India-An Opportunity Dawns - Financial Services

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Preface
TheIndianeconomyisonthefulcrumofaarobustlyincreasinggrowthcurve.
WithpositiveindicatorssuchasastableGDPannualgrowthrateintherangeof
8-9percent,boomingcapitalmarkets,risingFDIandFIIinflowsandincreased
businessconfidence,Indiaisdrawingglobalplayerstoexplorenewavenuesof
expansion.
TheservicessectoroftheeconomyhasbeenboomingwithITandITESatthe
forefrontofthisgrowth.Financialservices,whichisamajorportionofthe
servicessectorhasalsobeengrowingatafastpace.Theconsumption-ledboom
triggeredbyfavorabledemographicshasfuelledthegrowthoffinancialservices
inIndia.Theattractiveopportunitiesinthissectorhaveledtotheentryofglobal
Ravi Trivedy majorsintotheIndianmarket.
Executive Director
KPMG in India TheSouthAfricanfinancialservicessectorbackedbyasoundregulatoryand
legalframeworkhasoneofthemostadvancedfinancialsectorsofallemerging
marketeconomies.TheSouthAfricanfinancialservicessectorhasseveralkey
strengthsandcapabilities,whichcanbeleveragedintheIndiancontext.These
includenewproductdevelopment,riskmanagementandtheabilitytoservicea
diversecustomerbase.
Theopportunitiesinvarioussub-sectoroftheIndianfinancialservicesindustry
havebeenanalysedinthisreportbasedonthemarketopportunity,growth
driversandfutureoutlookandregulationsgoverningtheentryofforeignplayers
inIndia.Thesub-sectorssuchasbankingandfinancing,insurance,capital
marketsandotheremergingsectorspromisetoprovideinvestmentandgrowth
opportunities.
Wehopeyoufindthisreportusefulintermsoftappingthegrowthand
Sanjay Aggarwal investmentopportunitiesinIndia.
National Industry Director
Financial Services
KPMG in India
Ravi Trivedy Sanjay Aggarwal

Executive Director National Industry Director
Financial Services
Contents
ExecutiveSummary 1
India–PoisedforGrowth 7
OverviewoftheIndian
FinancialServicesSector 10
InvestmentOpportunitiesinthe
IndianFinancialServices 12
RegulatoryFrameworkfor
FinancialServicesinIndia 25
01
ExecutiveSummary
The India Growth Story

Indiaisthesecondfastestgrowingeconomyintheworld,withaGDP
growthrateof9.4percentinthefinancialyear2006-07.Theaverage
growthrateoverthepastfouryearshasbeen8.6percentwhichisthe
fastestsinceitsindependencein1947.Thisstellarperformancecanbe
attributedtofavorablemacro-economic,demographicandpsycho-graphic
factors,amongstacombinationofotherfactors.Theresultantimpactof
rapidGDPgrowthhasbeenanincreaseinthepercapitaGDPandalso
anincreaseintheincomelevelsofbothruralandurbanhouseholds.
Overthepastfewyears,Indiahaswitnessedashifttowardstheservices
sectorwhichhasledtoanincreaseindisposableincomesandagrowing
shiftinconsumerism.Theconsumption-ledboominIndiahasfueledthe
demandforlifestyleproducts,consumerdurablesandfinancialproducts
amongothers.
India’sfavorabledemographicmix,itsabundanceofeducatedand
talentedmanpower,andamongtheyoungestpopulationsintheworld,
hasfurthercatapultedtheeconomytoanenviableposition.
TheattractivenessoftheIndianeconomyhasresultedinanincreasein
foreigninvestmentinthecountry.Besides,increasingconfidencelevels
amongretailinvestorsandtheprevalentliquidityowingtoforeigninflows
intotheeconomy,hasledtofavorablegrowthintheIndianequity
markets.
South Africa’s Financial Services Capabilities

SouthAfrica’sfinancialservicessector,backedbyasoundregulatoryand
legalframework,haswitnessedthepresenceofalargenumberof
domesticandforeigninstitutionsprovidingafullrangeofservices-
commercial,retailandmerchantbanking,mortgagelending,insurance
andinvestment.
SouthAfrica'sbankingsectorcomparesfavourablywiththoseof
industrialisedcountries.SouthAfricanbanksarewellmanagedandutilise
sophisticatedrisk-managementsystemsandcorporate-governance
structuresinconductingtheirbusiness.Thestockmarketshavebeen
performingwellwithexponentialgrowthinthe1990’sandtherehasalso
beenariseintheshareofforeigntransactions.
02
PlayersintheSouthAfricanfinancialservicessectorpossessseveralkey
capabilitiesthatcanbeleveragedinIndia.Playerspossessthenecessary
expertiseonnewproductdevelopment,riskmanagementandtheability
toserveadiversecustomerbase,whichwouldbevaluedinIndia.
The Indian Financial Services Sector

TheservicessectorinIndiahasbeenwitnessingaboominrecenttimes.
InadditiontothestronggrowthinIT/ITES,theIndianfinancialservices
sectorisconsideredtobestableandprogressive,andhasbeenamajor
beneficiaryofIndia’sgrowthstory.
Retaillendinghaspoweredtheexplosivegrowthinthefinancialservices
sectorwithplayersfocusedontheretailsegmentregisteringimpressive
top-linegrowth.Theretailportfolionowaccountsforasignificantshare
ofthetotallendingformostplayers.
IncreasingprosperitycoupledwithrisingconsumerismofIndian
consumershasfueledaremarkableboominretailcreditdemand.Rapid
growthbythecorporatesectorhasgeneratedaneedforcapitalwhich
hasresultedingrowthofinstitutionalfinance.AlargenumberofNon-
BankingFinanceCompanies(NBFCs)havebeenoperatinginthecountry.
Thishashelpeddriveassetpenetrationonaccountofawiderdistribution
reach.
Thegrowingattractivenessofthefinancialservicessectorhastriggered
theentryofglobalmajors.Aggressiveplansofincumbentscoupledwith
theentryofnewplayersareexpectedtofurtherdrivethegrowthofthe
sector.
Thefinancialservicessectoranalyzedcomprisesthefollowingkey
sub-sectors:
• BankingandFinancing–ConsumerFinance,SmallandMedium
Enterprise(SME)finance,Agricultureandruralfinance,Institutional
FinanceandProjectFinance
• Insurance–LifeandNon-lifeinsurance
• CapitalMarkets–AssetManagement,Pension,Wealthmanagement,
InvestmentBankingandSecuritiesBroking
• EmergingOpportunities–WealthManagement,StructuredFinance,
PrivateEquity,DistressedAssets,RealEstateFinance,Leveraged
FinanceandNon-recourseLending
03
Attractive Investment Opportunities

TheopportunitiesinIndianfinancialserviceshavebeenanalysedindetail
basedonparameterssuchasmarketsize,growth,profitability,intensity
ofcompetition,futureoutlookandgovernmentregulationsgoverning
entry.Ananalysisofthevarioussub-sectorsusingtheabovecriteriahas
yieldedseveralattractiveopportunitiesforentryinthemediumterm.
Banking & Financing

Banking Sector: TheIndianbankingsectorisgrowingatafastpaceas
playersareaggressivelytargetingsemi-urbanandruralareaswhichare
underpenetrated.Theincreasedfocuson“financialinclusion”bythe
governmenthasalsoledtointroductionofnewerproducts,suchas
‘no-frillsbankingaccounts’and‘kisan(farmer)creditcards’toenhance
bankingaccesstoruralandeconomicallyweakersectionsofthe
population.
However,undertheRBI’sroadmapforpresenceofforeignbanksinIndia
announcedinFebruary2005,itisexpectedtoreviewthedevelopments
andaccordinglyallowfull-fledgedmarketaccesstoglobalplayerspost
April2009.
Consumer Finance: Risingconsumerismandincreasingfocusbyleading

banksandNBFCshaveresultedinrapidgrowthoftheconsumerfinance
sectorinIndia.SincebankingpenetrationinruralIndiaremains
significantlylowercomparedtourbanIndia,ithasbecomeanattractive
segmentforplayerstogainanearlymoveradvantage.
SME Finance: SMEfinancingiswitnessingstronggrowthduetothe

strongperformanceofthebuoyantSMEsectorandincreasingfocus
frombanksowingtohigherprofitability.TheburgeoningSMEsectorhas
alsoledtoafocusonfactoringservicesforworkingcapitalmanagement
andotheradvisoryservices.
Institutional Finance and Project Finance: Anexcellentperformanceby

corporatesinIndiacoupledwiththeirexpansionstrategiesseeking
inorganicgrowth,haveresultedinahugedemandforinstitutional
finance.ProjectfinanceinIndiaisalsowitnessingparticipationfrom
leadingbanksandfinancialinstitutionsduetotheloweredoperational
andexecutionrisks.
04
Agri and Rural finance: Abouttwo-thirdsofIndia’spopulationresidesin

