How is Indias high growth financed?

An overview of the Indian Financial System

Sidharth Sinha IIM Ahmedabad

July 2009

How is Indias high growth financed?

An overview of the Indian Financial System
India has completed an unprecedented five years of growth (2003-04 to 2007-08) of around 9% per annum. Almost 70% of the growth is accounted for by services whose share in GDP has increased from 59% in 2003-04 to 63% in 2007-08.1 The relationship between economic growth and financial development has received intense attention by researches over the last 15 year. Levine (2003) 2, after surveying a decade of research on the finance and growth nexus arrives at the following conclusions: Countries with better-developed financial systems tend to grow faster. Specifically, both financial intermediaries and markets matter for growth. The size of the banking system and the liquidity of stock markets are each positively linked with economic growth. Simultaneity bias does not seem to be the cause of this result. Better-functioning financial systems ease the external financing constraints that impede firm and industrial expansion. Thus, one channel through which financial development matters for growth is access to external capital, which enables industries and firms to expand.

Zingales (2003)3 in his commentary on Levine (2003) points out that for the relation between finance and growth to be used as a policy tool, there is a need to better understand the mechanism through which finance promotes development. This will o help identify the aspects of the financial system which are most important for growth. For example, while most studies agree that having a more developed banking sector is better than having an underdeveloped one, there is still uncertainty about whether a developed equity market provides an additional benefit, even more so if the development of the equity market occurs at the expense of the development of the banking system. From a policy perspective, this is probably the most important question. It is of little use to know that a relation between finance and growth exists, if policymakers do not know how to promote financial development. The primary purpose of this paper is to document the performance of the Indian financial system during the current period of high growth. The basic framework is one of identifying the role of institutions and markets in channelizing household savings to investment by the public and private sectors. At a disaggregated level the financial system can also influence the allocation of savings to alternative investment opportunities. The following conclusions emerge from the analysis. The recent period of high growth has been accompanied by significant changes in firm financing patterns. Overall there has been an increase in the share of external sources. The
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A glance at the growth record suggests that it is the continuing and consistent acceleration in growth in services over the decades, that had earlier been ignored, that really accounts for the continuous acceleration in overall GDP growth, once again, except for the 1965-81 interregnum. There is nothing particularly special about service sector growth over the last decade except that the acceleration over time has continued. Rakesh Mohan, Finance and Growth: The Growth Record of the Indian Economy, 1950-2008: A Story of Sustained Savings and Investment, June 2008
2

Ross Levine, More on Finance and Growth: More Finance, More Growth?, Review of Federal Reserve Bank of Stylus, July August 2003.
3

Luigi Zingales, Commentary, The Weak Links, Review of Federal reserve Bank of St.Louis, July August 2003.

shares of all major sources of external financing have increased with the exception of trade credit. However, banks continue to play a dominant role in the Indian financial systems. The role of banks is made possible by high deposit growth as well as liquidation of holding of government securities beyond the minimum required SLR levels. The role of markets is small. Equity markets have a minor position in both households financial savings and corporate financing. Equity markets continue to be illiquid and bonds markets are non existent. Private placement of debt has emerged as a major financing source. Attempts are being made to develop a bond market around private placements. The government securities market is yet to develop sufficiently. Trading is inadequate to provide a proper term structure for the development of other fixed income markets. Securitization is still in a nascent stage. Currently it is mainly through direct assignments rather than the issue of tradable securities. In spite of only a small deficit in domestic savings relative to domestic gross capital formation foreign capital flows have increased significantly and played an important role during the high growth period. Foreign capital flows have come in the form of debt (external commercial borrowings) and equity (foreign direct investment). While the former may have made up for the absence of corporate debt markets the latter may have been especially important given the reluctance of households to invest in equity. While overall domestic savings may have been adequate to finance domestic investment, the form of the savings may not have matched the capital structure requirements of the corporate sector. This paper is organized as follows: Section 1 provides an overview of the savings investment balance, and details of the instruments of household savings. The main component of household savings is bank deposits. Section 2 examines the role of banks in channelizing household deposits to private and public investment. This intermediation has been influenced by recent policy reforms and continues to be affected by policies for priority sector lending and investment in government securities. Section 3 assesses the development of financial markets for government securities, equity and bonds. The market for financial derivatives is not covered. The inflow and outflow of foreign capital is also considered in this section. Section 4 looks at the role of banks and financial markets in Corporate Finance. The implication of concentrated ownership of business groups for corporate governance and financing is also examined. The World Economic Forum in its first Financial Development Report released in 2008 ranked Indias financial system development at 31 out of 52 countries. The banking system was ranked at 50 out of 52. Section 5 concludes. A set of Tables which form the basis for the paper are provided in the Appendix. The paper can be read without referring to these Tables. The Tables provide more detailed information.

1. Savings and Investment

Gross Domestic Saving (GDS) of the Indian economy constitutes savings of public, private corporate and household sectors. At the sectoral level, savings estimates for the public sector and private corporate sectors are prepared by CSO. The private corporate sector savings estimates are prepared on the basis of company finance studies of Reserve Bank of India (RBI). The savings of the household sector are estimated separately under financial assets and physical assets. RBI takes the responsibility for estimating the household savings in financial assets, while CSO estimates the household savings in physical assets. Household financial savings is estimated using the economy-wide Flow of Funds (FOF). For the FOF, the economy is classified into six sectors and nine instruments. The six sectors are corporate; public; rest of world; banking and other financial institutions; and the residual being the household sector comprising heterogeneous entities like individuals and unincorporated business enterprises such as sole proprietorships and partnership concerns, and non-profit institutions. The nine instruments are currency, deposits, investments, loans and advances, small savings, life insurance funds, provident funds, trade debt and foreign claims. Therefore, the households sector as relevant for savings estimation is exactly the same as for FOF estimation. Household's financial saving is estimated as a sum of flow in the above instruments as they emerge from the accounts of the organized sectors. The household sector is treated differently because while the corporate and government sectors have their balance sheets and income-expenditure accounts at annual intervals to base their annual savings estimates on, the household sector does not have such accounts for all its constituents such as pure households, HUF, self employed persons, trusts, proprietorships etc. The savings of the household sector in physical assets are not estimated independently. CSO estimates the household investment and transfers the same to the account of household saving in physical assets. As a result, the estimates of household savings in physical assets and household investment are the same estimated through Commodity Flow Approach. Net financial savings of the household represents the gross financial savings less the increase in financial liabilities of the households. This may be misleading as part of the financial liabilities of household finance physical savings but are deducted from household financial savings, thus lowering the share of financial savings. Growth in Savings and Capital formation (Table 1) After having remained almost stagnant during the decade of the 90s, gross domestic savings (GDS) has increased from 23.5% of GDP in 2001-02 to 37.7% in 2007-08. Households are the dominant provider of savings. However, the share of households in total savings has declined from 94% of GDS in 2001-2002 to 65% in 2007-08. During the same period the public sector share increased sharply from a negative 8.6% to a positive 12%. The corporate sector share increased from 14.4% to 23.3%. This is reflected in the fact that of the total increase of 14.2% in GDS over the period 2001-02 to 2007-08, the public sector contributed 6.5%, the corporate sector 5.4% and the household sector 2.2%. Therefore, the contribution of the household sector to the growth in savings during this period is small relative to the other sectors. The improvement in the performance of the public sector may be a result of the FRBM (Fiscal Responsibility and Budget Management Act-2003) legislation which puts limit on the borrowings as well as on revenue expenditure of both the Central and State governments. The net Government borrowing (fiscal deficit) of the Centre as well as of all States has to be reduced to 3% of GDP by the year 2008-09 and subsequently to be contained within 3% of GDP. During the same period, the revenue deficit is required to be completely eliminated.

Gross capital formation (GCF) kept pace with domestic savings with the overall savings investment gap around +1% till 2003-04 and -1% thereafter, rising to -1.4% in 2007-08. As a percentage of GDP, GCF increased by about 14.5% during the period 2001-02 to 2007-08. The corporate sector accounted for 10.5%; the household sector 1.3%; the public sector 2.2%; and valuables 0.5%. The savings-investment gap of the private corporate sector increased from -2% in 2001-02 to -7% in 2007-08. The public sector savings-investment gap shrunk from -8.9% to -4.6%. These were financed by the household sector savings-investment surplus in the form of financial savings which increased from 10.9% to 11.7%. This financial savings (net of increase in financial liabilities) constitutes about 48% of the total savings of the household sector in 2007-08, the balance being physical savings. In 200405 construction accounted for about two-thirds of physical savings with the balance onethird being accounted for by machinery and equipment. Since 2001-02 there has been an increase in the share of construction and a decline in the share of machinery and equipment. Household financial savings financed about 50% of public investment and about 44% of private investment in 2007-08. In 2007-08 about 60% of the household sector financial savings financed private corporate investment as compared to only 19% in 2001-02. Therefore, there has been a significant increase in the flow of household savings for private investment relative to public investment. This of course represents an almost stagnant public sector investment at 7-9% of GDP as compared to a sharp jump in private sector investment from 5.4% to 15.9% during the same period. Simultaneously, the public sector also moved from a negative 2% savings rate to a positive 4.5% over the period. Composition of gross financial savings (Table 2) Gross financial savings is before deducting the increase in financial liabilities. After several years of increase in Gross financial savings there was a small drop in 2007-08. There is a sharp increase in the share of deposits in gross household saving from 37% in 2004-05 to 55% in 2007-08. However, the sum of deposits and claims on government, including small savings, has remained almost constant at 60% till 2006-07. In 2007-08 while the share of deposits remained unchanged at 55% claims on government was a negative 4%. In addition there has been a decrease in the share of Provident and Pension funds from 13% to 9%. Therefore, the recent sharp increase in the share of deposits may be partly attributed to the decline in small savings and investments in government securities with recent declines in interest rates and changes in the Government Savings Certificate Act in 2005. One important change restricts investments in small savings schemes only to individuals. In addition changes in the Income Tax Act have lead to neutrality of tax concessions across savings instruments. The share of life insurance funds remained steady at around 15% of gross household savings till 2006-07 but increased to 17% in 2007-08. Over the four year period 2004-05 to 2007-08 there has been an increase in the proportion of shares and debentures in total financial savings from about 2% to 11%. By 2007-08 mutual funds accounted for almost 75% of the investment in shares and debentures by households. The share of mutual funds in financial saving increased from 0.4% to 8%. Debt funds account for more than 50% of the assets under management of mutual funds. There has been a sharp increase in changes in financial liabilities of the household sector. During the period 2003-04 to 2006-07 changes in financial liabilities of the household sector has increased from 2.5% to about 6.5% of GDP. As a percentage of gross financial savings changes in financial liabilities has increased form 18% to 37%. However, in 2007-08 there was a drop in changes in financial liabilities to 28% of gross financial savings.

2. Bank intermediation of financial savings

As of March 2007, Public Sector banks accounted for 70% of total assets of scheduled commercial banks. State Bank of India and its subsidiaries alone accounted for 23% of total assets of scheduled commercial banks. The share of foreign banks was 8%. Deposits and Credit (Tables 3-6) Growth in deposits, accompanied by an increase in the credit deposit ratio, resulted in a sharp increase in bank credit from 24% of GDP in 2000-01 to 30% in 2003-04 and to 50% in 200708. Deposits consistently account for about 80% of total bank liabilities. Aggregate deposits increased from 46% of GDP in 2000-2001 to 54% in 2004-05 and then to 68% in 2007-08. Over the period 2001-02 to 2007-08 the share of the household sector in bank deposits decreased from 67% to 59% of total bank deposits. Over the same period there has been a corresponding increase in the share of the government and corporate sectors. There has been a steady increase in the proportion of short term deposits (up to 2 years) from 52% of total deposits in March 2000 to 70% in March 2007. There has been a corresponding decrease in the share of long term deposits (2-5 years) from 49% to 29%. The credit deposit ratio increased from 0.56 in 2003-04 to 0.74 in 2007-08. The share of Loans and advances in total assets of banks increased from 44% in 2003-04 to 57% in 200708. Simultaneously, the share of Investments in total assets decreased from 41% in 2003-04 to 27% in 2007-08. With the transformation of ICICI and IDBI into banks, lending by banks is no longer limited to working capital finance but also includes medium and long term finance. The share of medium and long term credit to industry in total credit to industry increased from 26% in March 2000 to 54% in March 2007. An important part of the increase in medium and long term loan came from increased credit to the infrastructure sector. According to the RBI, a distinct feature of banks operations in the last 10 years has been flexible adjustment of the investment portfolio in line with the changing credit demand. As credit demand slowed down in the second half of the 1990s, banks remained invested in SLR securities, even when SLR was brought down significantly. However, as credit demand picked up, banks liquidated SLR investments. Liquidation of holdings and the expansion of net demand and time liabilities have brought down the holding of SLR securities very close to the statutory limit of 25 per cent. Policy changes4(Tables 7-8) There have been several policy changes aimed at relaxing constraints faced by banks in their lending and borrowing decisions.

