Financial system Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial

products

A financial system, which is inherently strong, functionally diverse and displays efficiency and flexibility, is critical to our national objectives of creating a market-driven, productive and competitive economy. A mature system supports higher levels of investment and promotes growth in the economy with its depth and coverage. The financial system in India comprises of financial institutions, financial markets, financial instruments and services. The Indian financial system is characterised by its two major segments - an organised sector and a traditional sector that is also known as informal credit market

INDIAN FINANCIAL SYSTEM

Financial intermediation in the organised sector is conducted by a large number of financial institutions which are business organisations providing financial services to the community. Financial institutions whose activities may be either specialised or may overlap are further classified as banking and non-banking entities. The Reserve Bank of India (RBI) as the main regulator of credit is the apex institution in the financial system. Other important financial institutions are the commercial banks (in the public and private sector), cooperative banks, regional rural banks and development banks. Non-bank financial institutions include finance and leasing companies and other institutions like LIC, GIC, UTI, Mutual funds, Provident Funds, Post Office Banks etc. The Indian financial sector is in for an overhaul. Financial sector reforms have long been regarded as an integral part of the overall policy reforms in India. India has recognized that these reforms are imperative for increasing the efficiency of resource mobilization and allocation in the real economy and for the overall macroeconomic stability. The reforms have been driven by a thrust towards liberalization and several initiatives such as liberalization in the interest rate and reserve requirements have been taken on this front. At the same time, the government has emphasized on stronger regulation aimed at strengthening prudential norms, transparency and supervision to mitigate the prospects of systemic risks. Today the Indian financial structure is inherently strong, functionally diverse, efficient and globally competitive. During the last fifteen years, the Indian financial system has been incrementally deregulated and exposed to international financial markets along with the introduction of new instruments and products.

EVOLUTION OF INDIAN FINANCIAL SYSTEM

Capital Market India has a long tradition of functioning capital markets. The Bombay stock exchange is over a hundred years old and the volume of activity has increased in the recent years. The process of reform of capital markets started in 1992 and aimed at removing direct government control and replacing it by a regulatory framework based on transparency and disclosure. The first step was taken in 1992 when SEBI was elevated to a full-fledged capital market regulator. An important policy initiative in 1993 was the opening of capital markets for foreign institutional investors and allowing Indian companies to raise capital abroad. FII registrations in the country have gone up significantly over the years. The number of registered FIIs has gone up significantly. The FIIs have been rewarded well by attractive valuations and increasing returns. The depository and share dematerialization systems have been introduced to enhance the efficiency of the transaction cycle. A number of significant reforms have been implemented in the spot equity and related exchange traded derivatives markets since the early 1990s. For instance, spot prices are mostly market-determined, trading volumes in the derivatives market exceed those in spot markets and market practices such as speed of settlement and dematerialization are close to international best practices.

Banking Sector The banking sector is the most dominant sector of the financial system in India. Significant progress has been made with respect to the banking sector in the post liberalization period. The financial health of the commercial banks has improved manifolds with respect to capital adequacy, profitability, asset quality and risk management. Further, deregulation has opened new opportunities for banks to increase revenue by diversifying into investment banking insurance, credit cards, depository services, mortgage, securitization, etc. Liberalization has created a more competitive environment in the banking sector.The competition has increased within the banking sector (with the emergence of new private banks and foreign banks) as well as from other segments of the financial sector such as mutual funds, Non Banking Finance Companies, post offices and capital markets. Insurance Sector There exists huge scope of investment in the insurance sector in India. India has an enormous middle-class that can afford to buy life, health and disability and pension plan products. Further, insurance is one of the most important tax saving instrument in the country. Insurance sector has been opened up for competition from Indian private insurance companies with the enactment of Insurance Regulatory and Development Authority Act, 1999 (IRDA Act). As per the provisions of IRDA Act, 1999, Insurance Regulatory and Development Authority (IRDA) was established on 19th April 2000 to protect the interests of holder of insurance policy and to regulate, promote and ensure orderly growth of the insurance industry. IRDA Act 1999 paved the way for the entry of private players into the insurance market, which was hitherto the exclusive privilege of public sector insurance companies/ corporations. Under the new dispensation Indian insurance companies in private sector were permitted to operate in India on the fulfillment of certain prerequisites. A large number of public and private players are competing today in both life and general insurance segments. The FDI cap/ Equity in the insurance sector is 26 percent under the automatic route subject to licensing by the insurance regulatory and development authority. Some of the major private players in the sector are: In Life insurance Sector: Bajaj Allianz Life Insurance Corporation Birla Sun Life Insurance Co. Ltd. (BSLI) HDFC Standard Life Insurance Co. Ltd. (HDFC STD LIFE) ICICI Prudential Life Insurance Co. Ltd. (ICICI PRU) ING Vysya Life Insurance Co. Pvt. Ltd. (ING VYSYA) Max New York Life Insurance Co. Ltd. (MNYL) MetLife India Insurance Co. Pvt. Ltd. (METLIFE) Kotak Mahindra Old Mutual Life Insurance Co. Ltd. SBI Life Insurance Co. Ltd. (SBI