ruralareas.Thereliesahugecustomerbasewhichisunder-serviced
providingasignificantopportunityforagri-lendingandruralfinancefor
earlymovers.
Insurance
TheinsurancesectorinIndiahaswitnessedaparadigmshiftsincethe
year2000withtheopeningupofthesectorforprivateparticipation.The
ensuingcompetitionhasprovidedcustomerswithachoiceofproducts
andproviders,andalsoimprovedservicelevelsimmensely.Bothlifeand
non-lifeinsuranceinIndiahastremendousgrowthpotentialduetolow
penetrationandper-capitaspendingincomparisontoothernations.The
non-lifeinsurancesectorissettowitnessstronggrowthduetothe
recentde-tarifficationofkeycategoriesincludingmotor,fire,engineering
andworkmencompensationinsurance.Healthinsurancehasbeen
amongthefastestgrowingmarketsegmentsandisexpectedto
showcaseaminimumgrowthof30percentgoingforward.Thereisa
significantpotentialwhichisexpectedtobeunlocked,especiallyinthe
semi-urbanandruralareasinthefuture.
Capital Markets
WithIndiawitnessinganeconomicboom,capitalflowsintothecountry
viatheFIIroutehavebeenontherise,positivelyimpactingtheIndian
equitymarkets.TheperformanceofIndianequitymarketshasbeen
impressive,notonlybecauseofFIIinflowsbutalsoduetoincreased
confidencelevelsamongretailinvestorsinthecountry.Thekey
sub-sectorsthathavebenefitedfromthisstronggrowthincludeasset
management,wealthmanagement,investmentbankingandsecurities
brokingservices.
TheIndianassetmanagementindustryhaswitnessedamassive
increaseinAUM,posttheentryoflargedomesticandforeignplayers.
However,thereexistsahugeopportunityonaccountoflowpenetration
levelsincomparisonwithothercountries.Wealthmanagementservices
arelikelytowitnessheightenedactivityowingtoincreasingprosperity
andawarenessoffinancialplanning.Increasingparticipationfromretail
investorsduetoastrongequitymarketperformancehasledtoarobust
demandforsecuritiesbroking.TheincreasingappetiteofIndian
corporatesforcapitalaswell,asanacquisition-ledinorganicgrowth
strategy,hasalsoresultedinastrongdemandforinvestmentbanking
andadvisoryservices.
05
ThechangingIndiandemographicmixandlowpensioncoveragehas
sparkedreformsinthepensionsectorwhichissettodramatically
changethepensionlandscapeinIndiainthemediumtolongterm.
Emerging opportunities
ThevibrantIndianeconomyandrobustfinancialservicessectorhaveled
totheemergenceofseveralemergingopportunitieswhichareexpected
togainprominenceinthelongtermbasedonregulatoryandmarket
developments.
TheIndianstructuredfinancesectorisdominatedbyassetbacked
securitization.Increasingregulatoryclarityandinitiativestoenhance
liquidityisexpectedtoincreasethebreadthanddepthinthesector.The
Indiandistressedassetssectorisalsowitnessingincreasingattention
duetotherapideconomicgrowthandhigherassetvalueswiththereal
estateboom.
Indiahaschartedanambitiousinfrastructuredevelopmentprograminthe
nextfivetosevenyears,whereinpublic-privatepartnershipsare
emergingasthepreferredinvestmentvehicle.Nonrecourselendingis
emergingasthepreferredlendingrouteowingtoreducedleverage,
therebyobviatingtheneedforsecurity.Realestatefundsarewitnessing
intenseactivitywithsignificantparticipationfromdomestic(specifically
HighNetworthIndividuals)andforeigninvestors;estimatessuggestthat
fundsexceedingUSD12-15billionareawaitingdeploymentintheIndian
realestatesector.
TheboomingIndianeconomyandtherobustcorporateandSME
performancehasledtoamassiveinflowinPrivateEquitycapitalinto
India.Theacquisition-ledinorganicgrowthstrategyofIndiancorporatesis
alsoexpandingtheleveragedfinancemarketinIndia.
Investment Considerations
TheIndianfinancialservicessectorwillcontinuetotreadthehighgrowth
pathinthemediumtermonthebackoffavorablestructuraldrivers,
whichwillcontinuetodriveGDPgrowth.ThisprovidesSouthAfrican
firmsanopportunitytoenteranexpandingmarketwithhighgrowth
potential.
06
TheIndianregulatoryframeworkforentryintotheIndianfinancial
servicessectorhasbeendefinedbyvariousregulatorswithrespectto
theentryvehicle(FDIorFII),modeofoperations/presence(branch,
representativeofficeorsubsidiary)whichhaveasignificantbearingon
thetaxandreportingrequirements.Todevelopacoherentstrategyfor
entryintotheIndianmarket,SouthAfricanfirmsshouldconsiderthe
regulatoryimplicationsaswell.
AnIndiastrategyisincreasinglybecomingakeyimperativeforanytruly
globalcorporation,andinterestedSouthAfricanplayersneedtoweigh
theiroptionsandchoosetheoptimalstrategytoleveragetheIndia
opportunityinthefinancialservicessector.
07
India-PoisedforGrowth
Indiaistheworld'slargestdemocracyandrankssecondinthelistoffastest
growingeconomiesglobally.Thepastdecadehaswitnessedfundamental
changesintheIndianeconomywithrespecttogovernmentpolicy,business
outlookandmoreimportantly,theIndianmindset.
SomecontributorstothedynamicgrowthoftheIndianeconomyinclude,anew
industrialresurgence,increasedbusinessandinvestorconfidence,increased
investment,relativelymodestinflationinspiteofspiralingglobalcrudeprices,
layingofsomeinstitutionalfoundationsforfasterdevelopmentofphysical
infrastructureandprogressinfiscalconsolidation.
Services-led Growth
Traditionally,developingcountrieshavetransitionedfrombeing‘primary’
agriculture-basedto‘secondary’manufacturing-basedandsubsequentlyto
‘tertiary’services-basedeconomies.Indiahasleap-froggedastagethroughits
directtransformationfromaprimaryfocusedintoatertiaryservicesbased
economy.
Structural Change in the Indian economy
Source:IMFWorldEconomicOutlook,CIAWorldHandbook2007,‘DreamingwithBRICS’–Paperno.99,
GoldmanSachs,KPMGAnalysis
08
Favourable Demographics: The Engine of Growth

AkeyfactordrivingIndia’sgrowthisitslargeandyoungpopulation.Witha
medianageofaround24years1 andover500millionIndiansbelowtheageof21
years2,alargepercentageofIndia’spopulationisexpectedtobeintheworking
ageevenin2025,whenthemedianageshallbe31years3.Thislargeclassof
consumersisexpectedtodriveIndia’simpressivegrowth,makingittheworld’s
fifthlargestconsumermarketby2025,4 surpassingGermany.
AccordingtoastudybytheMcKinseyGlobalInstitute,India’sgrowthisexpected
tocreateavastmiddleclass(IncomeofUSD5,000–USD25,0005),biggerthan
thatofU.S.andEuropecombined.Thismiddleclass,numberingaround600
millionby2025,isexpectedtoaccountforover60percentofthetotalspending
inthecountry6.
Indiahasfastbecomeapreferredinvestmentdestinationforglobalinvestorsand
companiespropelledby:
• Existenceofastabledemocracyandpoliticalsystem;
• GlobalizationoftheIndianeconomy;
• Favourableregulatoryreformsandinstitutionalframeworkleadingto
integrationwiththeglobaleconomy;
• Emergenceasaglobalhubformanufacturing,softwareandBPOservices;
• Robustearningsgrowthofthecorporatesectorandaboomingcapitalmarket;
• Favourabledemographicswithagrowingconsumingandinvestingclass;and
• Increasedsavingsintheeconomy,channelizedintothecreationofproductive
assets
1Source:AsianDemographics 5Source:McKinseyGlobalInstitute
2Source:AsianDemographics 6Source:McKinseyGlobalInstitute
3Source:AsianDemographics 7Source:ICRAreport
4Source:AsianDemographics
09
Foreign Institutional Investment (FII)
Source:RBIreport
TwohundredoftheFortuneGlobal500companies7 havealreadyestablished
theirpresenceinIndiaandthenumberisrising.Thisnumberisontherisegiven
thefavourableeconomicenvironmentinIndia.Infact,increasinglyglobalplayers
areexpressinginteresttoenterthecountryinseveralsectors.
7Source:ICRAreport
10
TheFinancialServicesSector
inIndia
TheIndianfinancialservicessectorisgraduallyemergingasamatureand
sophisticatedglobaleconomy.Reformsintroducedintheearly1990shave
positivelyimpactedtheproductivityandstabilityoftheIndianfinancialservices
sectorenablingittokeeppacewiththegrowingneedsofcorporatesandretail
borrowers.
Reforms and other developments