Lending rates

This is based on RBI Report on Currency and Finance 2005-06 Section 4.39 to 4.42

Lending interest rates of commercial banks were deregulated in October 1994 and banks were required to announce their prime lending rates (PLRs). The Reserve Bank mooted the concept of benchmark prime lending rate (BPLR) in 2003 to address the need for transparency in banks lending rates as also to reduce the complexity involved in pricing of loans. Banks now are free to prescribe respective BPLRs, as also lend at sub-BPLR rates. Banks are also permitted to offer floating rate loan products linked to a market benchmark in a transparent manner. Various restrictions on term loans by banks were gradually phased out by 1997. Cash Reserve Ratio (CRR) The Cash Reserve Ratio (CRR) was reduced from its peak level of 15 per cent maintained during the period 1989 to 1992 to 4.5 per cent of Net Demand and Time Liabilities (NDTL) in June 2003. Although the Reserve Bank continues to pursue its medium-term objective of reducing the CRR, in recent years, on a review of macroeconomic and monetary conditions, the CRR has been revised upwards in phases. The CRR after reaching a low of 4.5% in June 2003 increased only marginally to 5% till October 2006 and then sharply to a peak of 9% by August 2008. Since then it has decreased to 5.5% in December 2008. Over the same period the Reverse Repo Rate was reduced from 6% to 5.5% and the Repo Rate from 9% to 6.5%. Statutory Liquidity Ratio (SLR) In response to widening fiscal deficits beginning in the 1970s there were periodic increases in the statutory liquidity ratio (SLR)5 to finance the rising fiscal gap. The SLR was raised in phases reaching 34 per cent by the late 1970s. The process continued during the 1980s as fiscal deficits expanded further, and the SLR reached a high of 38.5 per cent of net demand and time liabilities (NDTL) of the banking system in September 1990. As a part of the financial sector reforms and in order to reduce financial repression, the required SLR was reduced to the then statutory minimum of 25 per cent in 1997 and remained at that level since. This has been reduced to 24% in view of the liquidity crunch in financial markets. Although the initial reduction in the required SLR was expected to enable banks to expand credit to the private sector, banks continued to make investments in Government securities much in excess of the statutory minimum stipulated requirements. During this period, several factors contributed to the decline in demand for credit by the corporate sector. The industrial sector witnessed massive expansion in capacity in certain sectors, especially cement and steel, in the initial phase of reforms. However, as the quantitative restrictions were removed and import tariffs reduced, the corporate sector faced intense competition during the latter part of the 1990s. The focus of the corporate sector, thus, shifted from expanding capacity to restructuring and the industrial sector slowed down significantly. This affected the demand for credit by the corporate sector. During 1997-02 downward stickiness of nominal interest rates on the one hand, and falling inflation rate on the other, led to a significant rise in real interest rates. The average real lending rates of banks increased to 12.5 per cent during 1996-97 to 2001-02 as against 6.5 per cent during 1990-91 to 1995-96. This also appeared to have contributed to slackness in credit expansion.
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Under Section 18 of the Banking Regulation Act, 1949, all scheduled banks are required to maintain SLR, i.e., a certain proportion of their demand and time liabilities (DTL) as on the last Friday of the second preceding fortnight as liquid assets (cash, gold valued at a price not exceeding the current market price or unencumbered approved securities valued at a price as specified by the Reserve Bank from time to time). Following the amendment of the Act in January 2007, the floor rate of 25 per cent for SLR was removed.

The introduction of prudential norms relating to income recognition, asset classification and provisioning in the mid-1990s revealed large gross NPAs with banks. Banks found riskadjusted returns on government securities more attractive. Hence, despite lowering of SLR, banks continued to invest in government securities, far in excess of the requirements. By March 2004 investment in government securities by banks had increased to 44% of deposits and 41% of total assets. As already observed credit growth accelerated in 2002-03 and increased sharply during 2004-05 to 2006-07. Management of NPAs There has been significant improvement in the asset quality of the banking sector in India in recent years. Gross NPAs as percentage of gross advances steadily declined to 7.2 per cent in March 2004 from 15.7 per cent in March 1997. The corresponding decrease in Net NPAs was from 8.1 to 2.8%. Gross and Net NPAs further declined to 3.3 and 1.2 percent respectively by March 2007. The gap between the gross and net NPAs has also narrowed over the years. NPAs of the Indian banking system are now comparable with several advanced economies and significantly lower than several economies in the Asian region. The decline in NPAs is particularly significant as income recognition, asset classification and provisioning norms were also tightened over the years Sectoral distribution of credit (Table 9-11) In terms of the sectoral distribution of credit there is a steady decline in the share of industry, including SSI, from about 47% of total credit outstanding in 1999-2000 to 38% in 2006-07. The share of small and medium scale industry declined from about 8% to 4% during this period. There have been some changes in the share of specific industries in the overall bank credit to industry. Among the industries with a decline in share the engineering industry experienced the largest decline from 10.5% of total outstanding credit to industry in 2001-02 to 6% in 2007-08. The other industry to witness a significant decline was chemicals, whose share declined from 11.3% to 7.4%. Infrastructure experienced the largest increase in share from 10..6 % to 23.2% of total outstanding credit to industry. Within infrastructure, power accounted for about 50% of total bank credit to infrastructure. There were small increases also in the case of gems and jewellery (2.7% to 3.4%), construction (1.7% to 3.2%), and automobiles (2% to 3.3%). The share of agriculture has increased marginally over this period from 10% to 12%. A significant development during the current decade has been the rapid expansion of credit to the household sector in the form of housing and other retail loans. Until the early 1990s, there were several restrictions for granting of personal loans and housing loans. All these conditions/restrictions were gradually removed in the early 1990s and banks were given freedom to decide the quantum, rate of interest, margin requirement, repayment period and other related conditions. The share of personal loans in total bank credit outstanding increased to 23% at end-March 2008. Total housing loans accounted for about 12% of outstanding bank credit at March end 2008. Housing loans meeting certain criteria were added to the priority sector list in 2007. Priority Sector Lending (Table 12) Soon after nationalization in 1972, banks were advised to extend credit to certain activities, known as the priority sectors. Major categories of priority sector credit include agriculture

and allied activities and small scale industries. The scope of the priority sector has been expanded over the years to include export activity, education, housing, software industry, venture capital, leasing and hire purchase. Initially there were no specific targets fixed in respect of priority sector lending. In 1974, public sector banks were advised that their priority sector lending should reach a level of not less than one-third of the outstanding credit by March 1979. Subsequently, the target was enhanced to 40 per cent of aggregate advances. In achieving this overall target, sub-targets for lending to agriculture sector and weaker sections were also stipulated for the banks. At present banks are required to lend at least 18 per cent and 10 per cent, respectively, of their Net Bank Credit to the agriculture sector and weaker sections of society, respectively. The Public Sector Banks (PSBs), as a group, first achieved the priority sector lending target of 40 per cent in 2000 and, as a group, continued to meet the target till 2007-08, missing it by 0.4 per cent in March 2007. However, individual banks did not achieve the sub targets for agriculture and weaker sections. At the end March 2008 the amount outstanding of the priority sector lending by public sector banks consisted mainly of loans to Agriculture (41%), Small Enterprises (24%) and Housing (24%).

3. Capital Markets
Capital raised through private placement, public issues, and Euro issues increased from 2.8% of GDP in 2003-04 to 6.8% in 2007-08. During this period private placement accounted for the dominant share of 72% of total capital raised, with public issues of equity and debt accounting for 21% and euro issues 7%. Equity issues accounted for about 93% of total public issues. Public issue of debentures appears to have been completely replaced by private placement of debt. (Table 13) Private Placement6 (Table 14) Under Section 81 of the Companies Act, 1956, a private placement is defined as an issue of shares or of convertible securities by a company to a select group of persons. An offer of securities to more than 50 persons is deemed to be a public issue under the Act. Private placement involves issue of securities, debt or equity, to selected subscribers, such as banks, FIs, MFs and high net worth individuals. It is arranged through a merchant/ investment banker, who acts as an agent of the issuer and brings together the issuer and the investors. Since these securities are allotted to a few sophisticated and experienced investors, the stringent public disclosure regulations and registration requirements are relaxed. Corporates access the private placement market because of certain inherent advantages. Private placement is a cost and time-effective method of raising funds and can be structured to meet the needs of the entrepreneurs. It does not require detailed compliance of formalities as required in public or rights issues. The private placement market in India, which shot into prominence in the early 1990s, has grown sharply in recent years. The private placement market was initially not regulated. Given the high rate of growth of this market, in May 2004 SEBI prescribed that the listing of all debt securities, irrespective of the mode of issuance, i.e., whether issued on a private placement basis or through public/rights issue, shall be done through a separate listing
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Box VII.2, Private Placement Market in India, Report on Currency and Finance

agreement. The Reserve Bank also issued guidelines to the financial intermediaries under its purview on investments in non-SLR securities including, private placement. Boards of banks were advised to lay down policy and prudential limits on investments in bonds and debentures, including cap on unrated issues and on a private placement basis. The private placement market is dominated by Financial Institutions which account for almost two-thirds of total private placement. The share of private non financial companies stands at 20%. Most of the resources from the market are raised by way of debt, with a majority of issues carrying AAA or AA rating. Though, there were some instances of private placements of equity shares, there is no comprehensive data coverage of this. The two sources of information regarding private placement market in India are Prime Database and RBI. The former data set, however, pertains exclusively to debt issues. RBI data, which is complied from information gathered from arrangers, covers equity private placements also. RBI estimates the share of equity in total private placements as rather insignificant. Some idea, however, can be derived from the equity shares issued by NSE-listed companies on private placement basis. During 2006-07 a total of 207 companies privately placed equities mobilizing around Rs.12,216 crores. . According to NSE the maturity profile of issues in the private placement market ranged between 12 months to 240 months during 2006-07. The largest number of placements was for 36 months (94 placements) and 120 months (79 placements). A total of 58 offers had put option, while 105 offers had call option. Unlike public issues of bonds, it is not mandatory for corporates issuing bonds in the private placement market to obtain and disclose credit rating from an approved credit rating agency. Rating is however required for listing. Equity markets (Table 15, 16, 17) Stock prices have increased sharply since 2002-03 with the Sensex increasing from about 3,000 in 2002-03 to 13,000 in 2006-07. This caused market capitalization to increase from 48% of GDP in 2002-03 to 86% in 2006-07. However, turnover, as a % of capitalization, decreased from 150% to about 80% during the same period. During this period the price earnings ratio of the BSE Sensex increased from 14.5 in 2002-03 to about 17 in 2005-06. Therefore, most of the increase in prices during this period can be attributed to increases in earnings rather than increases in the P-E ratio. However, there was a sharp jump in the P-E ratio in 2006-07 to about 21. Simultaneously, the P-BV ratio increased steadily during this period from 2.23 in 2002-03 to 4.9 in 2006-07. The year 2007-08 saw the BSE Sensex increase from about 13,000 in April 2007 to over 20,000 in December 2007. However, by the end of the year the Sensex had fallen to 15,000. There were significant amounts of equity issues coinciding with the boom in the stock markets. This peaked in 2007-08 with equity issues crossing Rs.80,000 crores almost equal to the total amount raised in the previous three years. As noted in the Economic Survey of 2006-07, stock market trading is dominated by retail investors. On the NSE the average trade size since 2001-02 had been in the range of Rs. 25,000-30,000 showing the dominance of retail investors. There has been an improvement in the depth of the stock market over the period 2003-04 to 2007-08. In 2002-03 the top 10 securities accounted for about 50-55% of turnover on both the major stock exchanges. By 2007-08 this proportion had come down to 25-30%. As of endDecember, 2006, the market concentration of Indian equity market was comparable to those of other Asian countries.

