five Year plan and Rs. 14,075 crore in the eighth Five Year plan respectively.
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Besides, it is very difficult to estimate the aggregate expenditure on health care in the
country because of numerous sources of health financing. One available estimate (IIMA
study, 1987) indicates that contribution of public sector expenditure is about 37 per cent and
the rest came fromprivate sector. Break up of these estimates are Central Government
7.82 per cent, State Government 22.72 per cent, local bodies 6.55 per cent, household sector
59.62 per cent and private non-house-hold sector 3.29 per cent. A serious problem in sectoral
allocation of public health spending has been the large and increasing proportion of expenditure
on salaries (60 % to 90%) and a markedly reduced (29% to 5%) proportion on non-salary
components like medicines, equipment, fuel, etc. This has led to a waste of resources because
the health personnel in place cannot work effectively without other supportive expenditure.
It is equally difficult to indicate the pattern of funding in curative and preventive care since
they are often provided in an integrated manner. Besides, Indian economy is a mixed economy
where private sector is contributing in financing health care. In addition, there are insurance
schemes, ESIS and CGHS, which are subsidised facilities. There is mediclaiminsurance
scheme for reimbursement of expenses for policy holders. Besides, there are high interstate
variations in health expenditure and health status. Thus, there is a clear need to examine in
detail the (i) health expenditure by the Central and State Governments; (ii) their real (price
adjusted) growth; (iii) temporal variations both in per capita and as share real / nominal GDP
or SDP; (iv) distribution of finance between rural and urban and by nature of health care
activities like preventive, curative and (v) the nature of relationship between health status
and health expenditure.
HEALTHCARE EXPENDITURE IN INDIA
The Indian constitution charges the states with the raising of the level of nutrition
and the standard of living of its people and the improvement of public health. Central
government efforts at influencing public health have focused on the five-year plans, on
coordinated planning with the states, and on sponsoring major national health programs. For
most national health programmes government expenditures are jointly shared by the central
and state governments. Healthcare expenditure is a very necessary social expenditure for
any country. Like any other social expenditure health expenditure also requires a significant
contribution fromthe Government. Whether it is a developed country or a developing one
states role in developing a good health infrastructure and assuring good health to everybody
becomes very critical and important. The spending on health has major contributions coming
fromprivate households (75 per cent). State governments contribute 15.2 percent, the central
government 5.2 percent, third-party insurance and employers 3.3 percent, and municipal
government and foreign donors about 1.3 (World bank 2005). Of these proportions, 58.7
percent goes toward primary health care (curative, preventive, and promotive) and 38.8
percent is spent on secondary and tertiary inpatient care.
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HEALTH EXPENDITURE BY THE STATES
Analysis of the health expenditure by the States, relating to two points of time 1996-
2000 and 2001-2005, conducted both at the nominal and adjusted figures (using appropriate
price deflators) showed two distinct patterns5. The non-plan expenditure is devoted largely
to medical care viz. highest was 86 per cent for Kerala and the lowest was 50 per cent for
Rajasthan in 1996-2000. The maximumallocation of plan expenditure goes to water supply
and sanitation followed by family welfare. This is true for both the years and for all the
States. The growth pattern of health expenditure by the States revealed an interesting trend.
Out of 16 States, ten (Andhra Pradesh, Asam, Bihar, Kerala, Orissa, Punjab, Rajasthan,
Tamil Nadu, Uttar Pradesh and West Bengal) have registered a faster growth in their health
expenditures then their State Domestic Product (SDP) and a few major States (Haryana,
Karnataka, Madhya Pradesh, Maharashtra and Gujarat) had a negative growth in their
health budget, though all of themare developed both economically as well as by the level of
their health status. The highest growth in the health budget during this period was seen in
Uttar Pradesh a State with low health status. Thus, allocative efficiency of budgetary
resources in U.P. needs close scrutiny.