Financialsectorreformsconstituteanintegralpartoftheoveralleconomicpolicy
reforminIndia.Thereformshavebeendrivenmainlybyathrusttowards
liberalization.However,therehasalwaysbeenastrongemphasisonregulations
aimedatstrengtheningprudentialnorms,transparencyandsupervisionto
mitigatesystemicrisks.Today,theIndianfinancialstructureisfunctionallydiverse,
efficientandgloballycompetitive.
Nevertheless,somechallengescontinuetoimpactoldplayersandnew-some
keystructuralgapsincludethelackofaninter-bankinterestratebenchmark,an
inactivecorporatedebtmarketandanunder-developedderivativesmarket.
Notwithstandingthesegaps,thecumulativeeffectofallreformssince1991has
beenquiteencouraging.
Banking
ThebankingsectoristhemostdominantsectorinthefinancialsysteminIndia.
Postliberalization,thebankingsectorhaswitnessedseveralchanges.Therehas
beenaparadigmshiftinproducts,technology,operationsandcustomerservice.
Keyreforminitiativesincludedbankinglicensestonewprivatesectorbanks,de-
regulationofinterestrates,adoptionofBaselIInormsandaroadmapforforeign
banksentryunveiledbyRBIin2005.
Thefinancialhealthofcommercialbankshasimprovedmanifoldwithrespectto
capitaladequacy,profitability,assetqualityandriskmanagement.Further,
deregulationhascreatednewopportunitiesforbankstoincreaserevenueby
diversifyingintoinvestmentbankingandothersub-sectors.
Insurance
TheIndianinsuranceindustrywitnessedalandmarkeventwiththeenactmentof
theInsuranceRegulatoryandDevelopmentAuthorityActin1999toregulate,
promoteandensureorderlygrowthoftheinsuranceindustry.Underthenew
dispensation,privateandforeigninsurancecompanieshavebeenpermittedto
operateinIndiawithsomerestrictionsonFDIlimits(currentlyat26percent).
11
GiventhattheIndianinsurancemarketislargelyunderpenetratedespeciallyin
thenon-lifesegment,thereexistsahugepotentialforinvestmentduetothe
burgeoningmiddle-classthatcanaffordtobuylife,health,disabilityandpension
products.Therecentdetarifficationofkeynon-lifeinsurancecategoriesisalso
expectedtogiveafilliptomotor,fireandengineeringinsurance,whileincreasing
focusofallplayerstowardshealthinsurance.
Capital Markets
TheIndiancapitalmarketisoneoftheoldestcapitalmarketsinAsia(theMumbai
stockexchangewasestablishedin1875).Postintroductionofreformsin1992,
whentheSecuritiesandExchangeBoardofIndia(SEBI)waselevatedtoafull-
fledgedcapitalmarketregulator,capitalmarketsinIndiahaveincreasingly
progressedtowardsbecomingmorestableandmature.Animportantpolicy
initiativein1993wastheopeningofcapitalmarketstoForeignInstitutional
Investors(FIIs).ToinjectaninternationalstandardtotheIndianstockmarket,the
NationalStockExchangewasstartedin1992whichhasincreasedtransparency.
Further,sharedematerializationsystemswerealsointroducedtoenhancethe
efficiencyofthetransactioncycle.
Future Potential
Thefinancialservicessectorisintheprocessofrapidtransformationwith
structuralreformsaimedatimprovingproductivityintheeconomy.Financial
institutionshavecombatedmarginpressurebyconstantlyinnovatingand
targetingattractiveconsumersegments.Thesectorisexpectedtowitness
increasingconsolidation,sophisticationandmaturityinthefuture.
Astudyofthevarioussub-sectorsintheIndianfinancialservicesspacefroma
perspectiveofthemarketandregulatoryenvironmentandtheSouthAfrican
companies’capabilitiesandstrengths,enablesidentificationofsectorswith
relativelyhighentrypotential.
Keysub-sectorshavebeenanalyzedinthefollowingsectiontoidentifyattractive
opportunitiesforinvestmentbySouthAfricanplayersusingamulti-pronged
approach.
12
InvestmentOpportunitiesinthe
IndianFinancialServicessector
Consumer Finance
GrowthintheconsumerfinancesegmentinIndiaismainlydrivenbyanincrease
inthepercapitaincome,increaseinworkingpopulationvis-à-vispopulationbase
andincreasingconsumerism.Increasingcompetitionandshrinkingmarginsinthe
commerciallendingspacehasledtoashiftinfocustoretaillending.The
consumerfinancesectorreachedamarketsize~USD51billioninFY2007,
registeringarobustCompoundedAnnualGrowthRate(CAGR)of29percent
between2002and2007.
Consumer Finance Disbursement trend (2000-2007)
Fy2000Fy2001Fy2002Fy2003Fy2004Fy2005Fy2006Fy2007
Source:SSKIreport(NBFCReport)
TheaggressivegrowthplansofleadingIndianprivatesectorbanksandNBFCs
willleadtoarapidincreaseinassetpenetration,especiallyinthesemi-urbanand
rurallocationswherecompetitionisnotasintense.Thehighgrowthpotentialand
thefragmentednatureoftheIndianconsumerfinanceindustryareincreasingly
attractingglobalplayers.Stronggrowthdriversareexpectedtosustainthe
currentgrowthalbeittemperedbytheprevailinghighinterestrateinthemedium
term.
NewerNBFCs,suchasRelianceCapitalandFutureCapitalarealsorampingup
theiroperations.Consolidationisanticipatedintheconsumerfinancesectorin
thenexttwoyears,whichisexpectedtoresultinafewdominantplayers
emerginginthemarket.
13
SME Finance
SmallScaleIndustries(SSI)isoneofthesignificantsegmentsoftheIndian
economy,contributingabout30percent8 ofIndia’sGDPacrosstrade,
manufacturingandservicesandisalsothelargestemploymentproviderinthe
country.IndiahasavibrantSMEsector,whoseroleintermsofemployment
creation,andupholdingtheentrepreneurialspiritandinnovation,hasbeencrucial
infosteringcompetitivenessintheeconomy.TheIndianSMEsectorcomprises
95percent9 ofalltheindustryestablishments.
SMElendingenableshigherspreadsvis-à-viscorporatebankingandalsohas
attractivefeeincomeopportunitiesforplayers.SMElendingalsohassignificant
potentialforwalletexpansionbybundlingtrade,cashandforeignexchange
productsandservices.PlayersareincreasinglyofferingadvisoryservicestoSME
customerstoemergeastheirpreferredfinancialsolutionsproviderandpartner
themingrowth.
TheSMEfundingopportunityisestimatedtobeaboutUSD45billion10 currently
withoutincludingthebenefitsofcross-sellingretailfinanceproducts.Indian
SMEsrequireadvisoryservicesinseveralareassuchascountry/sectoranalysis;
capacitybuildinginareassuchasqualityandsafety;andfeebasedopportunities
suchasloansyndication.Theattractivefee-incomepotentialandhigher
profitabilityisexpectedtoresultinarapidgrowthoftheSMEfinancingmarketto
reachlevelscomparablewithcommerciallending.
Agri and Rural Finance