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The volatility of the India stock market continues to be on the higher side relative to other developed and developing country markets. Mutual funds (Table 18) There has been a significant increase in the assets under management of mutual funds from 5.1% of GDP in 2004 to 10.7%% in 2008. Income/Debt oriented schemes account for about 60% of total asset under management at the end of March 2008 with equity schemes accounting for the balance 40%. The highest growth has been in Assets under management (AUM) in debt schemes. In 2008 AUM under debt schemes alone accounted for 43% of total AUM. The share of AUM in equity schemes accounts for about 4% of total market capitalization at the end of March 2008. Government securities (Table 19) The government securities market serves as the backbone of fixed income markets through the creation of risk-free benchmarks of a sovereign borrower. Outstanding securities of the central and state government has varied between 33% to 37% of GDP during 2002-03 to 2006-07. For the central government the share of market borrowings in financing the Gross Fiscal Deficit (GFD) increased from 62% in 2000-2001 to 80% in 2006-07. The corresponding increase for state governments was from 14% to 17%. In recent years, the securities issued to the National Small Savings Fund (NSSF) have emerged as the dominant source of financing the GFD of the State Governments. Set up in 1999, the NSSF invests in special securities of the Central and State Governments. These securities have a 25-year tenor with an initial five-year moratorium on repayment. In 2007-08 there was a significant decline in the securities issued to the NSSF. As a result market borrowings financed about 60% of the Gross Fiscal deficit. Banks are the largest investors in government securities. The holding of government securities by commercial banks has been driven by interest rate changes, apart from the SLR requirement. As part of the financial reforms, the SLR requirement for banks was gradually reduced to 25 per cent by October 1997 from the peak of 38.5 per cent in February 1992. Banks, however, maintained an average SLR of 37.3 per cent of net demand and time liabilities during the period 1998-99 to 2002-03. In recent years, however, banks restricted incremental investment and liquidated excess investment in government securities on account of increase in credit demand. Thus, SLR securities held by commercial banks are now very close to the prescribed limit of 25 per cent. The second largest category of investors in the government securities market is the insurance companies. According to the stipulations of the Insurance Regulation and Development Authority of India (IRDA), all companies carrying out the business of life insurance should invest a minimum of 25 per cent of their controlled funds in government securities. Similarly, companies carrying on general insurance business are required to invest 30 per cent of their total assets in government securities and other guaranteed securities, of which not less than 20 per cent should be in Central Government securities. For pension and general annuity business, the IRDA stipulates that 20 per cent of their assets should be invested in government securities. The non-Government provident funds, superannuation funds and gratuity funds are required by the Central Government to invest 40 per cent of their incremental accretions in Central and

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State government securities and/or units of gilt funds regulated by the Securities and Exchange Board of India (SEBI) and any other negotiable securities fully and unconditionally guaranteed by the Central/State Governments. The exposure of a trust to any individual gilt fund, however, should not exceed five per cent of its total portfolio at any point of time. Non-banking financial companies (NBFCs) accepting public deposits are required to maintain 15 per cent of such outstanding deposits in liquid assets, of which not less than 10 per cent should be maintained in approved securities, including government securities and government guaranteed bonds. The share of banks in outstanding security of central and state government has declined from about 60% in 2002 to 47% in 2007. Over the same period the share of LIC has increased from 20 to 23%. Government securities consistently account for almost 80% of LIC investments. The share of others in the holding of government securities has increased from 8.6% to 17%.7 At present, FIIs registered with SEBI are permitted to invest in Government Securities and corporate bonds up to USD 3.2 billion and USD 1.5 billion, respectively. These limits have recently been increased to USD 5 billion and USD 3 billion. Trading in government securities According to the Report on Currency and Finance 2006-07 the trading pattern of government securities indicates that most of the trading activity takes place in Central Government securities. The share of State Governments securities in annual turnover of the government securities market was about 3% in 2004-05 while their share in outstanding government securities was around 16 per cent. The number of actively traded securities is very low as compared with the total number of outstanding securities. As at end-December 2006, there were 102 Central Government securities with an outstanding amount of Rs.10,55,703 crore. Of these, 46 securities with outstanding issues of Rs.10,000 crore or more accounted for 77 per cent of the total outstanding amount. The turnover to total outstanding ratio dipped sharply to 1.1 in 2005-06 from more than 3 in 2003-04. On a daily basis, hardly 10-12 securities are traded, of which the actively traded securities are 4-5. The turnover in the secondary market for government securities manifested asymmetric response to the interest rate cycle, i.e. the market turned liquid and active during downward movement in interest rates but turned inactive when interest rates rise. As a result, the turnover as percentage of GDP which had increased sharply between 2001-02 and 2004-05, when interest rates softened, declined sharply thereafter when interest rates hardened Without active trades in the markets, the yield curve is kinked, thereby making it difficult to price securities. This also leads to a situation where securities of similar maturity profiles trade at different yields, with sizeable illiquidity premiums on some occasions. Corporate Bond markets The size of the Indian corporate debt market is very small in comparison with not only developed markets, but also some of the emerging market economies in Asia such as Malaysia, Thailand and China. In view of the dominance of the private placement segment,
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Others category includes subscription made by the rest of the economy including, viz., All India and some State level financial institutions/corporations plantation provident funds and refinancing

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most of the corporate debt issues in India do not find a way into the secondary market. Liquidity is also constrained on account of small size of issues. For instance, the average size of issue of privately placed bonds in 2005-06 worked out to around Rs.90 crore, less than half of an average size of an equity issue. Out of nearly 1,000 bond issues in the private placement market, only around 3 per cent of the issues were of the size of more than Rs.500 crore. Some companies entered the market more than 100 times in a single year to raise funds through small tranches. As a result, the secondary market for corporate debt is characterized by poor liquidity and trading is confined largely to the top 5 or 10 bond papers. Among various reforms needed for promoting the secondary market trading in corporate bonds, perhaps the most important factor is the existence of a reliable and liquid benchmark government securities yield curve. Even though the government securities market has seen a range of reforms in both the primary and secondary segments and a surge in issuances as well trading volumes, a stable and smooth sovereign yield curve, especially at the longer end of maturity is yet to emerge in India. If the yield curve derived from benchmark issues is to be reflective of an efficient risk free rate of return, there has to be sufficient liquidity in the government securities market. In general it has been difficult to develop the corporate bond market in most countries. Almost half the world's corporate bond market is in the US, and another 15 per cent in Japan. Among other countries, while the UK has a long standing bond market, the European bond market has only began to really develop after European monetary integration and introduction of the Euro. Among developing countries, it is perhaps only South Korea that has a reasonably well developed bond market. US Corporate Bond Markets8 The experience of the US bond market indicates some of the issues involved in the development of bond markets in other countries. The primary market for U.S. corporate bonds is large. Outstanding principal in corporate bonds is larger than either U.S. Treasury obligations or municipal bond obligations, though not quite as large as mortgage related bonds. During the early decades of the twentieth century, corporate bonds were predominantly traded on the New York Stock Exchanges transparent limit order market. However, corporate bond trading largely migrated away from the New York Stock Exchange to a dealer-oriented overthe-counter market during the 1940s. This migration coincided with the growth in bond trading on the part of institutional investors. The dealer market for corporate bonds is dominated by large institutional investors. While over-the-counter corporate bond trades tend to be large, they also tend to be infrequent. Corporate bonds trade infrequently even compared to other bonds. The lower trading frequency of corporate bonds may reflect their relatively large trading costs, which in turn could be attributable to greater information asymmetries regarding underlying value for corporate bonds compared to government bonds. Bonds issued by a given corporation at different points in time are distinct contracts that differ in terms of promised payments and legal priority in case of default, and are traded separately. Corporate bonds are also a favored investment for insurance companies and pension funds from the asset-liability management perspective. Correspondingly, most or all of a bond issue is often absorbed into stable buyand-hold portfolios soon after issue. In 2001 the Securities and Exchange Commission initiated post-trade transparency in the corporate bond market when it approved rules requiring the National Association of Security
8

Transparency and the Corporate Bond Market" Journal of Economic Perspectives. (Forthcoming)

13

Dealers to compile data on all over-the-counter transactions in publicly issued corporate bonds for public dissemination. By 2006, trades in all publicly-issued bonds were disseminated to the public. In addition, the timeliness with which dealers were required to report trades was tightened in stages. Overall, the statistical and anecdotal evidence indicates that the introduction of post-trade transparency in the corporate bond markets has significantly reduced the costs that investors pay to dealer firms for executing their trades in corporate bonds. However, the debate regarding optimal transparency of the corporate bond markets continues. Since corporate bonds trade less frequently and in larger sizes as compared to equities, the optimal degree of transparency for bond markets may differ from that of the highly transparent equity markets. Securitization9 (Table 20) The growth of the corporate bond market in several countries, including the US and Korea, was spurred by increased availability of structured financial products such as mortgage and asset-backed securities. In a pure corporate debt market, only large companies can access the market. The availability of structured products provides an alternative way of addressing a fundamental limitation of the corporate bond market, namely the gap between the credit quality of bonds that investors would like to hold and the actual credit quality of potential borrowers. Securitization as a means of raising finance or transferring credit risk has existed in India since the early 1990s. Initially, it consisted primarily of quasi-securitizations or Direct Assignments (DA). Portfolios or individual loans simply moved from the balance sheet of the originator to the investor, without any type of tradable security being created. Over time, the market has moved to more formal securitization involving special purpose vehicles (SPV). The individual loan(s) are assigned to an SPV (normally a trust) which issues tradable securities in the form of Pass-Through Certificates (PTC) to investors. According to ICRA estimates, issuance volume in the Indian structured finance market grew at a CAGR of 43% between FY 2004-2008 and by 59% in FY2008. Size Traditionally Asset Backed Securities (ABS), which covers cars and utility vehicles, commercial vehicles, construction equipment, two-wheelers, and personal loans, has been the dominant product. However, the share of ABS, declined from 64% in FY2007 to 45% in FY2008. During FY2008, almost two-thirds of the ABS issuances were originated by NBFCs and the balance by banks. The ABS market continues to be driven by a small number of issuers with the top five Originators accounting for 90% of the issuances in FY 2008. Loan Sell-Off (LSO), or securitization of single corporate loans, was the largest product class during FY2008, accounting for 54% of the total issuance volumes. In a LSO the Originator (most often a private sector or foreign bank or NBFC) securitizes the receivables from a single corporate loan (typically a loan to a home finance company or NBFC or a mid-sized corporate). Often the loan is originated with the specific intention of securitizing it. Regulatory factors like priority sector lending (PSL) guidelines for banks are important drivers of securitization transactions. Towards the fiscal year-end, banks falling short of the target for priority sector loan assets seek to acquire qualifying loan portfoliosloans to Small Road Transport Operators, various other Small and Medium Enterprises (SMEs), and loans to farmers being among themfrom other lenders. Such portfolios are normally sourced from
9

Indian Structured Finance MarketFY2008, ICRA

14

non-banking finance companies (NBFCs) since the PSL guidelines do not apply to this segment. These transactions are usually structured as Direct Assignment, as against securitization involving an SPV. The broad structure of such transactionsincluding bankruptcy remoteness, limited recourse to Originator, performance of servicing function by the Originator, and permissible commingling of pool collections with the Servicers own funds is similar to that of regular ABS transactions, except for the absence of the issuance of any instruments like PTCs. The pool receivables in such cases are assigned directly to the assignee or purchaser. These are accounted for by the purchaser, typically a bank, in its advances book (unlike PTCs, which form a part of the banks investments portfolio). The choice of the route, direct assignment or securitization, depends largely on investor preference. For instance, mutual funds can invest only in PTCs. However, banks often prefer to acquire loan portfolios outright, as PTCsby virtue of being investmentswould need to be marked to market, and loans and advances do not have such requirement. Also, the RBI guidelines (on securitization) do not extend to such bilateral direct assignments. The share of Residential Mortgage-Backed Securities (RMBS) declined further to a negligible level of less than 1% in FY2008. While MBS has large potentialgiven the significant expansion of the underlying housing finance businessthe long tenure of RMBS paper, the lack of secondary market liquidity, tenure uncertainty, and interest rate risk continue to hinder growth of this segment. Regulatory requirementscertain category of home loans qualify as priority sector lendingprovide the motive for trading in home loans too. The Securities Contracts (Regulation) Amendment Bill 2007 passed by the Parliament in May 2007 paves the way for the creation of a legal framework for the listing and trading of Pass Through Certificates (PTC). Once made operational, this law will enable secondary market liquidity for securitized debt instruments. The next step will be finalization of listing guidelines for the stock exchanges from the Securities & Exchange Board of India (SEBI), the market regulator. SEBI had put out draft guidelines for comments and is eliciting feedback. SEBI has suggested to the Government on the need for rationalization of stamp duty with a view to developing the corporate debt and securitization markets in the country. Further, the Finance Minister in his Budget speech of 2008-09 stated that though stock exchanges provide national electronic trading platforms for securities there is no seamless national market for securities because of differences among States on the scope and applicability of rates of stamp duty and proposed to request the Empowered Committee of State Finance Ministers to work with the Central Government to create a truly pan Indian market for securities that will expand the market base and enhance the revenues of the State Governments. External capital flow and Foreign Exchange markets (Tables 21-23) Over the period 2003-04 to 2007-08 capital inflows in the form of direct investment, portfolio investment and commercial borrowings increased from 13% to 37% of GDP. The corresponding capital outflows increased from 10% to 27%. Overall, net capital flow, inclusive of other items, increased from about 3% to 9% of GDP. Simultaneously, the current account balance turned from a surplus of 2.3% of GDP to a deficit of 1.5%. The modest current account deficit, in spite of an increase in trade deficit from 2.3% to 7.7% of GDP, was made possible by an increase in invisibles from 4.6% to 6.2% of GDP. The two major components of invisibles are software exports and private remittances.