ISSUES IN HEALTH FINANCING
The group recommended that health planning should be decentralized with less budget
heads and more delegation of financial powers. There should be proper distribution between
plan and non-plan allocation. Part of plan outlay needs to be converted into non-plan outlay
for funding increased maintenance liabilities. Alternate community financing schemes must
address equity of access while mobilising community participation for raising finances. For
making health care financing a shared responsibility and economic support a collective
commitment, effective co-ordination between different sectors viz. health, education,
agriculture, industry, housing, environment and sanitation should be developed and encouraged.
The government should develop clear policies, structure and mechanismto co-ordinate,
collate and optimise the use of financial resources i.e., community, voluntary organisations,
private and public institutions for promoting primary health care. The total plan outlay for
family welfare and health programmes is inadequate and needs to be raised substantially.
Higher allocations should be considered. Employers in the organised sector should contribute
more to health financing of their employees. Health insurance, which is coming up in urban
areas should be extended to rural population without any government subsidy. The research
areas identified and recommended by the group include:
(i) Evaluation of health financing effect on primary health care;
(ii) Provision of health
(iii) Care to different income groups; and
(iv) Economics of health planning.
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There is an urgent need to set up a technical committee or advisory group on health
economics and financing, comprising policy makers, economists, public health specialists
and academicians to address the following areas of concern:
(i) To outline research areas and develop necessary infrastructure for research on health
and related issues.
(ii) To provide updated and comprehensive information on individual researchers and
institutions.
(iii) To organise seminars and workshops to disseminate health data analysis and sensitise
policy makers, academicians and other concerned personnel.
(iv) To promote health economics and financing as an important research area of academic
excellence for colleges and institutions.
It is proposed that research cells may be set-up to review selected literature on health
financing and related issues. Regional repositories of selected journals and publications may
be established for use by researchers. National or international agencies would need to be
tapped for raising necessary finances for all these activities.
RURAL HEALTH INFRASTRUCTURE AND MANPOWER
FUNCTIONS
The Primary Health Care Infrastructure has been developed as a three tier system
with Sub Centre, Primary Health Centre (PHC) and Community Health Centre (CHC)
being the three pillars of Primary Health Care System. Progress of Sub Centres, which is
the most peripheral contact point between the Primary Health Care Systemand the community,
is a prerequisite for the overall progress of the entire system. A look at the number of Sub
Centres functioning over the years revealed that at the end of the Sixth Plan (1981-85) there
were 84,376 Sub Centres, which increased to 1,30,165 at the end of Seventh Plan (1985-90)
and to 1,45,272 at the end of Tenth Plan (2002-2007). As on March, 2011, 1,48,124 Sub
Centres are functioning in the country.
Similar progress can be seen in the number of PHCs which was 9115 at the end of
sixth plan (1981-85) and the figure almost doubled to 18671 at the end of Seventh Plan
(1985-90) and rose to 22669 at the end of Tenth Plan (2002-2007). As on March, 2008,
there were 23458 PHCs functioning in the country. In accordance with the progress in the
number of SCs and PHCs, the number of CHCs has also increased from761 at the end of
Sixth Plan (1981-85) to 1910 at the end of Seventh Plan (1985-90) and 4045 at the end of
Tenth Plan (2002-2007). As on March, 2008, 4510 CHCs were functioning. According to
the figures of population based on 2001 Population Census, the shortfall in the rural health
infrastructureis to the tune of 20486 Sub Centres, 4477 PHCs and 2337 CHCs, ignoring
surplus in some States / UTs.