LIFE) TATA AIG Life Insurance Co. Ltd. (TATA AIG) AMP Sanmar Assurance Co. Ltd. (AMP SANMAR) Aviva Life Insurance Co. Pvt. Ltd. (AVIVA) Sahara India Life Insurance Co. Ltd. (SAHARA LIFE) Shriram Life Insurance Co. Ltd In General Insurance sector: Bajaj Allianz General Insurance Co. Ltd. (BAJAJ ALLIANZ) ICICI Lombard General Insurance Co. Ltd. (ICICI LOMBARD) IFFCO Tokyo General Insurance Co. Ltd. (IFFCO TOKIO) Reliance General Insurance Co. Ltd. (RELIANCE) Royal Sundaram Alliance Insurance Co. Ltd. TATA AIG General Insurance Co. Ltd. (TATA AIG) Cholamandalam MS General Insurance Co. Ltd. HDFC Chubb General Insurance Co. Ltd. (HDFC CHUBB) Venture Capital India is prime target for venture capital and private equity today, owing to various factors such as fast growing knowledge based industries, favourable investment opportunities, cost competitive workforce, booming stock markets and supportive regulatory environment among others. The sectors where the country attracts venture capital are IT and ITES, software products, banking, PSU disinvestments, entertainment and media, biotechnology, pharmaceuticals, contract manufacturing and retail. An offshore venture capital company may contribute upto 100 percent of the capital of a domestic venture capital fund and may also set up a domestic asset management company to manage the fund. Venture capital funds (VCFs) and venture capital companies (VCC) are permitted upto 40 percent of the paid up corpus of the domestic unlisted companies. This ceiling would be subject to relevant equity investment limit in force in relation to areas reserved for SSI. Investment in a single company by a VCF/VCC shall not exceed 5 percent of the paid up corpus of a domestic VCF/VCC. The automatic route is not available.

OVERVIEW OF INVESTMENT BANKING INDUSTRY Investment banking refers to the segment of banking that includes the entire gamut of activities associated with helping companies and other entities acquire funds, make investments and carry out certain transactions. Today, investment banks play an important role in shaping the global financial industry. But how are the activities of investment banks different from those of commercial banks? Commercial banks provide deposit and loan services through their wide branch networks and thousands of ATMs spread across the globe. If you are looking at opening checking or savings accounts, you are seeking the services of a commercial bank. We all are familiar with commercial banks and interact with them regularly to invest our savings, fund our education or take a loan to buy a car. Commercial banks are involved in accepting deposits and using these funds to lend to other people. These banks earn their income by lending at rates higher than what is being paid by them to their depositors. Commercial banks also lend through credit cards, besides offering safe deposit, notary and merchant banking services. Investment banks differ from these commercial banks in that they work with bigger organizations, institutional investors and high net worth individuals. They advise clients on their investment issues, besides helping them raise funds through the debt as well as the equity routes. Investment bankers sometimes act as principals in some transactions, while representing their clients in several other transactions. Investment banks, such as Goldman Sachs, Lehman Brothers and Merrill Lynch, provide a wide range of services comprising of underwriting, trading in securities and financial advisory services related to restructuring, mergers and acquisitions. Although a significant percentage of investment banks are located in or around Wall Street , the nerve centre of global financial activity, several players operate from other financial centers, such as London (Barclays), Germany (Dresdner Kleinwort, Deutsche Bank) and recently Hong Kong (HSBC). The primary revenue sources of the investment banks are the fees or commission earned through the placement of equity and debt on behalf of their clients, which may include large institutions, companies, hedge funds and wealthy individuals. Investment banks also provide strategic advisory services for mergers, acquisitions or divestitures as well as other financial services, such as the trading of derivatives, fixed income, foreign exchange (forex), commodities, and equity securities. Over the years, the line between commercial banks and investment banks has thinned and is slowly disappearing. Several mega-banks, such as Citibank, Deutsche Bank and BNP Paribas, operate at a number of levels and provide an umbrella of services that could fall under either commercial banking or investment banking.