15

The surge in capital flows relative to the modest current account deficit resulted in an excess supply condition in the foreign exchange market. Large scale purchases of dollars by the Reserve Bank in the foreign exchange market absorbed the strong upward pressure on the exchange rate. As a result, foreign exchange reserves more than trebled during the period from US $ 54.1 billion at end-March 2002 to US $ 310 billion at end-March 2008. The Reserve Bank simultaneously resorted to sterilisation operations to absorb liquidity. Faced with the finite stock of Government of India securities with the Reserve Bank, market Stabilisation scheme (MSS) was introduced in April 2004 wherein the Government of India dated securities/Treasury Bills were issued to absorb liquidity. External Commercial Borrowing Policy The government maintains restrictions on the overall external commercial borrowings. A prospective borrower can access ECB under two routes, namely the automatic route and the approval route. A corporate, other than a financial intermediary, registered under the Companies Ac, 1956, can access ECB under the automatic route up to US$ 500 million in a financial year for investment (deployment of resources on import of capital goods, new projects, modernization / expansion of existing production units) in real sector (industrial sector including small and medium enterprises and infrastructure sector). The ECB, which is not covered by the automatic route, is considered under the approval route on a case-by-case basis by RBI. This includes ECB by a financial intermediary, ECB beyond US$ 500 million in a financial year, and ECB for purposes other than investment in real sector are considered under the approval route. The External Commercial Borrowing (ECB) policy is regularly reviewed by the Government in consultation with Reserve Bank of India (RBI) to keep it in tune with the evolving macroeconomic situation, changing market conditions, sectoral requirements, the external sector and lessons of experience. Overall assessment of markets The Raghuram Rajan Committee10 provides an assessment of the efficiency of Indian capital markets. A major prerequisite for market efficiency is liquidity - the ability to trade with low transactions costs. It has three dimensions: immediacy, depth and resilience. Immediacy is the ability to execute trades of small size immediately without moving prices adversely. Depth refers to the impact cost of executing large trades. Resilience is the speed with which prices and liquidity of the market revert back to normal conditions after a large trade has taken place. The Table summarises the state of Indian financial markets on the three aspects of financial market liquidity. In the view of the Committee, resilience is found in large stocks, their stock futures and the index futures. All other markets in India lack resilience. Depth is found, in addition, with on-the-run government bonds and interest rate swaps. Immediacy is found in a few more markets. A well functioning market is one which has all three elements. India has only one market where this has been achieved, for roughly the top 200 stocks, their derivatives and index derivatives. Liquidity of Indian financial markets: Market Immediacy, Depth and Resilience

10

A Hundred Small Steps : Report of the Committee on Financial Sector Reforms, Government of India, Planning Commission, New Delhi, 2009

16

Market Immediacy Stocks Large cap stocks/futures and index futures Y Other stocks Bonds and money market On the run government bonds Y Other government bonds Corporate bonds Commercial paper and other money market instruments Currency Y Derivatives Near money options on index and liquid stocks Y Other stock options Interest rate swaps Y Metals, energies and select agricultural commodity Y futures Other commodity futures

Depth Y Y

Resilience Y

4. Corporate Finance and Governance

The recent period of high growth has been accompanied by significant changes in firm financing patterns. Overall there has been an increase in the share of external sources. The shares of all major sources of external financing have increased with the exception of trade credit. Corporate finance (Table 24-26) Based on the Sources and Uses of Funds Statement of non-Government non-financial large public limited companies (each with paid-up capital of Rs.1 crore and above) the share of internal sources continues to have increased steadily during the decade of the nineties and early 2000s. However, there is an increase in the share of external sources from about 50% in 2003-04 to a peak of 62% in 2006-07 and a small decline in 2007-08, perhaps as a result of the financial crisis. The biggest increase is in the share of equity from 4% to 16% over the period 2003-04 to 2007-08. Borrowing increased from 19% to a peak of 31% in 2006-07 mainly because of an increase in the share of Foreign Institutional Agencies from almost 0% to 8.6% in 2006-07 and then declining to 4.4% in 2007-08. The share of banks after increasing from 17.5% in 2003-04 to 24.3% in 2005-06 declined to 19.5% in 2007-08. With easier access to external capital companies reduced their reliance on trade credit. The share of trade credit decreased sharply from 26.8% in 2003-04 to 13.6% in 2005-06 and then increased to around 18% in 2007-08. These trends are also noticed in the aggregate data for various sources of financing. Beginning in 2004-05 there is a steady increase in bank financing, private placement, domestic equity issues, external commercial borrowing and foreign direct investment (FDI). The role of external capital appears to be quite important in terms of providing not only borrowings but also scarce equity. It is likely that the increase in the share of equity was driven mainly by the FDI. During 2008-09, so far, flow of resources to the commercial sector declined reflecting subdued conditions in the domestic capital markets as well as deceleration of funds flow from external sources. Among the domestic sources, barring private placement and credit by housing companies, flow of resources from other sources have declined. Among the foreign

17

sources, barring foreign direct investment, flow of resources from all other sources has declined. Ownership concentration and financing of industry (Tables 27) The share of Indian promoters in the total shareholding pattern remained unchanged at 4550%. The share of foreign promoters increased only marginally from 5.6% in December 2002 to 7% in March 2008. However, the share of FIIs more than doubled from 4.6% to 11%. The share of non institutional Indian investors declined marginally from 17% to 13%. There is an intense ongoing discussion on the implications of concentrated ownership on financial development in general and financial markets in particular. Concentrated ownership, and the associated control of management, creates the potential for agency problems between the controlling shareholder and minority shareholders. Minority shareholders face the risk of expropriation by the controlling shareholders, especially in the absence of well enforced legal protection. This prevents the development of equity markets and possibly bond markets as sources of external financing. According to a study by LLSV (1999)11 concentrated ownership is the norm in countries other than the UK and USA. LLSV examine the ownership structures of the 20 largest publicly traded firms in each of the 27 generally richest economies using data for 1995. The firms are classified into those that are widely held and those with ultimate owners. A corporation has a controlling shareholder (ultimate owner) if this shareholders direct and indirect voting rights in the firm exceed 20 percent. They identify 5 categories of ultimate owners: (1) a family or an individual, (2) the State, (3) a widely held financial institution such as a bank or an insurance company, (4) a widely held corporation, or (5) miscellaneous, such as a cooperative, a voting trust, or a group with no single controlling investor. They find that 36 percent of the firms in the world are widely held, 30 percent are familycontrolled, 18 percent are State-controlled, and the remaining 15 percent are divided between the residual categories. In an average country, the ultimate family owners control, on average, 25 percent of the value of the top 20 firms. For the universe as a whole at least 69 percent of the time, families that control firms also participate in management. Overall, the controlling shareholder does not have another large shareholder in the same firm in 75 percent of the cases, and this number is 71 percent for family controlling shareholders. The potential for agency problems between ultimate owners and minority shareholders will depend upon the extent to which the cash flow ownership rights of the controlling shareholders are substantially below their voting rights. Ultimate owners can reduce their ownership below their control rights by using shares with superior voting rights; by organizing the ownership structure of the firm in a pyramid; or through cross-shareholdings. According to the study, relative to shares with differential voting rights and cross-holdings, pyramidal ownership appears to be a more important mechanism used by controlling shareholders to separate their cash flow ownership in sample firms from their control rights. 26 percent of firms that have ultimate owners are controlled through pyramids. Similar observations have been made for East Asia by Claessens (2002) 12 on the basis of a study of 1,301 publicly traded corporations from eight East Asian economies: Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand. Only four percent of corporations do not have a single controlling shareholder at the 10 percent
11

Corporate Ownership Around the World, Rafael La Porta, Florencio Lopez-De-Silanes, Andrei Shleifer, The Journal of Finance 1999 54:2 471
12

Disentangling the Incentive and Entrenchment Effects of Large Shareholdings, Stijn Claessens, Simeon Djankov, Joseph P. H Fan, Larry H. P Lang, The Journal of Finance 2002 57:6 2741

18

cutoff level of control rights. At the 20 percent cutoff level, 18 percent of corporations are widely held. Families are the largest shareholders, covering more than two-thirds of corporations at the 10 percent cutoff level and three-fifths at the 20 percent level. Indian business groups13(Tables 28) Moodys and ICRA have examined corporate governance in 32 companies in 16 prominent family-controlled Indian business groups. These companies cover a broad cross-section of Indian industry, and include 13 Sensex companies accounting for about 40% of the total Sensex market capitalization. Banks are excluded from the survey. Unlike in some other countries, and following the nationalization of the Indian banking sector in 1969, the banking sector is generally not family-controlled. Few private sector banks are linked to industrial groups; and the Reserve Bank of India applies strict controls to the sector, including loans to related parties. According to the survey, many families exert control with less than 50% shareholding, whereas others own more than 74%. Promoter shareholdings in the study ranged between 2690%, with a median of 50%. This situation may reflect each familys assessment of the level of shareholding it requires to maintain control - taking into account factors such as the overall group shareholding pattern, and rules regarding foreign investment in that sector. Although the Indian business environment does not support hostile M&A, a number of families have recently increased their shareholdings, possibly as a pre-emptive defense against possible future hostile action. Many Indian family-controlled groups have complex corporate structures. In such cases, and despite regulatory requirements to disclose promoter shareholding, it can be difficult to assess ownership and control on the basis of public information. Pyramid structures where control of substantial operating companies can be achieved through ownership of 51% of a chain of holding companies are not commonly observed in India. In addition, companies have generally not issued different classes of shares with differential voting rights. The lack of pyramid structures and different classes of shares in India may be more reflective of the fact that families can maintain control without having to resort to such measures. This is possibly due to Indias business culture which lacks activist shareholders and does not permit hostile M&A activity, plus the blocking rights available to a 26% shareholder. SEBI requires listed companies to provide consolidated group accounts. However, this often does not result in consolidation of entities which are controlled. Also, the holding companies through which families exercise control are generally not listed, and it may be difficult to obtain material public information on these entities. The Securities and Exchange Board of India (SEBI), has introduced regulations set out in Clause 49 - for listed companies, covering board composition and functions of the audit committee. Although there are a number of reports of incomplete compliance, these have generally had a positive impact. 0 Clause 49 requires that all related-party transactions must be considered by the companys audit committee, and should also be disclosed in the annual report. However, the adequacy of disclosure on such transactions, particularly for family businesses, is an important governance concern in India. It can be difficult to truly know the level of promoter/family control, partly due to the complex group structures. This makes the extent of related-party transactions difficult to evaluate. A material difference between IFRS and Indian GAAP is the noninclusion as a related party of entities in which either key management personnel or promoters exercise significant control or voting power.

13

Corporate Governance and Related Credit Issues for Indian Family-Controlled Companies, October 2007, Special Comment, Moodys-ICRA Corporate Finance

19

Tunneling by Indian business groups There are two studies which investigate the occurrence of tunneling in Indian business groups. In a business group, a single shareholder (or a family) completely controls several independently traded firms and yet has significant cash flow rights in only a few of them. This discrepancy in cash flow rights between the different firms under control creates strong incentives to expropriate. The controlling shareholder will want to transfer, or tunnel, profits across firms, moving them from firms with low cash flow rights to firms with high cash flow rights. Bertrand, Mehta and Mullainathan (BMM 2002)14 devise a test to measure the changes in profits of group firms (the response) relative to changes in the profitability of other firms in the same industry (the industry shock). They find that the profitability of group firms on average underresponds and this is larger in low cash-flow-right firms. When this analysis is conducted separately for operating and non operating profits they find that it is the underresponse to non operating profits that drives the results. Group firms operating profits are, in fact, more sensitive to their own industry shock. From this they conclude that profits are tunneled from low cash flow rights firms by manipulating the non operating profit component of total profits. A related implication is that transfer pricing, which would affect operating profits, is not an important source of tunneling in India. Gopalan, Nanda and Seru (2007)15 carry out a more direct test of tunneling by examining the characteristics of intra-group loans, often cited as a mechanism for tunneling. In their sample they find that group loan inflows are large and, on average, constitute 59% of operating profits in the year a firm receives loans. The main providers of group loans are firms that are larger, more profitable, and have more tangible assets. External borrowing is the dominant source of financing for intra-group loans. Their evidence indicates that groups extend loans to financially weaker firms and significantly increase the extent of loans when member firms are hit with a negative earnings shock. There is little evidence for group loans being a means of financing investment opportunities. In fact, recipients of group loans significantly under-perform, in terms of both stock returns and operating performance, after receiving group loans. There is little evidence in favor of tunneling either. There is, for instance, no increase in group loan outflows from low insider ownership firms that experience a positive earnings shock, which would be expected to occur if group loans were being used to tunnel cash. The loans are also made on terms more favorable than those of comparable market loans, consistent with the loans being used to provide subsidized support. On average, firms receive group loans at 10% below the corresponding market borrowing rate. Further, a large proportion of loans (>80%) have no stipulated interest payment at all. They hypothesize that groups may provide support if they are concerned about revealing negative information about the group, especially to external capital providers. Such negative information may make it difficult for other firms in the group to raise subsequent external capital, further damaging the group's investment prospects and the solvency of the remaining firms.
14

Ferreting Out Tunneling: An Application to Indian Business Groups, Marianne Bertrand, Paras Mehta, Sendhil Mullainathan, The Quarterly Journal of Economics, Vol. 117, No. 1 (Feb., 2002), pp. 121-148 Radhakrishnan Gopalan, Vikram Nanda, Amit Seru, Affiliated firms and financial support: Evidence from Indian business groups, Journal of Financial Economics volume 86, Issue 3, , December 2007, Pages 759-795.
15

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Their evidence, therefore, does not support the tunneling hypothesis. However, it raises questions about the efficiency of the internal capital market. Support of group firms in distress may represent an inefficient allocation of capital if distress represents long term underperformance. Corporate Governance practices of Indian companies Two recent surveys by Bain Consulting and KPMG provide some information on the corporate governance practices of Indian companies. The main conclusion of both these reports is that while companies appear to be meeting the formal regulatory requirements the actual implementation is far from satisfactory. Is your board working?, Bain Brief Bain's Corporate Governance in India in 2009 survey16 was conducted in association with International Market Assessment (IMA) India and included more than 100 interviews with directors on the boards of 44 prominent Indian companies, across industries. Regulators, commentators, analysts and company secretaries were also interviewed. The major findings of the study are outlined below. Contributions to strategy: Indian board members make only informal contributions to strategy-most are in fact, never asked to formally take part in developing corporate strategy. Many board members also raised the concern that they were ill-equipped to comment effectively on strategy: about 45 percent of the respondents felt they did not understand the strategic issues facing their company. Succession planning More than 75 percent of the survey respondents reported that their board did not discuss CEO succession planning at all. Appointment of independent directors In a majority of the boards surveyed, board members did not play an active role in bringing the right leadership and talent on the board by appointing independent directors. According to a survey respondent: "It is the promoter (founder) of the company who does the head-hunting for independent directors." Very few Indian companies use a nominations committee to select new independent directors. Instead, in a few instances there is anecdotal evidence that independent directors were actually friends or family members; in one case, the lawyer to the family of the promoter was listed as an independent director. Evaluation-of the corporate leadership and the board : Indian boards do not focus enough on evaluation-of the corporate leadership's or their own. Board members are involved in CEO evaluation and compensation in just about 20 percent of the companies surveyed, and the involvement is lower in promoter-led companies. Risk management : Indian companies try to maintain high standards, but the stress is on compliance with rules, rather than a committed approach to unearthing weaknesses. Financial expertise of audit committee members : This was far from satisfactory. On the basis of a random sample of audit committees from the survey pool, the average expertise score was just 2.9 on a scale of 1 (limited expertise) to 5 (expert), and the highest average score was just 3.7.