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Presents the number of Sub Centres, PHCs and CHCs existing in 2011 as compared
to those reported existing in 2005. As may be seen from the Statement 1, at the national
level there is an increase of 2098 Sub Centres, 651 PHCs and 1463 CHCs in 2011 as
compared to those existing in 2005. This implies an increase of about 43% in number of
CHCs, about 2.8% in number of PHCs and about 1.4% in number of Sub Centres in 2011 as
compared to 2005. There is significant increase in the number of Sub Centres in the States
of Chhattisgarh, Haryana, J ammu & Kashmir, Maharashtra, Orissa, Punjab, Rajasthan,
Tamil Nadu, Tripura and Uttarakhand. Significant increase is also observed in the number of
PHCs in the States of Andhra Pradesh, Assam, Bihar, Chhattisgarh, Haryana, J ammu &
Kashmir, Karnataka, Maharashtra, Nagaland, Uttarakhand, Uttar Pradesh. In case of CHCs,
significant increase is observed in the States of Arunachal Pradesh, Chhattisgarh, Gujarat,
Haryana, Himachal Pradesh, J ammu & Kashmir, J harkhand, Kerala, Madhya Pradesh,
Odisha, Punjab, Rajasthan, Tamil Nadu, Uttarakhand, Uttar Pradesh and West Bengal. The
average population covered by a Sub Centre, PHC and CHC was 5624, 34876 and 173235,
respectively.
MANPOWER
The availability of manpower is one of the important prerequisite for the efficient
functioning of the Rural Health services. As on March, 2011 the overall shortfall (which
excludes the existing surplus in some of the states) in the posts of HW(F) / ANM was 3.8%
of the total requirement as per the normof one HW(F) / ANM per Sub Centre and PHC.
The overall shortfall is mainly due to shortfall in States namely, Chhattisgarh, Gujarat, Himachal
Pradesh, Kerala, Tamil Nadu, Tripura and Uttar Pradesh. The State-wise variation in shortfall
of ANMs
Similarly, in case of HW(M), there was a shortfall of 64.7% of the requirement. In
case of Health Assistant (Female)/LHV, the shortfall was 38% and that of Health Assistant
(Male) was 43.3%. For allopathic Doctors at PHC, there was a shortfall of 12.0% of the
total requirement. This is again mainly due to significant shortfall in Doctors at PHCs in the
States of Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Nagaland, Orissa, Rajasthan
and Uttar Pradesh. Even out of the sanctioned posts, a significant percentage of posts are
vacant at all the levels. For instance, 5% of the sanctioned posts of HW (Female)/ ANM
were vacant as compared to 42.2% of the sanctioned posts of Male Health Worker.
PUBLIC HEALTH INFRASTRUCTURE FRAMEWORK
The foundation of public health infrastructure in the country rests on its three tiers-
the Sub-Centre (SC), Primary Health Centre (PHC) and Community Health Centre (CHC).
NRHM seeks to strengthen this infrastructure as shown below:
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At the grass-root level, the Anganwadi worker (AWW) of Integrated Child
Development Services (ICDS) works with the Auxiliary Nurse Midwife (ANM) in the SC.
The ANM is responsible for primary medical care with focus on maternal and child care
and disease surveillance. District hospitals formthe top-end of the public health infrastructure.
PRIMARY HEALTHCARE INFRASTRUCTURE DEVELOPMENT
TEST OF HYPOTHESIS CORRELATION COEFFICIENT ANALYSIS
There is significant association between primary health-care centre service delivery
associate with infrastructure development in PHCs. The independent variables have been
cross checked with the beneficiaries to identify those variables that are important in their
day to day primary health-care delivery services and community participation. Primary
health-care delivery services and community participation (y) is the major dependent variable
which is influenced by the nine independent variables (x1 to x9). Primary services and
community participation (Y) it is a dependent variable to measure and evaluate the overall
performance of Primary health-care delivery services and community participation. It is
considered as a key performance indicator of rural health-care services while assessing the
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overall performance of the health services. This performance is influenced by the number
of independent variables in Primary health-care delivery services and community participation.
The relationship between the dependent variable and independent variables is expressed as
follows.
Primary services and community participate (Y) =f X1, X2, X3.X9}
Independent variables (x1 to x9): Primary services and community participate of the
rural health-care services influence with the delivery services variables such as frequency
of services, adequate of availability doctors. Recovery/ cure, Adequacy of rooms, adequate
medical equipment, Promoting universal immunization, construction household toilets,
coordination panchayat_self groups, Coordination with anganwadi and Providing Primary
medical care.