RuralIndiaishometomorethantwo-thirdsofIndia’spopulationandcontributes
almosthalfofIndia’sGDP.However,thepenetrationofbankingservicesinrural
IndiaremainssignificantlylowerthaninurbanIndia.TheGovernmenthas
identifiedfinancialinclusionasakeypolicyobjectiveandhastakenseveral
initiativesinthisdirectionincludingprioritysectorlendingnorms,Kisan(farmer)
CreditCardsand‘NoFrills’banking,amongothers.
Thekeychallengesinvolvedincateringtotheruralmarketincludetappingthe
heterogeneouscustomerbasedispersedacrosswideterritories,smallerticket
sizepertransaction,lowtechnologyawarenessandusage,largelycash-based
transactionsandlackofcreditinformation.Thesechallengesarebeingtackledby
innovativechannelsincludingtechnology-enabledkiosks,biometriccardsandSelf
HelpGroups(SHGs).SHGsarebeingincreasinglyusedasacreditdeliveryand
managementchannelbecauseoftheirefficiency,costeffectivenessand
specialized/localknowledge.
8Source:MinistryofSmallScaleIndustries
9Source:MinistryofSmallScaleIndustries
10Source:KPMGanalysis
14
Thevastcustomerbaseandlowassetpenetrationpresentsamassivelending
opportunityforearlymovers.Theincreasingfocusofleadingplayersand
regulatorythrustareexpectedtoresultinarapidgrowthintheruralandagri
financesector.ThesectorisprojectedtogrowatahealthyCAGRof23percent11
till2009.However,innovativemodelsofdeliveryarecriticaltoenhancing
penetrationwhilekeepingtabsontransactioncosts.
Institutional Finance
TherobustperformanceofIndiancorporateshasresultedinstrongbalancesheet
growth.Thereisanincreasingneedforcredittofundcapacityexpansionand
acquisition-ledinorganicgrowth.Severalbanksandotherinstitutionsactivein
Indiahavebeenabletofinancelargetickettransactionsandhaveemergedasthe
preferredandtrustedpartnersforleadingcorporates.
Thekeyplayersinthissub-sectorincludeDevelopmentalFinanceInstitutions
(DFIs),PublicSectorBanks,IndianPrivateBanksandForeignBanks.Giventhe
natureoftheindustry,successdependsontheabilitytonurturestrong
relationshipsandmaximizethewalletshare.Theotherfactorsthatdetermine
successincludeafocusoninnovation,syndicationandstructuringwiththeability
toofferacompleteproductoffering.
Indiancorporatesarecurrentlyshowcasinghighgrowthlevels.Thesectoris
expectedtowitnessstrongdemandforfundsinthefuture,duetoplanned
capacityexpansionandassociatedfixedtenureandworkingcapitalfunding
requirements.However,increasingcompetitionandprevailinghighinterestrates
vis-à-visforeignborrowingsisexpectedtoresultinincreasingpressureon
marginsandwouldthusimpacttheprofitabilityofthissector.
Project Finance
ThestepstakenbytheIndianGovernmenttoboostinfrastructuredevelopment
hasstimulatedinvestmentinthecoresectors,includingcement,steelandpower
leadingtoariseindemandforprojectfinance.Theprojectfinancesector
includesbothfee-based(projectadvisory)aswellasfund-based(fund
disbursement)opportunities.Owingtoshrinkingspreads,leadingplayersare
focusingonfee-basedincomestreams.
ThekeyinstitutionsprovidingprojectfinanceincludeDFIs,publicsectorbanks,
privatebanksandforeignbanks.However,newersourcesofcapitalincludingthe
capitalmarket,privateequity(PE)groups,investmentbanksandsyndicatedloans
haveemergedinrecenttimes.
11Source:NABARD,CLSA,KPMGanalysis
15
Astrongbalancesheetwithlowcostofcapital,soundprojectappraisal
capabilitiesandappetiteforIndia’ssovereigncreditriskarecriticalforsuccess.
TherecentupgradeofIndia’ssovereignratingto‘investment’gradeisexpected
tosignificantlyeasesupplysideconstraintstoinvestment.
Life Insurance
TheIndianlifeinsuranceindustryhasexperiencedtremendousactivitysincethe
openingupoftheinsurancemarketin2000toprivateandforeigninvestments.
Thoughtheindustryisstilldominatedbythepublicsectorbehemoth,theLife
InsuranceCorporationofIndia(witha64percent12 marketshareinFY2007),
privateplayersarecatchinguprapidly.Thenewentrantshavebeenabletogarner
marketsharebyaggressivelybuildingthedistributionnetwork(intheformof
agents)andreachingruralandsemi-urbanareas,totakeonthemarketleader.
Besides,theprivateplayersarefocusingonunit-linkedpolicies,whichhave
contributedtotheirincreasingmarketsharevis-à-visLICinvalueterms.
Thegrowthinthelifeinsurancesectorhasbeencatalyzedbyincreased
awarenessoftheneedforlifeinsuranceandintroductionofunitlinkedpolicies
andproductswhicharemoreacceptabletotheIndianmasses.Theinsurance
industryinIndiahastremendousgrowthpotential,duetoalargepopulation,fast
andrapidgrowingeconomyandconstantimprovementinthestandardofliving.
Besides,lifeinsurancepenetrationinIndiaislow,incomparisontoother
developednations.
LifeinsurancepenetrationinIndiaisslatedtogrowrapidlyduetotheincreasing
reachofplayersinTierIIandTierIIIcities.Micro-insuranceisexpectedto
significantlyincreasethesizeofthetargetpopulationasitincreasesthe
affordabilityoftheproduct.TheanticipatedincreaseinForeignDirectInvestment
(FDI)limitfromthecurrent26percentisexpectedtospurtheentryofglobal
playersintothissector.ThemarketsizeforFY2007wasUSD18.9billion,andis
projectedtogrowtoUSD41.1billionbyFY2010.
Life Insurance Market Size: Current and Projected
Source:IRDA
12Source:IRDAwebsite
16
Non-life Insurance
TheIndianNon-lifeinsurancesectorwitnessedtheentryofseveralglobalmajors
afterthesectorwasopeneduptoprivatesectorplayersintheyear2000.The
entryofprivatesectorinsurersmarkedaparadigmshiftinthisindustryandhas
triggeredseveralchangesinproductfeaturesandservicelevels.However,the
growthpotentialwasnotfullyrealizedduetofixedtariffsandrelativelylowscope
forcustomization.
Indiahasanextremelylowinsurancepenetrationwithtremendousscopefor
improvementtoreachlevelscomparablewithotheremergingmarkets.Infact,
non-lifeinsurancedensityisverylowincomparisontoothernations,indicating
thetremendousopportunity.
Theentryofnewplayersandintroductionofnewproductscoupledwith
increasingdistributionreachishelpingincreaseawarenessamongcustomers.
Thechangingdemographicprofilewithrisingincomesandayoungpopulationis
alsoleadingtoincreasedpercapitaexpenditureoninsuranceproducts.
Withsaturatedmarketsinmostdevelopednations,globalinsurersare
increasinglyinterestedinIndiaforsustaininggrowth.Theanticipatedincreasein
theFDIlimitforforeigncompaniesandrecentde-tarifficationisexpectedto
significantlyincreaseglobalinterestinthissector.Thenon-lifeinsuranceindustry
iscurrentlywortharoundUSD6.1bnandisprojectedtogrowataCAGRof13
percentintheforeseeablefuture.
Growth in Non-Life Insurance: Actual and Projected
Source:IRDA,AsiaInsurancePost,KPMGResearch,CompanyReports
17
Theinsuranceregulatorisencouragingtheentryofmoreplayerssothat
insurancepenetrationlevelscanfurtherincrease.Severalinitiativesarealsobeing
plannedtopromotetheestablishmentofstandalonehealthinsurancecompanies.
Therecentde-tarifficationofmotor,fire,engineeringandworkmencompensation
insurancesinceJanuary2007,isexpectedtoresultinincreasingfocusonproduct
innovationandrisk-basedpricing.Healthinsurancehasbeenamongthefastest
growingmarketsegmentsinrecenttimesandisexpectedtocontinueshowinga
minimumgrowthof30percentgoingforward.
Asset Management
TheIndianassetmanagementindustryhascomealongwayfrombeingasingle
playerindustry(UnitTrustofIndia)foralmost23yearstoafast-growingsector
with32players13 todayandseveralmorewaitinginthewings.Investorshavea
widevarietyofschemesaswellasfundhousestochoosefrom.
Atpresent,theindustrymanagesassetsamountingtoapproximatelyUSD97.8
billion14 (June2007)butisstillinitsinfancywhencomparedtoglobalstandards.
TheratioofAssetsUnderManagement(AUM)toGDPisjust6percentinIndia
comparedto20-85percentindevelopedeconomies.
AUM as a percent of GDP (2006)
Source:CLSAAsiaPacificMarkets
Theassetmanagementsectoriswitnessinghighgrowthinrecenttimesdueto
severalfactorsincludingrisingincomes,increasingawarenessoffinancial
products,focuseddistributionefforts,strongequitymarketgrowthandrobust
performanceofleadingfunds.
Complex,innovativeandsophisticatedproductsformasmallpartoftheindustry
AUMatpresent.However,goingforwardwithrisinginvestorawareness,these
schemesareexpectedtoattractgreaterinvestment.
13Source:AMFIwebsite
14Source:AMFIwebsite
18
WiththeIndianeconomygrowingatarapidpaceandthecapitalmarkets
performingwell,theassetmanagementindustryinIndiaislikelytowitnesshigh
growthrates.Increasingretailparticipationandlargeamountofsurplusliquid
fundswithinstitutionalInvestors,theindustryisexpectedtogrowataCAGRof
25percent15 betweenFY2007andFY2010.
Pensions
ThecurrentdemographicdividendthatIndiaenjoysmaynotlastindefinitely.Asa
resultofdecliningbirthratesandlongerlifeexpectancy,theelderlywillconstitute
alargeproportionofthetotalpopulation.Eventoday,whilethepopulationofthe
elderlyisproportionatelylower,inabsoluteterms,itistillaverysignificant
number.Thechangingdemographicdynamicscallsforacriticallookatthe
pensionsupportsysteminIndia.Lessthan10percent16 oftheestimated
workingpopulationinIndiaiscoveredunderformalold-ageincomesecurity
schemes.ThepenetrationbywayofthePublicProvidentFund(PPF)accountis
lessthan1percentoftheentireworkingpopulation.
Inthepastfewyears,therehavebeennumerousdiscussionsonpermitting
participationfromtheprivatesectorandforeignplayersintheIndianpensions
industry,poweredbytheproposedintroductionoffavorableregulatoryinitiatives.
Theregulationsplannedforthepensionandprovidentfundindustriesrequire
structuralandproceduralmodifications.
TheformationoftheinterimPensionFundRegulatoryandDevelopmentAuthority
(PFRDA)kicked-offthereformprocess.Thepensionreformsinthecountrythen
acquiredmomentumwiththeannouncementfromReserveBankofIndia(RBI)
regardingnormsformanagementofpensionfundsbybanks.
Implementationofpensionsectorreformsisexpectedtohaveasalutaryimpact
ontheIndianpensionandprovidentfundsector.PFRDAhasalreadylaiddown
theeligibilitycriteriaforpensionfunds.ThoughtheRBInormsintendto
eventuallypermitprivateandforeignbankstoenterthebusinessofpension
fundsmanagement,thedefinitionoftheroadmapforfuturegrowthisstill
awaited.
Investment Banking
Inthelastfewyears,thenumberofinvestmentbanksoperationalinIndiahas
increasedsignificantly,becauseoftheriseinthenumberofglobalmergerand
acquisition(M&A)dealsinvolvingIndiancompanies.High-valuedealssuchasthe
Tata-CorusdealandtheHutchison-Essarstakesaleiscreatingfurtherinterest
amongstglobalplayers,withrespecttotheIndianinvestmentbankingspace.
15Source:KPMGanalysis
16Source:KPMGPensionreport
19
M&AAdvisoryhasbeenthemostsignificantcontributortoInvestmentBanking
revenues.WithanincreasingnumberofIndiancompanieslookingatoverseas
acquisitions,thisactivityislikelytoincreaseinprominence.
Thestrongregulatorymechanismandcapitalmarketenvironmenthasattracted
theinterestofleadingWallStreetinvestmentbanks,whoarefocusingontheir
Indiaoperations.Deregulationhasalsoopenedopportunitiestooffermore
serviceslikeriskmanagement,distresseddebt,proprietaryinvestingand
leveragedfinance,apartfromotherconventionalofferings.
Investmentbankingisapeople-drivenbusinessandrequireshumanresources
withexperienceintheindustry,trackrecordofsuccess,abilitytowinand
executedeals,strongnegotiationskillsandexcellentrelationshipmanagement
skills.Goingforward,playersneedtofocusonskilledprofessionalshaving
domainexpertise,giventhatincreasedactivityintheinvestmentbankingspace
hasresultedinatalentcrunch.
Securities Broking
TheIndianstockbrokingindustryiswitnessingincreasedglobalattentionwith
increaseinnumberofmergersandacquisitionsandrisingtradingvolumes.The
continuedForeignInstitutionalInvestor(FII)interestintheIndiancapitalmarkets
androbuststockmarketperformanceisfuelingretailinvestorinterestinequity
products.Theimmensepotentialofferedbyleveragingthelatentdemandinsemi-
urbanandruralmarketsisdrivingaggressiveexpansionplansofleadingIndian
brokinghouses.
TheIndianbrokingindustrycurrentlyincludesanumberofplayerswitharegional
orsectoralfocus.Largebrokeragehousesaregrowingandscalingupthrough
geographicalexpansion.Thisprocessisexpectedtocontinuewiththeentryof
globalmajorsintotheindustry.However,increasingcompetitionisexpectedto
reducemarginsintheindustrytherebyimpactingprofitability.
TheentryofaggressiveplayerssuchasRelianceCapitalthroughitsportal
‘RelianceMoney’isexpectedtosignificantlyincreasethereachandpenetration
ofsecuritiesbrokingservicesinIndia.Severallargeglobalplayersarealsomulling
anentryintotheIndianmarketinthenearfuture.
Thissectoristhereforesettowitnessincreasingactionwithintensifyinglevelsof
competitionamongexistingplayersandnewentrantsleadingtotheemergence
oflargeplayerswithapan-Indiapresenceandasignificantshareinthetotal
marketvolumes.Playersarealsopositioningthemselvesasretailfinancial
servicesbrandstoimproveshareofwalletandenhancecustomerretention.
20
Wealth Management
TheboomingIndianeconomy,risingstockpricesandincreaseinsalarieshas
turnedthespotlightontheWealthManagementsector.Keyproductsand
servicesincludeinvestmentadvisory-indebt,equity,mutualfundsand
derivatives;besidestaxadvisory;estateplanning;andinsuranceadvisory.
Thewealthmanagementspacewashithertoconsideredthepreserveofsome
foreignbanks,whichoffered‘exclusiveservices’toselecthighnetworth
customers.Today,severalprivatebanksoffertheseservices,whilethereis
virtuallynoparticipationfromthelargenationalizedbanks.Further,international
playersareincreasinglyofferingdedicatedwealthpropositionswithmoreevolved
productsthantheirIndiancounterparts.
ThegrowingnumberofaffluentIndianscoupledwithincreasingawarenessof
financialplanninghasresultedinexpandingthebaseofpotentialwealth
managementcustomers.
Liquid Assets of HNIs
Source:DatamonitorReportsonWealthManagement
Source:DatamonitorreportsonWealthManagement
21
Structured Finance
TheIndianStructuredFinancemarketisdominatedbysecuritizationingeneral
andAssetBackedSecuritization(ABS)inparticular.Securitizationwasintroduced
in1992;sincethen,volumeshavebeenscalingnewpeakseveryyearwitha
cumulativegrowthrateofnearly100percentbetween2002and2005.
Structured Finance Market Volumes
Source:ICRAreport
BaselIIcapitalconstraintsareexpectedtoresultinincreasingparticipationby
publicsectorbanksandnewNBFCspursuingaggressivegrowthstrategies.The
lowsizeofretailsecuritizationinrelationtotheunderlyingretailfinancemarket
highlightsthetremendousgrowthpotentialinthissector.
Giventherapidincreaseincreditoff-takeandtheproliferationofNBFCs,
securitizationwouldactasanincreasinglyimportantfundingtoolinthefuture.
TheexpectedlaunchofRealEstateMutualFunds(REMFs)inthenearfuturemay
alsofacilitateinstitutionalizationoftherealestatesectorandencourage
ResidentialMortgage-BackedSecurity(RMBS)andCommercialMortgage-Backed
Security(CMBS)issuance.Withincreasingregulatoryclarityandmovesto
enhanceliquidityofsecurityreceipts,thissectorisonthecuspofrapidgrowth
andisattractinginterestfromglobalplayers.
Private Equity
Inthepastfewyears,IndiahasbecomeoneofthetopfivePEdestinationsinthe
AsiaPacificregionwithPEfundsconstitutingover25percentofFDIinflowsinto
India.Liberalforeigninvestmentpolicyencouragingforeignparticipationand
availabilityoftargetsatattractivevaluationsrelativetootheremergingmarkets
haveresultedinarapidgrowthofprivateequityinvestmentsinthecountry.
22
Private Equity Market Size
Source:Evalueserve,IVCA,GTandVentureIntelligenceIndia
Privateequitycapitalisbeingpreferredovertraditionalsourcesoffundsto
leveragetheirbrandequity,sectorknowledgeandrelationships.
PEinvestmentinIndiawasearlierlimitedtotheITandITESindustrywithafocus
onearlystageventures.However,inrecenttimes,PEinvestmenthasextended
toalargenumberofsectorsbesidesITandITES.PEplayersareincreasingly
focusingonattractiveopportunitiesinrealestate,mediaandentertainment,
telecom,financialservicesandmanufacturingandautoindustry.With
investmentsofoverUSD20-2517 billionneededbyIndiaintheinfrastructure
sectoralone,thecurrenthighgrowthtrajectoryintheprivateequitysectoris
expectedtocontinueinthemediumterm.
Distressed Assets
IndiahasanestimatedstockofUSD40billion18 innon-performingassets,
includingsouredcreditsatcooperativelenders,non-bankingfinancecompanies
andloanswrittenoffbybanks,asperARCIL,theleadingIndianasset
reconstructioncompany.FollowingthelandmarkenactmentoftheSARFAESIAct
(SecuritisationandReconstructionofFinancialAssetsandEnforcementof
SecurityInterestAct)in2002,investorappetiteforIndianassetsaswellasnon-
performingloansisgrowingastheeconomyexpandsatarecordpace.
Thecountry'sgrowthhaspushedupthevalueoftheplants,machinery,landand
buildingsusedascollateralbyborrowersnowindefault,makingthetaskof
recoupingloanseasier.RegulatorymeasuresbywayofrecognitionofPass-
ThroughCertificates(PTCs)assecuritiescouldprovideasignificantboosttothe
marketbyallowingFIIinvestmentintothemarket.
17Source:BusinessWorldandKPMGanalysis
18Source:RBI,ARCIL
23
Globalplayersarethereforecontemplatingentryintotheassetreconstruction
space,giventheattractivenessoftheopportunity.Theentryofmoredomestic
andforeignplayersintothisspaceinthefutureisalsoexpectedtoresultin
heightenedactivity,therebyenhancingpricingandrecovery.
Real Estate Finance