16

Is your board working?, Bain Brief 05/07/09, by Vivek Gambhir, Ashish Singh and Karan Singh

21

Rights of different types of shareholders : Indian boards lacked clarity on the rights of different types of shareholders and were resistant to wider representation on the board. One respondent dismissed private equity investors for "their short-term orientation," another found financial-institution nominees to the board "unproductive and to be tolerated." Many respondents rejected the right of minority shareholders being represented on the board. According to one respondent, "There is no such thing as minority shareholder interest, only shareholder interest." Decision making process : In many Indian boards, members contribute to decision making only informally. Repeatedly, survey respondents showed a lack of clarity on the role of board members and in most companies there is no well-defined, formal structure for board decisionmaking. As a consequence, the accountability of Indian board members suffers. Multiple board membership : Respondents were, on average, on more than four boards each. 20 percent of the respondents were on more than eight boards each. Given that, on average, board members attended seven board meetings a year per company, the survey reflected the practical limits to which board members can engage in strategic matters. KPMG The State of Corporate Governance in India: 2008 KPMG India conducted a poll17 between late November 2008 to early January 2009, involving over 90 respondents comprising CEOs, CFOs, independent directors and similar leaders, who were asked about the journey, experience and the outlook for corporate governance in India. The respondents were predominantly from private equity firms, financial services and the manufacturing sector. Some important findings of the poll are given below. Penalties for poor corporate governance : In comparison with developed countries that impose stringent penal and criminal consequences for poor corporate governance, penalty levels in India are considered to be inadequate to enforce good governance. 71 percent of the respondents considered penalty levels to discipline poor and unethical governance to be low. Another 22 percent of the respondents were either undecided or did not know if the penalty levels are low. Independent directors : Majority of the respondents felt that independent directors do not adequately challenge the executive directors and management in the process of discharging their governance responsibilities. Minority shareholders : In response to a question, Are concerns of minority shareholder groups adequately addressed by Indian board groups , 63% answered More often than not; 12% answered Sometimes, but in the best personal interests, rather than the best interests of the company; and 25% answered, Sometimes, in the best interests of the company rather than personal enrichment. Overall assessment of financial system development (Table 29-30) The World Economic Forum has undertaken a research initiative aimed at providing business leaders and policymakers with a common framework to identify and discuss the key factors in the development of global financial systems and markets. The attempt is to define and measure financial system development. The inaugural Financial Development Report 2008 provides an Index and ranking of 52 of the worlds leading financial systems. In order to understand and measure the degree of financial development, the report considers all of the different factors that together contribute to the degree of depth and efficiency of the
17

The State of Corporate Governance in India: 2008 is an initiative of KPMG in Indias Audit Committee Institute

22

provision of financial services. The seven pillars of development, that go into defining the index of financial development, have been grouped into three broad categories. 1. Factors, policies, and institutions: the inputs that allow the development of financial intermediaries, markets, instruments and services 2. Financial intermediation: the variety, size, depth, and efficiency of the financial intermediaries and markets that provide financial services 3. Capital availability and access: the outputs of financial intermediation as manifested in the size and depth of the financial sectors and the availability of, and access to, financial services The rankings of various countries on the seven pillars and the overall ranking is shown in Table 29. India is ranked 31st out of 52 in terms of its overall ranking. While Indias banks are ranked at the bottom at 50, non banks are ranked 16, and financial markets 22. The ranking on financial depth and access is 28. According to the report While India delivered solid results in terms of its financial markets (particularly foreign exchange and derivatives) and its non-bank institutions, its banks appear hamstrung by lack of size, low efficiency and poor information disclosure. Despite this, the banking system is very stable (5th) likely owing in part to sizable capital buffers that help it weather credit cycles. The business environment shows significant room for development, characterized by an inhospitable tax regime and relatively poor contract enforcement. India receives low marks related to the liberalization of its domestic financial sector and capital account. The quality of Indias higher education institutions is apparent as seen in the high score for the quality of management schools (8th), but development areas include brain drain, the ease of hiring foreign talent, and enrollment in tertiary schools. Indias ranking on each component of the seven pillars is shown in Table 30.

5. Conclusions
The Indian financial system is characterized by the dominance of banks with relatively underdeveloped equity markets. Bond markets are non existent but there is a large and growing private placement market. In the finance and growth literature underdevelopment of markets is sometimes attributed to the concentration of ownership. Ownership concentration, especially through pyramids and cross-holdings, expose minority shareholders to expropriation by controlling shareholders. More generally, these structures reduce transparency for arms-length investors. It is also possible that promoters significant shareholding removes a large proportion of shares from the floating stock leading to low liquidity and high volatility of equity markets in India.

23

Table 1
Ratio of Savings and Investment to GDP (per cent at current market prices)

Gross Domestic Saving Household Saving of which : a) Financial assets b) Physical assets Private Corporate Saving Public Sector Saving Net capital inflow Gross Domestic Capital Formation Gross Capital Formation of which : a) Public sector b) Private corporate sector c) Household sector d) Valuables Memo Saving-Investment Balance Public Sector Balance Private Sector Balance a) Private Corporate Sector b) Household Sector Sector shares Gross Domestic Saving Household Saving of which : a) Financial assets b) Physical assets Private Corporate Saving Public Sector Saving

2001-02 23.5% 22.1% 10.9% 11.3% 3.4% (2.0%) (0.6%)

2002-03 26.3% 22.9% 10.3% 12.6% 4.0% (0.6%) (1.2%)

2003-04 29.8% 24.1% 11.4% 12.7% 4.6% 1.1% (2.2%)

2004-05 31.7% 22.8% 10.1% 12.7% 6.7% 2.2% 0.4%

2005-06 34.2% 24.1% 11.7% 12.4% 7.7% 2.4% 1.2%

200607 PE 35.7% 24.1% 11.7% 12.4% 8.3% 3.3% 1.1%

2007-08 QE 37.7% 24.3% 11.7% 12.6% 8.8% 4.5% 1.4%

22.8% 24.2% 6.9% 5.4% 11.3% 0.6%

25.2% 25.2% 6.1% 5.9% 12.6% 0.6%

27.6% 26.8% 6.3% 6.8% 12.7% 0.9%

32.1% 31.6% 6.9% 10.8% 12.7% 1.3%

35.5% 34.8% 7.6% 13.7% 12.4% 1.2%

36.9% 36.4% 8.0% 14.8% 12.4% 1.2%

39.1% 38.7% 9.1% 15.9% 12.6% 1.1%

0.6% (8.9%) 8.8% (2.1%) 10.9%

1.2% (6.7%) 8.4% (1.9%) 10.3%

2.2% (5.3%) 9.2% (2.2%) 11.4%

(0.4%) (4.7%) 6.1% (4.0%) 10.1%

(1.2%) (5.2%) 5.7% (6.0%) 11.7%

(1.1%) (4.6%) 5.2% (6.5%) 11.7%

(1.4%) (4.6%) 4.7% (7.0%) 11.7%

100.0% 94.0% 46.4% 48.1% 14.5% (8.5%)

100.0% 87.1% 39.2% 47.9% 15.2% (2.3%)

100.0% 80.9% 38.3% 42.6% 15.4% 3.7%

100.0% 71.9% 31.9% 40.1% 21.1% 6.9%

100.0% 70.5% 34.2% 36.3% 22.5% 7.0%

100.0% 67.5% 32.8% 34.7% 23.2% 9.2%

100.0% 64.5% 31.0% 33.4% 23.3% 11.9%

Source: Macroeconomic and Monetary Developments in 2008-09, RBI, Table 19, Apr 20, 2009,

24

Table 2 Changes in financial assets / liabilities of the Household Sector

Rs Crores Changes in Financial Assets 296,582 322,583 377,387 434,318 597,867 650,412 715,994 746,864 Percentage of Changes in Financial Assets Provident Claims Shares Bank Life and on and Deposits Insurance Pension GovernDebent # Fund* Fund ment + ures ++38% 38% 38% 36% 46% 48% 50% 55% 14% 16% 14% 16% 14% 18% 18% 20% 16% 15% 13% 13% 10% 11% 10% 9% 18% 17% 23% 25% 15% 3% -4% -3% 3% 2% 2% 2% 5% 9% 12% 3% Rs. Crores Changes in Financial Liabilities 51,727 60,305 69,982 120,566 183,424 176,787 173,135 165,656

Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

P : Provisional. $ : Preliminary Estimates.+ : Includes compulsory deposits.# : Includes deposits with co-operative non-credit societies.* : Includes State / Central Government and postal insurance funds. ++ : Includes investment in shares and debentures of credit / non-credit societies, public sector bonds and investment in mutual funds (other than UTI)
Source: Table 11, Handbook of Statistics on Indian Economy 2008, RBI

25

Table 3 SCHEDULED COMMERCIAL BANKS RATIOS (Year end outstanding amounts)

As per cent to Aggregate Deposits Investments in Total Government Credit Investments Securities As per cent to GDP Investments in Total Government Investments Securities

Year

Credit

Aggregate Deposits

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

53% 53% 57% 56% 65% 72% 74% 74% 72%

39% 40% 43% 45% 44% 34% 30% 30% 30%

35% 37% 41% 44% 42% 33% 30% 30% 30%

24% 26% 30% 30% 35% 42% 47% 50% 52%

18% 19% 22% 25% 24% 20% 19% 21% 22%

16% 18% 21% 24% 23% 20% 19% 20% 22%

46% 48% 52% 54% 54% 59% 63% 68% 72%

Source: Table 239 Handbook of Statistics on Indian Economy 2008, RBI

26

Table 4
CONSOLIDATED BALANCE SHEET OF SCHEDULED COMMERCIAL BANKS

Liabilities Total (Rs. Crores) Total Liabilities/ Assets 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 1,536,424 1,699,197 1,974,017 2,355,509 2,785,863 3,463,406 Percentage of Total Borrowing s 7% 5% 5% 7% 7% 7% Other Liabilities and Provisions 9% 9% 9% 8% 8% 9%

Equity Deposits 5% 6% 6% 6% 7% 6% 78% 80% 80% 78% 78% 78%

Assets Total Rs. crores Total Liabilities/ Assets 1 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 13 1,536,424 1,699,197 1,974,017 2,355,509 2,785,863 3,463,406 Cash and Balances with RBI 7 6% 5% 6% 5% 5% 6% Money at Call and Short Notice 8 8% 4% 4% 4% 4% 5% Percentage of Total Loans and Advances 10 38% 41% 41% 37% 31% 27% 42% 44% 44% 49% 54% 57%

Investments 9

Fixed Assets 11 1% 1% 1% 1% 1% 1%

Other Assets 12 5% 5% 5% 4% 4% 4%

Source: Table 63, Handbook of Statistics on Indian Economy 2008, RBI

27

Table 5
SCHEDULED COMMERCIAL BANKS - MATURITY PATTERN of term deposits Rs. crores Total deposits 516,228 601,456 725,216 818,009 935,856 1,064,146 1,246,353 1,596,140 Percentage of Total Deposits 1-2 2-3 3-5 year years years 23% 22% 23% 23% 22% 23% 27% 33% 16% 15% 14% 18% 12% 11% 9% 7% 22% 21% 19% 15% 20% 18% 16% 15%

Yesr end 2000 2001 2002 2003 2004 2005 2006 2007

1 year 29% 31% 35% 35% 38% 39% 40% 37%

5 plus 11% 11% 10% 9% 8% 8% 8% 7%

Source: Table 51, Handbook of Statistics on Indian Economy 2008, RBI

Percentage Share in Total Deposits of Scheduled Commercial Banks: Sector-wise Corporate Sector (Nonfinancial) 4% 5% 6% 5% 8% 9% 10% Corporate Sector Household (Financial) Sector 8% 7% 7% 7% 9% 8% 10% 68% 67% 67% 65% 58% 61% 59%

EndMarch 2000 2001 2002 2003 2004 2005 2006

Government Sector 10% 10% 11% 12% 15% 15% 14%

Foreign Sector 11% 11% 10% 11% 11% 8% 7%

Total Deposits 100% 100% 100% 100% 100% 100% 100%

Note : Foreign sector represents the deposits of non-residents, foreign consulates, embassies, trade missions, information services, etc.and others. Source: Table 4.13, Handbook of Currency and Finance, 2008, RBI

28

Table 6

Type of Credit to Industry by Banks (Amount outstanding Rs. crore)

EndMarch 2000 2001 2002 2003 2004 2005 2006 2007 *

Short-Term Loans* Share in Total Credit (Per Amount cent) 1,52,369 1,70,114 1,65,828 1,79,687 1,89,918 2,29,672 2,68,138 3,36,958 74% 75% 63% 59% 58% 52% 48% 46%

Medium-Term Loans Share in Total Credit(Per cent) 7% 7% 8% 7% 10% 11% 10% 10%

Amount 13,928 16,067 22,313 22,366 32,187 46,535 58,018 71,865

Long-Term Loans Share in Total Credit (Per Amount cent) 38,777 41,341 74,910 99,853 1,06,084 1,62,296 2,30,202 3,22,335 19% 18% 28% 33% 32% 37% 41% 44%

Total Credit 2,05,074 2,27,522 2,63,051 3,01,906 3,28,189 4,38,503 5,56,357 7,31,157

: Short-term credit includes cash credit, overdraft, demand loans, packing credit, export trade bills purchased and discounted, export trade bills advanced against, advances against export cash incentives and duty drawback claims, inland bills purchased and discounted (trade and others), advances against import bills, foreign currency cheques, TCs/DDs/TTs/MTs purchased.
Source: Basic Statistical Returns of Scheduled Commercial Banks in India, various issues, Reserve Bank of India.