X1 =adequate availability of doctors
X2 =Recovery/ cure
X3 =Adequacy of rooms
X4 =adequate medical equipment,
X5 =Promoting universal immunization
X6 =construction household toilets
X7 =Coordination panchayats and _self help groups
X8 =Coordination with anganwadi workers
X9 =providing primary medical care.
Prior to running of regression model, the Pearsons correlation statistic has been run
to determine the variability among the dependent and independent variables for which the
correlation matrix (Table 5.79) has been generated. The Pearson correlation coefficient
indicates that there is no incidence of strong correlation that exists positively with the coefficient
value ranging from 0.6 to 1.0 among the independent variables. It indicates that there is an
absence of multi-colinearity among the variables. Consequently, a multivariate statistical
technique, multiple regression method has been run to analyse the cause and effect
relationship. After running the multiple regression analysis, it is observed that Eigen values
in 146 the multi-colinearity diagnostic matrix were found to be more than 1.0 for all the
variables hence no independent variable is dropped fromthe regression model.
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Table No 1
Correlations of Primary healthcare services and infrastructure
development variables
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
1 0.021 -0.48 -.011 -.094 0.164 0.122 -0.177 0.614* Provi_Prim_medi_care
1
0.292*
*
-.199 0.185 -0.211 -.035 -0.076 0.606* Coor_anganwadi
1 -.137 -.109 -0.092 -.133 0.236 0.683* Coor_panch_self_grou
1 0.032 0.014 0.021
0.273*
*
0.773* Con_hous_ toil
1 -.062 0.137 0.43 -.639* Abaialbilityof beds
1 -0.15 0.342* 0.096 Medical equipment
1 -.627* 0.694* Adequacy of rooms
1 0.636* Recovery/ cure
1 Availability of doctors
P_P_M C_AN C_P_G C_H_T P_U_I ME_EQ AD_RO RE_CU AV_DO
Primary services and
community
participation
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
1 0.021 -0.48 -.011 -.094 0.164 0.122 -0.177 0.614* Provi_Prim_medi_care
1
0.292*
*
-.199 0.185 -0.211 -.035 -0.076 0.606* Coor_anganwadi
1 -.137 -.109 -0.092 -.133 0.236 0.683* Coor_panch_self_grou
1 0.032 0.014 0.021
0.273*
*
0.773* Con_hous_ toil
1 -.062 0.137 0.43 -.639* Abaialbilityof beds
1 -0.15 0.342* 0.096 Medical equipment
1 -.627* 0.694* Adequacy of rooms
1 0.636* Recovery/ cure
1 Availability of doctors
P_P_M C_AN C_P_G C_H_T P_U_I ME_EQ AD_RO RE_CU AV_DO
Primary services and
community
participation
(Note: AV_DO =availability of doctors, RE_CU =Recovery/ cure, AD_RO=
Adequacy of rooms, ME_EQ =medical equipment, P_U_I =Promoting universal
immunization, C_H_T =construction household toilets, C_P_G =Coordination panchayats
and _self help groups, C_AN =Coordination with anganwadi workers, and P_P_M =
providing primary medical care.)
From the Table 1, it is observed that the coefficient of multiple determinations (R) is
0.742. The variation in the dependent variable is explained by 69.6 percent through the
quadratic relationship with the predictor which appears to be significant for making predictions.
From Table 5.80, DurbinWatson value of 2.036 indicates there is no presence of
autocorrelation among the independent variables.
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Table No 2
Multiple Regression
b Dependent Variable: Primary health-care delivery services
Predictors: (Constant), avail_doct, reco_cure, adey_room, medi_equp, promo_immu,
coo_hou, coo_pan, coo_anga, pro_medica
2.036 .507 .648 .696 .742a 1
Durbin-
Watson
Std. Error of the
Estimate
Adjusted R
Square
R Square R Model
b Dependent Variable: Primary health-care delivery services
Predictors: (Constant), avail_doct, reco_cure, adey_room, medi_equp, promo_immu,
coo_hou, coo_pan, coo_anga, pro_medica
2.036 .507 .648 .696 .742a 1
Durbin-
Watson
Std. Error of the
Estimate
Adjusted R
Square
R Square R Model
The Table 2 reveals that there is a significant contribution of predictors(Note: AV_DO
=availability of doctors, RE_CU =Recovery/ cure, AD_RO=Adequacy of rooms, ME_EQ
=medical equipment, P_U_I =Promoting universal immunization, C_H_T =construction
household toilets, C_P_G =Coordination panchayats and _self help groups, C_AN =
Coordination with anganwadi workers, and P_P_M =providing primary medical care.) on
Primary services and community participate performance which is denoted by ANOVA
statistic value of 26.873 and explained by the probability value, i.e., 0.000.