Investment Bankers act as Intermediaries in Financial and Capital Markets The investment banking industry plays a crucial role in raising and supplying the capital needed by a corporation to establish its business, expand and grow. The industry also provides advisory and asset management services to potential investors, governments and retirement funds. Investment banks act as intermediaries between the firms raising funds and investors, whether individuals or institutional. These banks help in the issuance of equity (primary or secondary) and bonds, in addition to arranging debt for their clients. Apart from acting as a mediator, investment banks often purchase debt and equities on their own accounts and act as market makers. Investment bankers can act as underwriters of new issues or initial public offerings (IPO) by buying the equity of the offering company at a pre-negotiated price and then reselling them to investors, institutions and, in some cases, other investment banks. An Investment Bank can also provide advisory services, like asset management, market research and analysis and facilitating mergers and acquisition (M&A) deals. Income earned on the sale and purchase of securities and other financial instruments also forms an important part of an investment bankers revenues. Although a major chunk of the investment banking communitys income comes from fees related to M&A deals and related transactions, it may vary for individual players depending on their specialization.

Activities of a Typical Investment Bank

A typical investment bank will engage in some or all of the following activities:

Raise equity capital (e.g., helping launch an IPO or creating a special class of preferred stock that can be placed with sophisticated investors such as insurance companies or banks) Raise debt capital (e.g., issuing bonds to help raise money for a factory expansion) Insure bonds or launching new products (e.g., such as credit default swaps) Engage in proprietary trading where teams of in-house money managers invests or trades the company's own money for its private account (e.g., the investment bank believes goldwill rise so they speculate in gold futures, acquire call options on gold mining firms, or purchase gold bullion outright for storage in secure vaults).

The Buy Side vs. Sell Side of an Investment Bank

Investment banks are often divided into two camps: the buy side and the sell side. Many investment banks offer both buy side and sell side services. The sell side typically refers to selling shares of newly issued IPOs, placing new bond issues, engaging in market makingservices, or helping clients facilitate transactions. The buy side, in contrast, worked with pension funds, mutual funds, hedge funds, and the investing public to help them maximize their returns when trading or investing in securities such as stocks and bonds. Front Office, Middle Office, and Bank Office Many investment banks are divided into three categories that deal with front office, back office, or middle office services.

Front Office Investment Bank Services: Front office services typically consist of investment banking such as helping companies in mergers and acquisitions, corporate finance (such as issuing billions of dollars in commercial paper to help fund day-today operations, professional investment management for institutions or high net worth individuals, merchant banking (which is just a fancy word for private equity where the bank puts money into companies that are not publicly traded in exchange for ownership), investment and capital market research reports prepared by professional analysts either for in-house use or for use for a group of highly selective clients, and strategy formulation including parameters such as asset allocation and risk limits. Middle Office Investment Bank Services: Middle office investment banking services include compliance with government regulations and restrictions for professional clients such as banks, insurance companies, finance divisions, etc. This is sometimes considered a back office function. It also includes capital flows. These are the people that watch money coming into and out of the firm to determine the amount of liquidity the company needs to keep on hand so that it doesn't get into financial trouble. The team in charge of capital flows can use that information to restrict trades by reducing the buying / trading power available for other divisions. Back Office Investment Bank Services: The back office services include the nuts and bolts of the investment bank. It handles things such as trade confirmations, ensuring that the correct securities are bought, sold, and settled for the correct amounts, the software and technology platforms that allow traders to do their job are state-of-the-art and functional, the creation of new trading algorithms, and more. The back office jobs are often considered unglamorous and some investment banks outsource to specialty shops such as custodial companies. Nevertheless, they allow the whole thing to run. Without them, nothing else would be possible.