Source: Table 6.9, Report on Currency and Finance , 2008, RBI

29

Table 7

STRUCTURE OF INTEREST RATES

1 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Cal rate 2 15.85 19.57 14.42 6.99 9.4 17.73 7.84 8.69 7.83 8.87 9.15 7.16 5.89 4.62 4.65 5.6 7.22 6.07

1-3 years deposit rate 3 9.00 - 10.00 12 11 10 11 12 11.00 - 12.00 10.50 - 11.00 9.00 - 11.00 8.50 - 9.50 8.50 - 9.50 7.50 - 8.50 4.25 - 6.00 4.00 - 5.25 5.25 - 5.50 6.00 - 6.50 7.50 - 9.00 8.25-8.75 +

SBI advance rate (iv) 6 16.5 16.5 19 19 15 16.5 14.5 14 12.00 - 14.00 12 11.5 11.5 10.75 10.25 10.25 10.25 12.25 12.25

GOI yield 1-5 years 7.04 - 21.70 8.37 - 26.26 9.08 - 23.77 11.86 - 12.86 9.75 - 11.76 6.00 - 14.28 5.21 - 16.21 5.50 - 17.69 4.45 - 17.73 3.18 - 14.30 4.94 - 16.66 5.32 - 10.96 5.12 - 10.98 3.93 - 7.16 4.32 - 8.14 2.84 - 8.57 6.23 - 11.37 6.95-9.93

Source: Table 74, Handbook of Statistics on Indian Economy, 2008, RBI

30

Table 8 Recent Changes in Policy Rates and Cash Reserve Ratio

Effective From September 18, 2004 October 2, 2004 October 27, 2004 April 29, 2005 October 26, 2005 January 24, 2006 June 9, 2006 July 25, 2006 October 31, 2006 December 23, 2006 January 6, 2007 January 31, 2007 February 17, 2007 March 3, 2007 March 31, 2007 April 14, 2007 April 28, 2007 August 4, 2007 November 10, 2007 April 26, 2008 May 10, 2008 May 24, 2008 June 12, 2008 June 25, 2008 July 5, 2008 July 19, 2008 July 30, 2008 August 30, 2008 October 11, 2008 October 20, 2008 October 25, 2008 November 3, 2008 November 8, 2008 December 8, 2008 Reverse Repo Rate Rate Change 4.50 4.50 4.75 (+0.25) 5.00 (+0.25) 5.25 (+0.25) 5.50 (+0.25) 5.75 (+0.25) 6.00 (+0.25) 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 5.00 (-1.00) Repo Rate Rate Change 6.00 6.00 6.00 6.00 6.25 (+0.25) 6.50 (+0.25) 6.75 (+0.25) 7.00 (+0.25) 7.25 (+0.25) 7.25 7.25 7.50 (+0.25) 7.50 7.50 7.75 (+0.25) 7.75 7.75 7.75 7.75 7.75 7.75 7.75 8.00 (+0.25) 8.50 (+0.50) 8.50 8.50 9.00 (+0.50) 9.00 9.00 8.00 (-1.00) 8.00 7.50 (-0.50) 7.50 6.50 (-1.00) Cash Reserve Ratio Rate Change 4.75 (+0.25) 5.00 (+0.25) 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.25 (+0.25) 5.50 (+0.25) 5.50 5.75 (+0.25) 6.00 (+0.25) 6.00 6.25 (+0.25) 6.50 (+0.25) 7.00 (+0.50) 7.50 (+0.50) 7.75 (+0.25) 8.00 (+0.25) 8.25 (+0.25) 8.25 8.25 8.50 (+0.25) 8.75 (+0.25) 8.75 9.00 (+0.25) 6.50 (-2.50) 6.50 6.00 (-0.50) 6.00 5.50 (-0.50) 5.50

Note : 1. With effect from October 29, 2004, the nomenclature of repo and reverse repo was changed in keeping with international usage. Now, reverse repo indicates absorption of liquidity and repo signifies injection of liquidity. The nomenclature in this Report is based on the new usage of terms even for the period prior to October 29, 2004. 2. Figures in parentheses indicate change in policy rates. Source: Table II.1: Trend and Progress of Banking in India, 2008, RBI

31

Table 9 SECTORAL DEPLOYMENT OF NON-FOOD GROSS BANK CREDIT- OUTSTANDING (Rupees crore)
Nonfood Gross Bank Credit 375,127 429,162 482,749 620,055 728,422 999,788 1,404,840 1,801,239 2,203,038 of which Small Scale Agriculture Industries 12% 12% 13% 12% 12% 13% 12% 13% 12% 14% 13% 12% 10% 9% 7% 6% 7% 7% Industry (Medium and Large) 39% 38% 36% 38% 34% 35% 33% 32% 33% Wholesale Trade (Other than Food Procurement) 4% 4% 4% 4% 3% 3% 3% 3% 2%

Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Priority Sector 35% 36% 36% 34% 36% 38% 36% 35% 34%

Total Industry 53% 51% 48% 48% 43% 43% 39% 39% 40%

Other Sectors 21% 22% 24% 24% 26% 23% 28% 30% 31%

Source: Table 48, Handbook of Statistics on Indian Economy, 2008, RBI

32

Table 10
Sectoral Deployment of Gross Bank Credit (Amount in Rs. crore)
Sector I. Gross Bank Credit (II + III) II. Food Credit III.Non-Food Gross Bank Credit (1 to 4) 1. Agriculture and Allied Activities 2. Industry (Small, Medium and Large) 3. Services 3.1 Transport Operators 3.5 Professional and Other Services 3.6 Trade 3.7 Real Estate Loans 3.8 Non-Banking Financial Companies 3.9 All Others 4. Personal Loans 4.2 Housing Memo: Priority Sector 5.1 Agriculture & Allied Activities 5.2 SSI 5.3 Housing Outstanding as on March end 2006 2007 2008 1,445,531 1,848,166 2,247,437 40,691 46,927 44,399 1,404,840 1,801,239 2,203,038 100% 100% 100% 173,972 230,398 273,658 12% 13% 12% 550,444 697,334 871,900 39% 39% 40% 320,177 416,773 546,516 23% 23% 25% 17,341 26,519 37,447 1% 1% 2% 15,283 23,926 29,756 1% 1% 1% 83,535 106,612 122,297 6% 6% 6% 26,723 45,206 62,276 2% 3% 3% 34,305 49,027 75,301 2% 3% 3% 127,261 143,708 191,602 9% 8% 9% 360,248 456,734 505,390 26% 25% 23% 185,203 230,994 255,653 13% 13% 12% 510,738 36% 173,972 12% 91,212 6% 133,200 9% 634,142 35% 230,398 13% 117,880 7% 160,345 9% 738,686 34% 273,658 12% 155,804 7% 182,646 8% Variation 2006-07 2007-08 402,635 399,271 6,236 (2,528) 396,399 401,799 100% 100% 56,426 43,260 14% 11% 146,890 174,566 37% 43% 96,596 129,743 24% 32% 9,178 10,928 2% 3% 8,643 5,830 2% 1% 23,077 15,685 6% 4% 18,483 17,070 5% 4% 14,722 26,274 4% 7% 16,447 47,894 4% 12% 96,486 48,656 24% 12% 45,791 24,659 12% 6% 123,404 31% 56,426 14% 26,668 7% 27,145 7% 104,544 26% 43,260 11% 37,924 9% 22,301 6%

Note : 1 Data are provisional and relate to select scheduled commercial banks which account for more than 90 per cent of bank credit of all scheduled commercial banks. 2 Gross bank credit data include bills rediscounted with Reserve Bank, Exim Bank, other financial institutions and inter-bank participations. 3 Figures in parentheses represent the share in total non-food gross bank credit. Source: Appendix Table III.3, Trend and Progress of banking in India, 2008, RBI

33

Table 11 INDUSTRY-WISE DEPLOYMENT OF GROSS BANK CREDIT Outstanding as on Last Reporting Friday of March (Rupees crore)

2002 Industry (Small, Medium and Large) of which : 3 Iron and steel Other metals and 4 metal products 5 All engineering of which : Electronics 6 Electricity 7 Cotton textiles 9 Other textiles 10 Sugar 12 Food processing 13 Vegetable oils Paper and paper 15 products Chemicals, dyes, 17 paints, i) Fertilisers ii) Petro-chemicals iii) Drugs and Pharmaceuticals 18 Cement Leather and leather 19 products 20 Gems and jewellery 21 Construction 22 Petroleum Automobiles including 23 trucks 24 Computer software 25 Infrastructure of which : i) Power ii) Tlecommunications iii) Roads and ports 27 Other industries

2003

2004

2005

2006

2007

2008

229,523 8.7% 2.8% 10.5% 2.6% 4.1% 5.1% 5.9% 2.2% 3.2% 1.2% 1.6% 11.3% 2.4% 2.9% 2.8% 1.8% 1.2% 2.8% 1.7% 4.9% 1.9% 0.7% 6.5% 0.0% 3.2% 1.7% 1.5% 18.2%

295,562 9.5% 2.9% 8.9% 2.6% 3.8% 5.3% 5.1% 1.9% 2.9% 1.0% 1.7% 10.8% 2.3% 2.6% 2.7% 2.2% 1.0% 2.5% 1.7% 5.0% 1.9% 0.9% 8.9% 0.0% 5.1% 2.0% 1.9% 19.3%

313,065 8.4% 2.6% 8.4% 2.7% 4.5% 5.5% 5.1% 2.0% 3.2% 1.0% 1.9% 9.8% 2.0% 2.3% 2.8% 1.8% 1.0% 2.9% 1.9% 3.9% 1.7% 1.0% 11.9% 0.0% 6.3% 2.7% 2.9% 19.3%

423,136 8.4% 2.7% 6.8% 2.2% 5.4% 4.6% 1.6% 5.7% 0.8% 1.6% 9.2% 1.9% 1.7% 2.9% 1.9% 0.8% 3.3% 2.0% 3.6% 2.8% 0.7% 18.7% 0.0% 9.0% 3.7% 3.4% 20.0%

550,444 9.3% 2.7% 6.3% 2.0% 5.4% 4.5% 1.6% 5.6% 0.9% 1.7% 8.8% 1.9% 1.3% 3.0% 1.4% 0.8% 3.7% 2.4% 4.6% 3.4% 0.7% 20.5% 0.0% 10.9% 3.4% 3.6% 14.7%

697,334 9.2% 2.9% 6.3% 1.9% 5.5% 5.1% 1.7% 5.7% 0.9% 1.7% 8.0% 1.4% 1.2% 2.7% 1.3% 0.7% 3.4% 2.9% 5.1% 3.0% 0.7% 20.5% 0.0% 10.4% 2.8% 3.6% 14.1%

871,900 9.3% 2.7% 6.0% 1.8% 5.4% 4.9% 1.9% 5.8% 0.8% 1.6% 7.4% 1.1% 1.1% 2.7% 1.6% 0.7% 2.9% 3.2% 4.8% 3.3% 0.9% 23.2% 0.0% 10.8% 4.3% 3.8% 12.8%

Source: Table 49, Handbook of Statistics on Indian Economy, 2008, RBI

34

Table 12
Advances to the Priority Sectors by Public Sector Banks (As on the last reporting Friday in March ) Amount Outstanding (Rs. crore)
2007 2,02,614 (15.4) 1,44,372 (11.0) 58,242 (4.4) 1,02,550 (7.8) 2008@ 2,48,685 (17.4) 1,76,135 (12.9) 72,550 (5.3)

I.