Table No 3
ANOVA
b Dependent Variable: Primary health-care delivery services
Predictors: (Constant), avail_doct, reco_cure, adey_room, medi_equp,
promo_immu, coo_hou, coo_pan, coo_anga, pro_medica
74 78.812
Total
.264 65 18.020
Residual
.000(a) 26.873 5.088 12 64.792 Regression
Sig. F
Mean
Square
Df
Sum of
Squares
b Dependent Variable: Primary health-care delivery services
Predictors: (Constant), avail_doct, reco_cure, adey_room, medi_equp,
promo_immu, coo_hou, coo_pan, coo_anga, pro_medica
74 78.812
Total
.264 65 18.020
Residual
.000(a) 26.873 5.088 12 64.792 Regression
Sig. F
Mean
Square
Df
Sum of
Squares
In regression with multiple independent variables, the coefficient tells how much the
dependent variable is expected to increase when that independent variable increases by
one, holding all the other independent variables constant. Table 5.81 lists all the coefficients
of variables which indicate construction of household toilets, Coordination panchayat_self
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groups and coordination with anganwadi workers that are observed to be statistically significant
at 0.05 level which indicates that these variables will influence the performance of primary
services and community participation in the rural health-care services.
Table 4
Coefficients
b Dependent Variable: Primary health-care delivery services
0.003 2.200 0.214 .083 0.295 Provi_Prim_medi_care
0.005 -2.277 0.211 .094 0.421 Coor_anganwadi
0.004 1.950 0.294 .084 0.233 Coor_panch_self_grou
0.876 0.157 0.025 .103 0.046 Con_hous_ toil
0.694 0.397 0.046 .077 0.134 Prom_uni_immuniz
0.368 0.912 0.083 .070 0.073 medical equipment
0.345 9.504 0.769 .066 0.608 Adequacy of rooms
0.466 -0.737 0.061 .141 -0.082 Recovery/ cure
.232 -3.285 .274 0.180 -.161 availability of doctors
0.785 0.274 0.530 0.273
(Constant)
Beta Std. Error B
Sig. T
Standardised
Coefficients
Unstandardised Coefficients
Model
b Dependent Variable: Primary health-care delivery services
0.003 2.200 0.214 .083 0.295 Provi_Prim_medi_care
0.005 -2.277 0.211 .094 0.421 Coor_anganwadi
0.004 1.950 0.294 .084 0.233 Coor_panch_self_grou
0.876 0.157 0.025 .103 0.046 Con_hous_ toil
0.694 0.397 0.046 .077 0.134 Prom_uni_immuniz
0.368 0.912 0.083 .070 0.073 medical equipment
0.345 9.504 0.769 .066 0.608 Adequacy of rooms
0.466 -0.737 0.061 .141 -0.082 Recovery/ cure
.232 -3.285 .274 0.180 -.161 availability of doctors
0.785 0.274 0.530 0.273
(Constant)
Beta Std. Error B
Sig. T
Standardised
Coefficients
Unstandardised Coefficients
Model
From Table 5.106, the multiple regression model is depicted as:
Y =0.273 - 0.161 x1 - 0.082 x2 +0.608 x3 +0.073 x4 +0.134 x5 +0.046 x6 +0.233 x7 +
0.421 x8+0.295x9
The other independent variables, such as availability of doctors, recovery and cure,
and adequacy of rooms and medicines, have negative regression coefficients. The
performance of the Primary health-care delivery services and community participation is
high when the promoting universal immunization, coordination with anganwadi workers and
providing primary medical care is significant. The rest of the independent variables have
insignificant effect on the primary healthcare services performance as the P-value is higher
than 0.05. Since the calculated value is more then the tabulated value, the alternative
hypothesis is rejected. There is no significant Association between the respondents opinion
about variables of PHCs delivery services and community participation. Majority of variables
indicated in-significant.