TherealestateandconstructionsectorinIndiahaswitnessedanunprecedented
boominrecenttimes.Strongresidentialandcommercialdemandinmajorcities
hasresultedinrapidprojectdevelopmentandcapacitycreation.
Inthepastfewyears,realestatefundingwitnessedadramaticchangewiththe
automaticapprovalof100percentFDIinvestment.Theincreasingtransparency
andhighreturnsoftheIndianrealestatesectorhaveattractedstrongforeignand
domesticinvestorstoIndianrealtyfirms.Indianrealestatemajorshavealsobeen
abletoleveragethecapitalmarketsandoverseas(AIM)routestoraisecapital.
Therealestatefinancesectorisanticipatedtobeveryactiveinthenearfuture
withseveralanticipateddevelopmentswhichinclude:
• Influxofforeignfunds–Thefundsavailableforrealestateinvestmentis
expectedtoexceedUSD12billion.Globalfundshavealreadyraisedover
USD12-15billion19 forinvestmentinIndianrealestateinthenextfiveyears.
• IntroductionofREMFs–TheanticipatedintroductionRealEstateMutual
Funds(REMFs)intheIndianmarketisexpectedtosignificantlyincreasethe
availabilityoffundingfromretailinvestors
• Regulations-FDIinrealestateissettowitnessincreasedregulatory
scrutinytocontaintheassetpricebubble.Thepreferentialequityand
convertibledebenturerouteshavebeenvirtuallyclosedduetonew
regulations.FIIinvestmentinrealestateislikelytohavesimilarrestrictionsin
thefuture.
Leveraged Finance
Indiancorporatesarealsoincreasinglyusinganacquisition-ledinorganicgrowth
strategytoexpandtheircapabilitiesandassets.Thekeydriversforthegrowthof
leveragedfinanceinIndiaincludetheincreasingglobalambitionsofIndian
corporatesaspartoftheirgeographicaldiversificationstrategy.
IntheIndiancontext,LeveragedBuy-outs(LBOs)havebeenmorecommonin
themanufacturingsector.Thisisduetothepresenceofcollaterals,intheformof
fixedassets,aswellassuccessfultrackrecords.Further,technologyandservice
companiesentailhigherbusinessriskandalsohaveminimalfixedassetsas
security.
19Source:ICICISecuritiesReport
24
Theleveragefinancesectorissettowitnesscontinuedgrowthowingtoa
favorableeconomicenvironment,highbusinessconfidence,andeasing
regulatoryrestrictionswithcorporates.Aspertherecentregulations,corporates
areallowedtofundupto200percentoftheirnetworthtooverseassubsidiaries
toacquireoverseastargets.Risingprivateequityinflowsandimprovementin
India’ssovereigncreditratingareenablingincreasedaccesstoforeigncapitalat
competitiverates.Itisexpectedtofuelthegrowthofthissectorinthemedium
term.
Non-Recourse Lending
TheIndianGovernment’sCommitteeonInfrastructurehasenvisagedmassive
infrastructurerelatedinvestmentsduringtheseventhplanperiod(2007-2012).
Givengovernmentalprioritiestoreininthefiscaldeficitandincreasespendingin
thesocialsector,publicinvestmentmustbesupplementedbyPublic-Private
Partnerships(PPPs).Inmanycases,investmentmayhavetobemadeexclusively
bytheprivatesector.
Thepoliticalconsensusoninfrastructuredevelopment,coupledwithacceptance
ofuserchargesandeaseoffinancing,isnowattractingprivateplayerstothe
Indianinfrastructuresector.
Theinfrastructuresectorisexpectedtowitnesshighgrowthwithinvestments
estimatedatUSD500billioninthenextfivetosevenyears.Power,roadsand
non-residentialrealestateareexpectedtobethekeysectorsforthenon-
recourselendingneededtosupportthis.
Thenearfuturecouldalsomarktheculminationofseveralinnovationsin
financingmodelsandthecreationofalternativesourcesofcapital,spurringthe
developmentofthissector.
25
RegulatoryFrameworkfor
FinancialServicesinIndia
Inthelastdecade,Indiahasemergedasapreferreddestinationforforeign
capitalflows.PrivateequityinvestorsandFIIshavecontributedtothe
strengtheningoftheIndiancapitalmarkets.
AsoundregulatorymechanismhasplayedanimportantroleinshapingtheIndian
FinancialServicessector.InIndia,certainagenciesareresponsibleforthe
regulationandsupervisionoftheinstitutionsandmarketparticipantsinthe
financialsector.
TheregulatoryframeworkforinvestmentinIndiaissummarizedinthefollowing
sections.
Regulators in Financial Services