Agriculture i) Direct ii) Indirect

II. II (A) III. IV. V. VI. VII. VIII.

Small-scale industries Small Enterprise#

1,48,651 (10.9) 2,06,661 (15.7) 40,740 (3) 3,136 19,844 1,47,626 (10.8) 6,08,963 (44.6) 13,64,268

Other priority sector advances Retail Trade* Micro - Credit* Education* Housing* Total Priority Sector Advances Total priority sector advances *

IX. Net Bank Credit IX Adjusted Net Bank Credit (A) @ : Provisional # : The new guidelines on priority sector advances take into account the revised definition of small and micro enterprises as per the Micro,Small and Medium Enterprises Development Act ,2006. * : In terms of revised guidelines on lending to priority sector, broad categories of advances under priority sector include agriculture, small enterprises sector, retail trade, microcredit, education and housing. Note : Figures in parantheses represent percetages to net bank credit. Since 2007-08, these figures represent percentage to adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposure, whichever is higher. Source: Appendix Table III.4, Trend and Progress of banking in India, 2008, RBI

5,21,376 (39.7) 13,13,840

35

Table 13
Mobilisation of Resources from the Primary Market (RBI Annual report) 2008-09 A. Prospectus and Rights Issues** 1. Private Sector (a+b) a) Financial b) Non-financial 2. Public Sector (a+b+c) a) Public Sector Undertakings b) Government Companies c) Banks/Financial Institutions 3. Total (1+2) % of GDP at market prices of which: (i) Equity (ii) Debt B. Private Placement 1. Private Sector (a+b) a) Financial b) Non-financial 2. Public Sector (a+b) a) Financial b) Non-financial 3. Total (1+2) % of GDP at market prices of which: (i) Equity (ii) Debt C. Euro Issues (ADRs and GDRs) 2007-08 2006-07 2005-06 2004-05 2003-04

14,671 466 14205

63,638 14,676 48,962 20,069 2,516 17,553 83,707 1.8% 82,398 1,309

30,603 1,425 29,178 1,779 997 782 32,382 0.8% 31,532 850

21,154 7,746 13,408 5,786 373 5,413 26,940 0.8% 26,695 245

13,482 5,710 7,772 8,410 2,684 5,726 21,892 0.7% 18,024 3,868

3,675 1,353 2,322 4,176 100 4,076 7,851 0.3% 3,427 4,424

14,671 0.3% 14,671

93,036 60,246 32,790 109,709 64,608 45,101 202,745 3.8% 960 201,785

129,522 88,151 41,371 83,046 56,185 26,861 212,568 4.5% 1,410 2,11,158

81,841 48,414 33,427 64,025 52,117 11,908 145,866 3.5% 57 1,45,809

41,190 26,463 14,727 55,284 39,165 16,119 96,473 2.7% 150 96,323

35,794 20,974 14,820 47,611 25,531 22,080 83,405 2.6%

18,760 12,551 6,209 45,141 26,461 18,680 63,901 2.3%

4,788

26,556 0.6% 322,831 6.8%

17,005 0.4% 195,253 4.7%

11,352 0.3% 134,765 3.8%

3,353 0.1% 108,650 3.4%

3,098 0.1% 74,850 2.7%

A+B+C % of GDP at market prices Gross market borrowings of center and state govts (table 120) % of GDP at market prices Gross Non Food Bank Credit % of GDP at market prices GDP at market price

222,204 4.2%

234,842 4.41% 399,400 7.5% 5,321,753

255,984 4.25% 401,650 8.5% 4,713,148

200,198 4.38% 396,399 9.6% 4,145,810

181,747 4.07% 405,052 11.3% 3,580,344

145,602 6.29% 271,366 8.6% 3,149,412

198,157 4.41% 108,367 3.9% 2,754,621

Source: Table 2.66, Annual report, 2009, RBI (and previous issues)

36

Table 14

RESOURCE MOBILISATION IN THE PRIVATE PLACEMENT MARKET (Rs. Crores)

Private Non Financial 1,934 646 4,879 4,824 8,528 9,843 12,601 15,623 6,209 14,820 14,727 33,066 41,371 Public Non Financial 4,739 6,032 11,237 12,299 23,874 18,530 18,898 21,464 18,679 22,080 16,119 12,158 26,861 Percentage of All Total Public 9,291 12,573 20,896 32,681 41,856 44,731 36,256 41,871 45,141 47,611 55,284 61,184 83,046 All 13,361 15,066 30,099 49,679 61,259 67,836 64,876 66,948 63,901 83,406 96,473 145,571 212,568 All Financial 50% 56% 46% 66% 47% 58% 51% 45% 61% 56% 68% 69% 68% Public 70% 83% 69% 66% 68% 66% 56% 63% 71% 57% 57% 42% 39% Pvt Non Fin 14% 4% 16% 10% 14% 15% 19% 23% 10% 18% 15% 23% 19%

1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 P 2007-08

Financial 2,136 1,847 4,324 12,174 10,875 13,263 16,019 9,454 12,551 20,974 26,463 51,321 88,151

Total Private 4,070 2,493 9,202 16,998 19,404 23,106 28,620 25,077 18,760 35,794 41,190 84,387 129,522

Financial 4,552 6,541 9,660 20,382 17,981 26,201 17,358 20,407 26,461 25,531 39,165 49,025 56,185

Source: Table 76, Handbook of Statistics on Indian Economy, RBI, 2008

37

Table 15
NEW CAPITAL ISSUES BY NON-GOVERNMENT PUBLIC LIMITED COMPANIES
Of total capital issues Ordinary Shares 9,953 9,960 17,414 11,877 6,101 1,162 2,563 2,753 2,608 860 460 2,471 11,452 20,899 29,756 56,848 Preference Shares 1 0 131 150 75 4 60 0 142 0 0 0 0 10 0 5,481 Of total capital issues

Debentures Total Prospectus Rights New Existing 1992-93 9,850 19,803 7,077 12,726 3,311 16,492 1993-94 9,370 19,330 11,547 7,784 5,580 13,750 1994-95 8,871 26,417 19,677 6,740 6,465 19,952 1995-96 3,970 15,998 10,332 5,666 3,117 12,881 1996-97 4,233 10,410 7,748 2,661 2,270 8,139 1997-98 1,972 3,138 1,411 1,727 675 2,463 1998-99 2,391 5,013 2,602 2,411 58 4,955 1999-00 2,401 5,153 4,028 1,125 222 4,931 2000-01 3,068 5,818 5,291 528 2,312 3,506 2001-02 4,832 5,692 4,980 712 88 5,604 2002-03 1,418 1,878 1,407 471 207 1,671 2003-04 1,251 3,722 2,715 1,007 1,384 2,338 2004-05 1,627 13,079 9,636 3,444 4,778 8,301 2005-06 245 21,154 16,937 4,217 10,264 10,890 2006-07 847 30,603 27,175 3,428 25,662 4,941 2007-08 P 1,309 63,638 47,978 15,660 37,088 26,549 Note : 1. Up to 1980, data are on January-December basis and from 1981 to 2007, on April-March basis. 2. In conformity with the Controller of Capital Issues, the initial and further capital issues were changed to new and existing along with conceptual changes from 1971. Source: Table 81, Handbook of Statistics on Indian Economy, 2008, RBI

38

Table 16
MAJOR INDICATORS OF DOMESTIC EQUITY MAKRETS
Market Capitalisation (Rupees crore) 15,85,585 28,13,201 33,67,350 48,58,122 28,96,194 33,67,350 36,50,368 38,98,078 39,78,381 43,17,571 42,96,994 48,86,561 57,22,227 58,76,742 65,43,272 52,95,387 54,19,942 48,58,122 54,42,780 50,98,873 41,03,651 44,32,427 44,72,461 39,00,185 28,20,388 26,53,281 29,16,768 27,98,707 26,75,622 28,96,194

2004-05 2005-06 2006-07 2007-08 2008-09 2006-07 2007-08 April May June July August September October November December January February March 2008-09 April May June July August September October November December January February March

SENSEX 6,493 11,280 13,072 15,644 9,709 13,072 13,872 14,544 14,651 15,551 15,319 17,291 19,838 19,363 20,287 17,649 17,579 15,644 17,287 16,416 13,462 14,356 14,565 12,860 9,788 9,093 9,647 9,424 8,892 9,709

NIFTY 2,036 3,403 3,822 4,735 3,021 3,822 4,088 4,296 4,318 4,529 4,464 5,021 5,901 5,763 6,139 5,137 5,224 4,735 5,166 4,870 4,041 4,333 4,360 3,921 2,886 2,755 2,959 2,875 2,764 3,021

Price/ Earning Ratio # 14.79 15.69 19.51 19.12 16.25 17.95 19.28 19.74 20.08 21.30 19.47 21.05 24.59 25.15 26.55 25.33 22.19 20.58 21.27 21.46 18.99 17.56 18.63 17.98 13.77 12.42 12.69 12.73 13.38 13.30

Turnover (Rupees crore) 11,40,071 15,69,556 19,45,285 35,51,038 27,52,023 1,67,954 1,68,567 2,07,585 1,93,648 2,67,227 2,31,241 2,66,050 4,55,589 4,14,420 3,66,385 4,47,138 2,80,176 2,53,012 2,71,227 2,77,923 2,64,428 2,95,816 2,34,251 2,62,261 2,16,198 1,73,123 2,12,956 1,91,184 1,49,857 2,02,799

Source: APPENDIX TABLE 43 and 44, RBI Annual Report, 2008-09

39

Table 17

Daily Return and Volatility: Select World Stock Indices

2008 (Oct '07-Sept '08) 2.42 2.36 2.29 2.29 1.74 1.65 1.64 1.6 1.57 1.55 1.4 1.2 1.14

Calender Year Hong Kong HSI Brazil IBOV India BSE SENSEX India S&P CNX NIFTY Japan NKY Mexico MEXBOL South Africa JALSH UK FTSE 100 Singapore STI Australia AS 30 USA DOW JONES Malaysia KLCI France CAC

2005 0.73 1.57 1.08 1.11 0.82 1.05 0.83 0.55 0.61 0.59 0.65 0.49 0.69

2006 0.91 1.53 1.63 1.65 1.25 1.45 1.39 0.79 0.86 0.8 0.62 0.53 0.93

2007 1.66 1.73 1.54 1.6 1.17 1.36 1.2 1.1 1.36 1.04 0.92 1.04 1.07

Source: SEBI Bulletin, October 2008

40

Table 18
ASSETS UNDER MANAGEMENT OF MUTUAL FUNDS
Year (EndMarch) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Amount (Rupees crore) 85,822 97,228 68,193 107,946 90,587 100,594 109,299 139,615 149,600 231,862 326,292 505,152 % GDP 6.2% 6.4% 3.9% 5.5% 4.3% 4.4% 4.5% 5.1% 4.8% 6.5% 7.9% 10.7%

Source: Table 86, Handbook of Statistics on Indian Economy, RBI, 2008

ASSETS UNDER MANAGEMENT AS ON MARCH 31 (Rs. in Crore) 2008 Income/Debt Oriented Debt LIQUID / MONEY MARKET GILT Total Growth/Equity Oriented GROWTH ELSS BALANCED GOLD ETFs Other ETFs Total TOTAL 156,722 16,020 16,283 483 2,647 192,155 505,152 132,803 326,388 106,949 231,862 113,386 10,211 9,110 96 92,867 6,589 7,493 220,762 89,402 2,833 312,997 119,322 72,006 2,257 193,585 60,278 61,500 3,135 124,913 2007 2006

Source: AMFI website

41

Table 19
OWNERSHIP OF CENTRAL AND STATE GOVERNMENT SECURITIES (Outstanding as at End-March Rs. crores) Percentages of Total
Reserve Bank of India 20.3% 17.9% 8.2% 2.4% 2.0% 7.3% 2.8% 10.7% 9.1% 7.0% 7.7% 6.4% 6.6% 4.1% 5.2% 5.0% 7.5% Commercial banks 59.4% 63.7% 66.4% 72.5% 69.6% 64.9% 67.3% 58.9% 59.5% 60.9% 61.0% 60.6% 58.6% 56.1% 52.4% 46.5% 46.9% Life Insurance corporation 12.3% 13.3% 14.7% 15.8% 16.2% 16.8% 18.7% 18.0% 17.9% 18.1% 18.3% 19.6% 19.4% 19.4% 20.5% 22.2% 22.8% PF Schemes 1.7% 1.5% 1.4% 1.2% 1.0% 1.5% 1.9% 2.1% 2.8% 3.0% 3.3% 3.6% 3.5% 3.2% 3.7% 4.3% 5.0% Primary dealers 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.4% 1.1% 1.2% 1.0% 0.7% 0.7% 0.3%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Total 86,021 95,879 105,339 136,668 168,723 207,457 236,475 299,852 373,136 455,766 540,433 640,350 807,293 1,004,077 1,164,785 1,261,194 1,420,204

% GDP 15.1% 14.6% 14.0% 15.8% 16.6% 17.4% 17.2% 19.6% 21.3% 23.3% 25.7% 28.1% 32.9% 36.5% 37.0% 35.2% 34.3%

Others 6.4% 3.6% 9.2% 8.2% 11.2% 9.5% 9.3% 10.3% 10.8% 11.1% 8.4% 8.6% 10.8% 16.2% 17.5% 21.4% 17.1%

Source: Table 125, Handbook of Statistics on Indian Economy, RBI, 2008

42

Table 20 Trend in SF Issuance Volumes Rs. crores

FY200 4 ABS RMBS CDO/LSO(1 ) PG (2) Others (3) Total Growth 50 13,920 8,090 2,960 2,830 FY200 5 22,290 3,340 2,580 1,600 1,000 30,820 121% 680 25,650 -17% 36,960 44% 58,710 59% FY200 6 17,850 5,010 2,100 FY200 7 23,420 1,610 11,920 FY200 8 26,370 590 31,750