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FINDINGS AND SUGGESTIONS
The evaluation study clearly brings out the fact that PHCs have not been able to
render specialised health care services for which these were established. The constraints to
utilisation of their services as identified are the inadequacies in infrastructure, non-availability
of medical specialists and Para-medical staff and non-functional complementary facilities.
Notwithstanding these constraints and sub-optimal utilisation , the majority of the beneficiaries
expressed their preference for the services of public health care institutions to those of
other alternatives. For improvement in access to public health care services, the following
measures can be suggested:
1. As only 43% of the required number of PHCs have been established, a significant
increase in the allocation of plan resources for the health sector is needed to close the
supply gap. It seems unlikely that the resources required for closing the gap will be
available from budgetary provisions alone. Alternative sources of funds and /or
alternative modes of delivery of health care services need to be explored to meet the
demand for specialised health care services in the rural areas.
2. As the effective utilisation of a PHCs as a referral centre depends on its ability to
provide the complete package of services required for specialised health care, efficient
utilisation of available resources warrants its use in closing the supply gap in
infrastructure and manpower of the existing PHCs. The complementarity of facilities
and manpower of health care institutions should get primacy over other considerations
in allocation of resources, as thin spread of resources over a large number of health
care institutions has led to sub-optimal utilisation of facilities created. It is advisable to
make in each district a few PHCs fully equipped with all complementary facilities
and manpower to discharge the intended functions of PHCs and disseminate the
information about their functionality among the villages of the district through PRIs so
that the people in the district can take full advantage of these well-equipped PHCs.
3. For some people, even a distance of more than 50 kms was not a constraint, while for
some others, a distance of a little over 10 kms was inconvenient. However, what
comes out clearly fromthe survey is that, wherever some medical specialists and
the rudimentary infrastructure are available and functional, people have braved all
inconveniences and made use of the services available in PHCs. Thus, what is of
utmost importance is whether a PHC is equipped to deliver specialised health care
services.
4. The monitoring of the functioning of PHCs and removal of constraints to utilization
are important issues that need to be addressed for improvement in access to health
care services. Non-availability of doctors (in position) for consultation and non-
functionality of existing equipments have been noted in PHCs which are otherwise
equipped to deliver the intended services Perhaps, the routinised departmental
monitoring can be supplemented by a Monitoring Committee (at the district level)
comprising the CMO/DHO and representatives of the Panchayati Raj Institutions.
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CONCLUSION
The profession of healthcare management is challenging and requires that persons in
managerial positions at all levels of the organization possess sound conceptual, technical,
and interpersonal skills in order to carry out the required managerial functions of planning,
organizing, staffing, directing, controlling, and decision making. In addition, managers must
maintain a dual perspective where they understand the external and internal domains of
their organization, and the need for development at the self, unit/team, and organization
levels. Opportunities exist for managerial talent at all levels of a healthcare organization,
including supervisory, middle management, and senior management levels. The role of
manager is critical to ensuring a high level of organizational performance, and managers are
also instrumental in talent recruitment and retention as well as succession planning.
How to finance and provide health care for the more than 1.3 billion rural and urban
poor in low and middle-income countries is one of the greatest challenges facing the
international development community. The underlying causes of many of todays health
problems in lower income countries are often well known, and effective and affordable
drugs, surgical procedures and other interventions often exist. But, because of a number of
problems related to resource mobilization, revenue pooling, resource allocation/purchasing
arrangements, as well as problems in the provision of goods and services to rural and low
income populations potentially effective policies and programs often fail to reach households
and communities that need themthe most.
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