TheReserveBankofIndia(RBI),thecentralbank,regulatesandsupervisesa
majorpartofthefinancialsystem.ItssupervisorydomaincoversCommercial
Banks,Non-BankingFinancialCompanies(NBFCs),UrbanCooperativeBanks
(UCBs),someoftheAll-IndiaFinancialInstitutions(AIFIs)andAsset
ReconstructionCompanies(ARCs).SomeAIFIs,inturn,regulateand/orsupervise
otherinstitutionsinthefinancialsector.Accordingly,theRegionalRuralBanks
(RRBs)andCentralandStateCooperativeBanksaresupervisedbytheRBI
throughtheNationalBankforAgricultureandRuralDevelopment(NABARD),and
theHousingFinanceCompaniesthroughNationalHousingBank(NHB).
EntitiesintheinsurancesectorareregulatedbytheInsuranceRegulatoryand
DevelopmentAuthority(IRDA).Theapexregulatorybodyforpensionfundsisthe
PensionFundRegulatoryandDevelopmentAuthority(PFRDA).
TheSecuritiesandExchangeBoardofIndia(SEBI),thecapitalmarketregulator,
regulatesthecapitalmarketsandsupervisesseveralinstitutionsincludingthe
stockexchanges,mutualfunds,assetmanagementcompanies,securitiesdealers
andbrokers,merchantbankers,creditratingagencies,FIIs,venturecapitalfunds,
etc.
26
Insurance Pension Fund

Securitiesand
Reserve Bank Regulatory & Regulatory &
Exchange
of India Development
BoardofIndia
Development
(RBI) Authority India Authority of India
(SEBI)
(IRDA) (PFRDA)
Non–Banking
Scheduled Asset PensionFund
Financial Co-operative Finance Insurance Capitalmarket
Commercial Reconstruction Managers/Inter
Institutions Banks Companies Companies intermediaries
Banks Companies mediaries
(NBFC)
• Complete Range • Development • Regional/ • Financial • SARFAESI • Life Insurance • Asset • Regulatory role
of commercial finance Community/orie intermediaries Registered Management includes
• Non-life
banking institutions nted Banks involved in Companies designing of
Insurance • Broking
activities sponsored by equipment basic
• Perform role of
State or Cenral leasing, hire • Wealth
• Diversified with regional • Products, and
Goverments purchase, Management/Po
regards to aggregate is in fixing auennes
lending and rtfolio
products as also • Role largely to semi urban & for investment
investing Management
footprint of develop markets rural areas
Services
operations through • Two broad
• Extensive
refinance and categories : • Venture capital
• Comprise : coverage with a
development • Fll
developmental • Deposit taking
• Public Sector activities
role in • FVCI
Banks • Non-deposit
• Comprise : familiarizing the
taking • Merchant
• Old Private economically
• Development Bankers
Sector Banks backward
Finance
• New Private sections with • Unde writers
Institutions
Sector Banks banking habits
• Specialized Custodians &
• India Branches Finance Depositaries
of foreign Institutions
banks
• Investment
Institutions
• Refinance
Institutions
Foreign Investment in India
Theregulatoryapprovalprocesshasbeensubstantiallyliberalizedtofacilitate
investmentintoIndia.TheforeigninvestmentintoIndiaisdepictedinthechart
below:
27
Policy on FDI
Thegovernmenthassettheregulationsthatapplytoforeign-equityparticipation
inthefinancialservicessector.
ThecomplianceaspectsofFDIareembeddedintheFDIPolicy,ForeignExchange
ManagementAct,1999,andvariousotherregulationsprescribedbytheRBIfrom
timetotime.
FDIcanbeclassifiedintotwobroadcategories:Investmentundertheautomatic
routeandinvestmentwithpriorapprovaloftheGovernment.
Investment under the Automatic Route:

Thereisnorequirementforpriorregulatoryapproval,butonlypost-factofiling/
intimationwiththeRBI.TheprocedureinvolvesfilingofintimationwithRBI
within30daysofreceiptofinvestmentmoneyinIndiaandfilingofprescribed
documentsandparticularsofallotmentofshareswithin30daysofallotmentof
sharestoforeigninvestors.
19financialservicesactivitiesarepermissibleundertheautomaticroutesubject
tocertainminimumcapitalisationnorms.The19activitiesincludeMerchant
banking,Underwriting,PortfolioManagementServices,StockBroking,Asset
Management,VentureCapital,CustodialServices,Factoring,Leasing&Finance,
HousingFinance,Creditcardbusiness,MicroCredit,RuralCredit,Credit
ReferenceAgencies,CreditratingAgencies,ForexBroking,Moneychanging
Business,InvestmentAdvisoryServicesandFinancialConsultancy.
TheminimumcapitalisationrequirementsdependingonthelevelofFDIinthe
abovefund-basednon-commercialbankingactivities,undertheautomatic
approvalrouteareasunder:
Minimum capitalization
FDI limit Comments
required
Upto51% USD0.5million Upfrontcapitalinfusion
Above51%and
USD5million Upfrontcapitalinfusion
upto75%
USD7.5milliontobe
FDIbeyond75%
USD50million broughtupfrontandbalance
andupto100%
in24months
28
RBIpermitsanyforeignbankwithpresenceinIndiatoholdsharesinanyother
privatesectorbankonlyupto5%ofthepaidupcapitaloftheinvesteebank.In
theinterestofdiversifiedownershipofthebanks,nosingleentityorgroupof
relatedentities(exceptforeignbankandprivatesectorbank)arepermitted
shareholdingorcontrol,directlyorindirectly,inanybankinexcessof10%ofthe
paidupcapitaloftheprivatesectorbank.Anyhigherlevelofacquisitionwillbe
withpriorapprovalofRBI.
FDIininsurancesectorispermissibleupto26%oftheIndianjointventure
companyundertheautomaticroute,subjecttoIRDAapproval.
Investment with prior approval of the Government