TOP INVESTMENTS BANKS IN THE WORLD Investment Bank (US$bn, 12/2011) Goldman Sachs Revenue: 28.811 Net Income: 4.442 Total assets: 923.00 Assets under management (AUM): 828.00 Morgan Stanley Revenue: 32.406 Net Income: 4.111 Total assets: 807.69 Assets under management (AUM): 781.475 JPMorgan Chase Revenue: 97.234 Net Income: 18.976 Total assets: 2,265.79 Assets under management (AUM): 1,923.88 Credit Suisse Revenue: 27.075 Net Income: 2.076 Total assets: 1,308.49 Assets under management (AUM): 1,309.56 Bank of America Revenue: 94.426 Net Income: 1.446 Total assets: 2,129 Assets under management (AUM): 647.126 Deutsche Bank Revenue: 42.999 Net Income: 5.569 Total assets: 2,802.71 Assets under management (AUM): 1,445.83 Barclays Revenue: 50.2 Net Income: 6.141 Total assets: 2,431.48 Assets under management (AUM): 253.394 UBS Revenue: 29.585 Net Income: 4.429 Total assets: 1,510.95 Assets under management (AUM): 2,307.16

Citigroup Revenue: 78.353 Net Income: 11.067 Total assets: 1,873 Assets under management (AUM): Lazard Revenue: 1.919,6 Net Income: 0.179 Total assets: 3.082 Assets under management (AUM): 141.39

Fees Change in Fees % of Fees collected by product in First Quarter 2012

Top 10 Banks
JP Morgan

($m) vs. Prev Period*

M&A

Equity

Bonds

Loans

1,260.48 -11%

15

22

39

25

Bank of America Merrill Lynch

1,064.33 -20%

18

17

37

28

Morgan Stanley

800.69 -20%

34

24

34

Citi

773.39 +7%

12

22

47

20

Deutsche Bank

761.37 -17%

17

21

44

19

Goldman Sachs

736.50 -29%

37

27

31

Credit Suisse

721.10 -20%

28

20

37

15

Barclays

594.33 -29%

21

15

49

15

UBS

511.89 -12%

30

26

35

Wells Fargo

408.38 +24%

15

46

33

Total

16,535.93 -15%

30

20

32

17

Investment Banking in India

Grindlays bank began Investment Banking (Merchant Banking) in India in 1967 with RBI issuing the second license to Citi in 1970. These two banks primarily provided services which included loan syndication, equity raising and other advisory services. In 1972, a Banking Commission report asserted the need for Merchant Banking services in India by public sector banks. The commission recommended the same structure as American investment banks (Glass-Steagall Act). Merchant banks were meant to manage investments and provide advisory services. SBI was the first Indian public sector bank to set up its merchant banking division in 1972. This was followed by Bank of India, Central Bank of India, Bank of Baroda and many more. SBI Caps and IDBI Caps are two prime examples of merchant banks in India today. Currently, there are 136 merchant banks registered with SEBI. Currently, without holding a certificate of registration granted by the Securities and Exchange Board of India, no person can act as a merchant banker. The categories for which merchant banking registration may be granted by SEBI: 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 to an issue Category IV to act only as adviser or consultant to an issue The capital requirement depends upon the category. The minimum net worth requirement for acting as merchant banker are Category I Rs. 5 crores, Category II Rs, 50 lakhs, Category III Rs. 20 lakhs and Category IV Nil