UnderthepriorGovernmentapprovalroute,investmentinactivities/industriescan
bemadebyseekingapproval,wheretheautomaticrouteisnotavailableor
previousventureinIndiainthesamefieldorifinvestmentinexcessof24%in
smallscaleunitisrequiredorifinvestmentexceedssectoralcaps.Suchapproval
isgrantedbytheForeignInvestmentandPromotionBoard(FIPB).
Policy on FVCI Investment

AForeignVentureCapitalInvestor(FVCI)isonethatisincorporatedand
establishedoutsideIndia,isregisteredundertheFVCIRegulations,2000laid
downbySEBIandproposestomakeinvestmentsinaccordancewiththem.
Theregulationsstipulateinvestmentofatleast66.67percentoftheinvestible
fundsintounlistedequitysharesofaVentureCapitalUndertaking(VCU).AVCUis
definedasadomesticcompanywhosesharesarenotlistedandonethatis
engagedinthebusinessofprovidingservices,productionormanufactureof
articlesorthingsbutdoesnotincludeactivitieswhicharespecifiedinthe
negativelist(sectorsinwhichforeigninvestmentisnotcurrentlypermissible).
Further,notmorethan33.33percentoftheinvestiblefundsmaybeinvested
towardsthefollowingpurposes:
• SubscriptiontoanInitialPublicOffering(IPO)ofaVCU
• Anydebt/debtinstrumentofaVCUinwhichtheFVCIhasalreadymade
equityinvestments
• Preferentialallotmentofsharesofalistedcompanysubjecttoalock-in
periodofoneyear
29
Policy on FII Investment

ForeignInstitutionalInvestors(FII’s)aregovernedbySEBI(FII)Regulations,1995.
ThefollowingentitiesareeligibletobeclassifiedasFII’s:
Pensionfunds,Mutualfunds,Investmenttrusts,Assetmanagement
Companies,Banks,Insurancecompanies,Re-insurancecompanies,Institutional
portfoliomanagers,InvestmentManagers,InvestmentAdvisors,Foreign
GovernmentAgencies,ForeignCentralBanks,InternationalorMultilateral
OrganizationsorAgenciesthereof,Trusteesor‘PowerofAttorney’holdersand
entitiesthathaveexistedforatleastfiveyears(Universityfunds,Endowments,
Foundations,CharitabletrustsorCharitablesocieties).
Whenabankactsonbehalfofanintermediary,asubaccountisopenedforeach
oftheintermediaries'clients,toholdtheirfundsintheirname.Theaccountcan
onlybeoperated,andthefundscanonlybeused,accordingtothetermsofa
writtenagreement(PowerofAttoney)thatisgivento,andapprovedby,thebank.
EligibleentitiesforSub-accountsare:
Broadbasedfunds;proprietaryfunds;foreigncorporatesandforeignindividuals
(otherthanNon-ResidentIndiansandOverseasCorporateBodies)
FII’sarecategorizedaccordingtothepercentageofequityinvestments:
• 100percentequityFII-Investmentinequityandequity-relatedsecurities
shouldbeatleast70percentoftotalFIIinvestments
• 100percentdebtFII–limitoninvestmentindebttobeapprovedbySEBI
• Noforeigncorporateorforeignindividualtoinvestthrough100percentdebt
sub-accountroute.
TheInvestmentframeworkspecifiesthesecuritieseligibleforFIIinvestment.
Theseare:
Shares,debentures,warrantsofunlisted,listedortobelistedcompanieson
recognizedstockexchanges(otherthanAssetReconstrutionCompanies
(ARC’s)),securityreceipts,mutualfundunits(listedorotherwise),dated
governmentsecuritiesincludingtreasurybills,derivativestradedonrecognized
stockexchange,commercialpaper.
Investment restrictions
InvestmentbyFIIontheirownaccountorbehalfofsub-accountcannotexceed
10percentofthepaid-upequitycapitalofinvesteecompanyandincaseof
foreigncorporateorindividual,theceilingis5percentofthepaid-upequity
capitaloftheinvesteecompany.
30
Further,allFIIsandtheirsub-accountstakentogethercannotacquiremorethan
24percentofthepaidupequitycapitalofanIndiancompany.Theinvestment
canbeincreaseduptothesectoralcap/statutoryceiling,asapplicabletothesaid
company.ThiscanbedonebypassingaresolutionbytheBoardofDirectors,
followedbythepassingofaspecialresolutiontothateffectbyitsGeneralBody.
Also,allFIIs/sub-accountscantransactindematerializedformthrougha
recognizedstockbrokerandonarecognizedstockexchangeandarerequiredto
giveortakedeliveryofsecurities.
Investment Vehicles for Foreign Investors

Dependingupontheirrespectivebusinessneeds,foreigncompaniesconsidering
abusinesspresenceinIndiacanchoosebetweensetting-upaliaisonoffice,
branchoffice/projectofficeorincorporatingacompany.Thiscouldbeeithera
whollyownedsubsidiaryorajointventurewithanotherperson.
Liaison office
Aliaisonoffice(LO)issetuptoactasachannelofcommunicationinIndiafor
theheadoffice.Itisnotpermittedtoundertakeanycommercial/trading/
industrialactivity,directlyorindirectly.EstablishinganLOrequirestheapproval
fromRBI,whichalsomonitorsitsactivities.
ForeigninsurancecompaniessettingupanLOinIndiawouldrequireapproval
fromtheIRDA.
Branch office/Project office

ForeigncompaniesundertakingprojectsinIndiacansetupproject/siteoffices
(POs).ThesettingupandoperationoftheseofficesisregulatedbytheRBI.Prior
approvaltosetupaPOisnolongerrequired(subjecttocertainconditions).APO
canonlyundertakeactivitiesrelatedtoandincidentaltotheexecutionofspecific
projectsinIndia.
Companiesengagedinmanufacturingandtradingactivities,ontheotherhand
maysetupBranchOffices(BO).ForeignBankscanpresentlyset-upoperationsin
IndiaasBOwithpriorapprovaloftheRBI.ABOcancarryoutactivitiespermitted
byRBI;however,theactivitiesgenerallydonotincludemanufacturing(unlessset
upinanSEZ)andretailtrading.
31
Local subsidiary or Joint Venture Company

Asubsidiaryorajointventurecompanycanbeformedeitherasaprivatelimited
companyorapubliclimitedcompany(exceptinsurancejointventurewhichcan
beonlypubliccompany).Acompanyisregulatedinteralia(amongstotherthings)
bytheRegistrarofCompanies(ROC)undertheCompaniesAct,1956.
Thekeydifferencesbetweenaprivatecompanyandapubliccompanyhavebeen
setoutinthetablebelow:
Sr. No. Particulars Private Company Public Company
1. Minimumnumberofshareholders Two Seven
2. Maximumnumberofshareholders Fifty Unlimited
3. Minimumnumberofdirectors Two Three
Twelve
(canbeincreased
4. Maximumnumberofdirectors Seven
withGovernment
approval)
Minimumpaid-upcapital INR1,00,000 INR5,00,000

5.
requirement (Approx.USD2200) (Approx.USD11000)
Statutory requirements for formation of companies

Typically,theincorporationprocessenvisagesfilingofvariousdocuments/
informationwiththeROC.Afterverifyingthedocuments,theROCissuesa
‘CertificateofIncorporation’,whichistheproofofincorporation.Aprivate
companycancommencebusinessimmediatelyafterobtainingthiscertificate.A
publiccompanyisrequiredtoobtaina‘CertificateofCommencementof
Business’byfilingadditionaldocumentswithROC.
32
AboutKPMG
KPMGistheglobalnetworkofprofessionalservicesfirmsofKPMGInternational.
Ourmemberfirmsprovideaudit,taxandadvisoryservicesthroughindustry
focussed,talentedprofessionalswhodelivervalueforthebenefitoftheirclients
andcommunities.Withnearly1,13,000peopleworldwide,KPMGmember
firmsprovideservicesin148countries.
KPMG’smemberfirmsinIndiawereestablishedinSeptember1993.As
membersofthecohesivebusinessunit,theyrespondtoaclientservice
environmentbyleveragingtheresourcesofagloballyalignedorganizationand
providingdetailedknowledgeoflocallaws,regulations,marketsandcompetition.
InIndia,KPMG’srangeofservicesincludesAudit,Tax,andAdvisoryservicesto
over2,000internationalandnationalclients.Clientsrangeacrossfivesectors
namelyfinancialservices;consumermarkets;industrialmarkets;information,
communicationandentertainment;andinfrastructureandgovernment.KPMG
hasofficesinIndiainMumbai,Delhi,Bangalore,Chennai,Hyderabad,Kolkata,
andPune.ThefirmsinIndiahaveaccesstomorethan2,200Indianand
expatriateprofessionals,manyofwhomareinternationallytrained.KPMG
providesrapid,performance-based,industryfocusedandtechnologyenabled
services,whichreflectasharedknowledgeofglobalandlocalindustriesand
experienceoftheIndianbusinessenvironment.
KPMGalsooperatesIndiaDesksinafewcountriesaroundtheworld.The
objectiveoftheIndiaDeskistohelpclientsonIndiarelatedissuessuchas
conductingindustryreviews;developingbusinessstrategiestoinvestinnew
projects;identifyingopportunitiesforpartnershipsandacquisitions;rendering
transactionadvisory,andprovidingadvisoryoninvestmentstructuresfroma
regulationandtaxperspective.
KPMG'sFinancialServices(FS)practicehasundertakenanumberofpioneering
projectsinsectorssuchasconsumerbanking,creditcards,SMEbanking,agri&
ruralbanking,lifeinsurance,generalinsurance,assetmanagementandwealth
managementamongstothers.Theseprojectscoversolutionssuchasmarket
assessment,strategyformulation,businessplanning,policyformulation,demand
assessment,partnerselection,processdesign,businesscontinuityservicesand
programmanagement.
KPMGassistscompaniesinthefinancialservicessectorwhoareexploringentry
intoIndia.
SuccessfulimplementationofanIndiaentrystrategyrequiresastructured
approachrightfromthestrategydevelopmentstagethroughimplementation.
Thisapproachencompassesawiderangeofservicesfromassessingmarket
potentialtodefiningthestrategyandmakingitoperational.
33
SuccessfulimplementationofanIndiaentrystrategyrequiresastructured
approachrightfromthestrategydevelopmentstagethroughimplementation.
Thisapproachencompassesawiderangeofservicesfromassessingmarket
potentialtodefiningthestrategyandmakingitoperational.
Inlinewithyourglobalpositioningandstrategy.Thisincludesanassessment
Market Assessment and
ofvariousrelevantaspects–marketsizing,growthpotential,customer
Business case
segments,products,competitors,regulatoryissuesandfuturetrends
Evalution of market Evaluatingtherightapproach(whollyownedsubsidiary,JVandacquisition)

entry options forenteringtheIndianmarket
Developmentofkeyselectioncriteriaandassessmentofpotentialpartners/
acquisitiontargets(forJV/acquisitionentryroute)basedonstrategicfit,
JV Partner / Acquisition
brand,financialstrength,distributioncapabilities,customerbaseetc.
Target Strategy and Search
Negotiationsofenterprisevalueandclosedealwithstructureandtransaction
terms
Assistingnewentrantsontaxandregulatorycompliancearoundentity
Capital Structuring and
structuring,companyregistrationanddraftingtheJVandShareholders’
Tax Advice
Agreements
Developmentofabusinessstrategyandfinancialplan,drivenbythe
Business strategy strategicvisionoftheJVpartners.Theplanincludesstrategiesfortarget
and planning segments–products,distribution,geographies,operations,andcustomer
services
Designinganoperatingandreportingstructure,organizationmodel,
Operation set up performancemanagementframework,informationtechnologystrategyand
applicationselection
Programmanagementservicestosupporttheplanning,prioritising,
Implementation and monitoringandreportingofallimplementationactivities.KPMG’sleverages
roll-out itsunderstandingofrisk,toassessandmitigateprogramrisks,thusenabling
thesuccessful,time-boundimplementationofthenewventure.
34
Glossary
Abbreviation Full form
ABS AssetBackedSecuritisation
AIM AlternateInvestmentMarket
ARCIL AssetReconstructionCompanyIndiaLimited
AUM AssetUnderManagement
BO BranchOffice
CAGR CompoundedAnnualGrowthRate
CMBS CommercialMortgage-BackedSecurity
DFI DevelopmentFinanceInstitutions
FDI ForeignDirectInvestment
FII ForeignInstitutionalInvestor
FIPB ForeignInvestmentPromotionBoard
FVCI ForeignVentureCapitalInvestors
FY FinancialYear
GDP GrossDomesticProduct
IRDA InsuranceRegulatoryDevelopmentAuthority
IT InformationTechnology
ITES InformationTechnologyEnabledServices
LIC LifeInsuranceCorporation
LO LiaisonOffice
M&A MergerandAcquisition
MNC MultiNationalcompany
NBFCs NonBankingFinanceCompanies
PE PrivateEquity
PPPs PublicPrivatePartnerships
PTC Pass-throughCertificates
RBI ReserveBankofIndia
REMFs RealEstateMutualFunds
RMBS ResidentialMortgage-backedSecurity
ROC RegistrarofCompanies
SARFAESI SecuritisationandReconstructionofFinancialAssetsandEnforcementofSecurityInterestAct
SEBI SecuritiesExchangeBoardofIndia
SHG SelfHelpGroup
SME SmallandMediumEnterprise
SSI SmallScaleIndustry
USD UnitedStatesDollar
VCU VentureCapitalUndertaking
in.kpmg.com
KPMGinIndia
Bangalore Kolkata
Mumbai
Maruthi Info-Tech Centre Park Plaza, Block F, Floor 6
KPMG House, Kamala Mills Compound
11-12/1, Inner Ring Road 71 Park Street
448, Senapati Bapat Marg,
Koramangala, Bangalore 560 071 Kolkata 700 016
Lower Parel, Mumbai 400 013
Tel: +91 80 39806000 Tel: +91 33 22172858
Tel: +91 22 39896000
Fax: +91 80 39806999 Fax: +91 33 22172868
Fax: +91 22 39836000
Delhi Chennai
4B, DLF Corporate Park Wescare Towers
DLF City, Phase III 16 Cenotaph Road,Teynampet
Gurgaon 122 002 Chennai 600 018
Tel: +91 124 2549191 Tel: +91 44 24332533
Fax: +91 124 2549101 Fax: +91 44 24348856
Pune Hyderabad
703, Godrej Castlemaine II Floor, Merchant Towers
Bund Garden Road No. 4, Banjara Hills
Pune 411 001 Hyderabad 500 034
Tel: +91 20 30585764/65 Tel: +91 40 23350060
Fax: +91 20 30585775 Fax: +91 40 23350070
ContactUs:
Pradeep Udhas Ravi Trivedy
Head - Markets, KPMG in India Executive Director
Tel: +91 22 3983 5400 Advisory Services
email: pudhas@kpmg.com Tel: +91 22 3983 5604
email: rtrivedy@kpmg.com
Sanjay Aggarwal Narayanan Ramaswamy

National Industry Director Director
Financial Services Advisory Services
Tel: +91 22 3983 5102 +91 44 3984 4900
email: saggarwal@kpmg.com email: narayananr@kpmg.com
©2007KPMG,anIndianPartnershipandamemberfirm
Theinformationcontainedhereinisofageneralnatureandisnotintendedtoaddressthecircumstancesofanyparticularindividual oftheKPMGnetworkofindependentmemberfirms
orentity.Althoughweendeavortoprovideaccurateandtimelyinformation,therecanbenoguaranteethatsuchinformationis affiliatedwithKPMGInternational,aSwisscooperative.
accurateasofthedateitisreceivedorthatitwillcontinuetobeaccurateinthefuture.Nooneshouldactonsuchinformation Allrightsreserved.
withoutappropriateprofessionaladviceafterathoroughexaminationoftheparticularsituation. KPMGandtheKPMGlogoareregisteredtrademarksof
KPMGInternational,aSwisscooperative.PrintedinIndia.

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India-An Opportunity Dawns - Financial Services

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in.kpmg.

Sanjay Aggarwal Narayanan Ramaswamy

© 2007 KPMG, an Indian Partnership and a member firm

Ravi Trivedy Sanjay Aggarwal

The India Growth Story

South Africa’s Financial Services Capabilities

The Indian Financial Services Sector

Attractive Investment Opportunities

Banking & Financing

Consumer Finance: Risingconsumerismandincreasingfocusbyleading

SME Finance: SMEfinancingiswitnessingstronggrowthduetothe

Institutional Finance and Project Finance: Anexcellentperformanceby

Agri and Rural finance: Abouttwo-thirdsofIndia’spopulationresidesin

Structural Change in the Indian economy

Favourable Demographics: The Engine of Growth

Foreign Institutional Investment (FII)

Reforms and other developments

Consumer Finance Disbursement trend (2000-2007)

Agri and Rural Finance

Life Insurance Market Size: Current and Projected

Growth in Non-Life Insurance: Actual and Projected

AUM as a percent of GDP (2006)

Liquid Assets of HNIs

Structured Finance Market Volumes

Private Equity Market Size

Real Estate Finance

Regulators in Financial Services

Insurance Pension Fund

Foreign Investment in India

Investment under the Automatic Route:

Upto51% USD0.5million Upfrontcapitalinfusion

Investment with prior approval of the Government

Policy on FVCI Investment

Policy on FII Investment

Investment Vehicles for Foreign Investors

Branch office/Project office

Local subsidiary or Joint Venture Company

Sr. No. Particulars Private Company Public Company

1. Minimumnumberofshareholders Two Seven

2. Maximumnumberofshareholders Fifty Unlimited

3. Minimumnumberofdirectors Two Three

Minimumpaid-upcapital INR1,00,000 INR5,00,000

Statutory requirements for formation of companies

Evalution of market Evaluatingtherightapproach(whollyownedsubsidiary,JVandacquisition)

Sanjay Aggarwal Narayanan Ramaswamy

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