(1) securitisation of individual corporate loans or loan sell-off (LSO) (2) PG: Partial Guarantee (3) mostly on-balance sheet structured debt transactions

Source: Indian Structured Finance MarketFY2008, ICRA

43

Table 21
Indias Balance of Payments - Key Indicators
199091 Items (US $ billion) i) Trade Balance ii) Invisibles, net iii) Current Account Balance iv) Capital Account v) Foreign Exchange Reserves* (Increase -/Decrease +) Indicators (in Per cent) 1. Trade i) Exports/GDP ii) Imports/GDP iii) Trade Balance /GDP iv) Export Volume Growth 2. Invisibles i) Invisibles Receipts/GDP ii) Invisibles Payments/GDP iii) Invisibles (Net)/GDP 3. Current Account i) Current Receipts@/GDP ii) Current Payments/GDP Iii) Current Receipts Growth@ iv) Current Account Balance/GDP 4. Capital Account i) Foreign Investment to India(net)/GDP ii) Capital Flows(net)/GDP iii) Capital Inflows/GDP iv) Capital Outflows/GDP 5. Others i) Debt - GDP Ratio ii) Debt - Service Ratio iii) Liability - Service Ratio iv) Import Cover of Reserves (in months) (9.4) (0.2) (9.7) 7.1 1.3 200102 (11.6) 15.0 3.4 8.6 (11.8) 200405 (33.7) 31.2 (2.5) 28.0 (26.2) 200506 (51.9) 42.0 (9.9) 25.5 (15.1) 200607 (61.8) 52.2 (9.6) 45.2 (36.6) 200708PR (91.6) 74.6 (17.0) 108.0 (92.2) 200809P (119.4) 89.6 (29.8) 9.1 20.1

5.8% 8.8% (3.0%) 11.0% 2.4% 2.4% (0.1%) 8.0% 11.2% 6.6% (3.1%)

9.4% 11.8% (2.4%) 3.9% 7.7% 4.6% 3.1% 16.9% 16.3% 4.5% 0.7%

12.1% 16.9% (4.8%) 17.5% 9.9% 5.5% 4.4% 21.9% 22.4% 29.3% (0.4%)

13.0% 19.4% (6.4%) 11.8% 11.1% 5.9% 5.2% 24.0% 25.3% 26.0% (1.2%)

14.1% 20.9% (6.8%) 15.8% 12.5% 6.8% 5.7% 26.6% 27.7% 25.1% (1.1%)

14.2% 22.0% (7.8%) 5.4% 12.7% 6.3% 6.4% 26.8% 28.3% 29.3% (1.5%)

15.1% 25.5% (10.3%)

..

14.0% 6.3% 7.7% 29.1% 31.8% 7.4% (2.6%)

2.2% 7.2% 5.0% 28.7 35.3 35.6 2.5

1.7% 1.8% 9.1% 7.3% 21.1 13.7 14.9 11.5

2.2% 4.0% 14.0% 10.0% 18.5 6.1 7.1 14.3

2.6% 3.1% 17.9% 14.7% 17.2 9.9 11.2 11.6

3.3% 4.9% 25.4% 20.5% 18.1 4.7 6.1 12.5

5.4% 9.2% 36.9% 27.7% 19 4.8 5.9 14.4

1.8% 0.8% 26.1% 25.3% 22 4.6 5.5 10.3

Source: Table 2.75: Annual Report, 2009, RBI

44

Table 22
INDIA'S OVERALL BALANCE OF PAYMENTS RUPEES (Rs. Crores and % of GDP)
2000-01 Current Account Merchandise Invisibles Total Current Account Total Capital Account Overall Balance (56,737) (2.7%) 45,139 2.1% (11,598) (0.6%) 40,610 1.9% 27,643 1.3% 2001-02 (54,955) (2.4%) 71,381 3.1% 16,426 0.7% 41,080 1.8% 56,593 2.5% 2002-03 (51,697) (2.1%) 82,357 3.4% 30,660 1.2% 52,366 2.1% 82,037 3.3% 2003-04 (63,386) (2.3%) 127,369 4.6% 63,983 2.3% 77,227 2.8% 143,993 5.2% 2004-05 (151,765) (4.8%) 139,591 4.4% (12,174) (0.4%) 125,367 4.0% 115,907 3.7% 2005-06 (229,664) (6.4%) 185,927 5.2% (43,737) (1.2%) 111,965 3.1% 65,896 1.8% 2006-07 (286,276) (6.9%) 240,933 5.8% (45,343) (1.1%) 206,389 5.0% 163,634 3.9% 2007-08 (362,096) (7.7%) 291,739 6.2% (70,357) (1.5%) 433,903 9.2% 369,689 7.8%

Source: Table 144, Handbook of Statistics on Indian Economy, RBI, 2008

45

Table 23
INDIA'S OVERALL BALANCE OF PAYMENTS Net Capital Flows RUPEES crores Short Foreign Foreign Commercial Term Direct Portfolio Borrowings Credit Investment Investment (MT & LT) to India 14,924 22,630 15,594 10,944 16,745 13,425 34,910 61,793 76,822 11,820 9,290 4,504 51,898 41,312 55,357 31,881 118,995 (65,062) 20,171 (7,528) (8,220) (13,260) 23,113 10,505 72,365 91,180 38,009 2,286 (3,765) 4,670 6,679 16,957 16,300 30,096 68,878 (31,160) Bankin g Capital (9,144) 13,778 50,333 27,782 17,040 5,795 8,477 47,148 (19,868)

Rs. Crores 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Capital Account 40,610 41,080 52,366 77,227 125,367 111,965 203,673 433,773 32,381

USD Million

US dollars (millions) 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Foreign Direct Investment 3,272 4,734 3,217 2,388 3,713 3,034 7,693 15,401 17,496

Short Foreign Commercial Term Portfolio Borrowings Credit Investment (MT & LT) to India 2,590 1,952 944 11,356 9,287 12,494 7,060 29,556 (14,034) 4,303 (1,585) (1,692) (2,925) 5,194 2,508 16,103 22,633 8,158 551 (793) 970 1,419 3,792 3,699 6,612 17,183 (5,795)

Bankin g Capital (1,961) 2,864 10,425 6,033 3,874 1,373 1,913 11,757 (3,397)

Capital Account 8,840 8,551 10,840 16,736 28,022 25,470 45,203 107,993 9,146

Source: Table 142, 143, Handbook of Statistics on Indian Economy, RBI, 2009

46

Table 24 Sources of Funds of Selected Large Public Limited Companies

No of companies covered 1377 2003-04 49.7% 1.1% 26.6% 22.1% 50.3% 4.2% 19.1% 0.4% 18.2% 17.5% 2.5% -0.6% 0.4% 1.4% 2.0% 0.0% 0.4% 26.8% 100.0% 1377 2004-05 43.6% 0.5% 22.3% 20.9% 56.4% 10.0% 18.8% 0.5% 16.1% 23.0% -4.7% -0.5% 0.6% -2.7% 0.3% 0.1% 2.1% 27.5% 100.0% 1431 2005-06 44.0% 2.4% 25.3% 16.3% 56.0% 15.6% 26.6% -0.9% 27.9% 24.3% -2.1% 6.0% 0.6% 0.5% -1.4% 0.4% -0.6% 13.6% 100.0% 1526 2006-07 37.6% 0.4% 28.3% 8.9% 62.4% 12.4% 31.7% -0.6% 31.9% 20.2% -0.2% 8.6% 0.0% 1.8% 1.6% 0.5% -0.2% 18.1% 100.0% 1526 2007-08 38.6% 0.2% 25.2% 13.2% 61.4% 16.4% 27.2% 0.1% 24.4% 19.5% 0.0% 4.4% 0.0% 0.3% 0.2% 2.8% 0.0% 17.7% 100.0%

Internal Sources A. Paid-up Capital B. Reserves and Surplus C. Provisions External Sources D. Paid-up Capital F. Borrowings Debentures Loans and advances (a) From banks (b) From other Indian financial institutions (c) From foreign institutional agencies (d) From Government and semiGovernment bodies (e) From companies (f) From others Deferred payments Public deposits Trade Dues and Other Current G. Liabilities Total Source:

Statement 5: Finances of Large Public Limited Companies: 2007-08*, RBI Bulletin, Mar, 2009 This article presents the financial performance of select 1,526 non Government non-financial large (each with paid-up capital of Rs.1 crore and above) public limited companies during 2007-08 based on their audited annual accounts closed during April 2007 to March 2008. Finances of Large Public Limited Companies: 2006-07, RBI Bulletin, Mar , 2008

This article presents the financial performance of select 1,431 nonGovernment non-financial large public limited companies (each with paidup capital of Rs.1 crore and above) during 2006-07, based on their audited annual accounts.
Finances of Private Limited Companies: 2004-05* The financial performance of non-Government non-financial private limited companies during the year 2004-05 is analysed in this article based on the audited annual accounts of 1,382 select companies, which closed their accounts during the period April 2004 to March 20051 . The analysis of the companies covered in this study revealed that a few companies exhibited results largely in variance with the other companies. Thus, the analysis is confined to 1,377 companies.

47

Table 25 Pattern of Sources of Funds of Indian Corporates (Per cent) Based on Finances of Public Limited Companies 1997-98 1992-93 to to 20002001-02 to 1996-97 01 2005-06 31% 43% 56% 69% 21% 33% 5% 11% 8% 9% 15% 57% 13% 29% 6% 9% 10% 3% 15% 44% 11% 14% -3% 22% -5% 0% 19%

Item 1. Internal Sources 2. External Sources (a+b+c) a) Equity capital b) Borrowings i) Debentures ii) From Banks iii) From FIs iv) Others* c) Trade dues & other current liabilities

* : Others includes borrowing from foreign institutional agencies, Government and semi-Government bodies, companies, deferred payments and public deposits. Note : Data pertain to non-Government non-financial public limited companies. Source : Report on Currency and Finance 1998-99, RBI for data up to 1997-98 and articles onFinances of Public Limited Companies, RBI Bulletin (various issues) for subsequent years. Source: Table 6.8:, Report on Currency and Finance 2006-08

48

Table 26
Select Sources of Funds to Industry Rs. Crores
Bank Credit (SML) 18,706 10,684 66,039 17,503 113,827 123,552 146,890 174,566 Private Placement (Private corporate) 9,843 12,601 15,623 6,209 14,820 14,727 33,426 41,371 Capital Issues * External Commercial Borrowings $ 22,457 (11,293) (3,550) (6,581) 40,070 26,805 102,692 160,163 Foreign Direct Investment 18,404 29,245 24,397 19,830 26,947 39,457 99,261 129,746

Year 200-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2004-08 Total % Total % Domestic funds

2,322 7,772 13,408 29,178 48,962

ADR/GDR Issues + 3,433 1,528 3,426 3,098 2,960 7,262 16,184 13,023

558,835 39% 73%

104,344 7% 14%

99,320 7% 13%

39,429 3%

329,730 23%

295,411 21%

Notes: Bank Credit: Credit to Industry (Small, Medium and Large) Table 48 RBI Handbook Private Placement: Private Non Financial Table 76 RBI Handbook Capital Issues : Private Non Financial Public Issues Table 2.69 RBI Annual Report 2008 ADR/GDR Issues : Select Sources of Funds to Industry Table 2.27 RBI Annual Report 2008 External Borrowings: Commercial borrowing (MT and LT) and Short term borrowings, Table 143 RBI Handbook Foreign Direct Investment, Table 143 RBI Handbook

49

Table 27
Shareholding Pattern at the end of March 2008 of Companies Listed on NSE Promoters Institutional
Financial Institutions/B anks/Central and State Government/I nsurance Companies

Non Promoters Non-Institutional

Indian promoters

Foreign promoters

Foreign Institutional Investors

Mutual Funds

Venture Capital Funds

Others

Bodies Corporate

Individuals

Others

Banks Engineering Finance FMCG Information Technology Infrastructure Manufacturing Media & Entertainment Petrochemicals Pharmaceuticals Services Telecommunication Miscellaneous Number of Shares (mill) % to Total Number of Shares

42% 29% 41% 17% 41% 69% 45% 44% 58% 42% 46% 56% 43% 86,792 49%

1% 2% 2% 16% 5% 8% 9% 5% 8% 7% 8% 4% 3% 12,418 7%

6% 8% 9% 14% 3% 2% 7% 2% 4% 5% 5% 4% 3% 9,469 5%

19% 11% 17% 14% 16% 9% 9% 12% 5% 11% 11% 9% 9% 18,768 11%

3% 11% 3% 8% 2% 2% 4% 6% 2% 3% 4% 1% 4% 5,756 3%

1% 0% 0% 0% 1% 0% 0% 0% 0% 0% 0% 0% 0% 251 0%

0% 1% 2% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 16 0%

9% 9% 6% 4% 7% 3% 6% 8% 6% 7% 8% 4% 10% 10,272 6%

13% 21% 14% 14% 17% 6% 15% 18% 12% 20% 13% 11% 23% 23,103 13%

1% 7% 4% 14% 6% 1% 3% 3% 2% 3% 2% 9% 4% 5,953 3%

Shares held by custodi ans 5% 1% 1% 0% 3% 0% 2% 1% 4% 1% 2% 1% 1% 3,467 2%

Source : NSE Fact book 2007, Table 3.3

50

Table 28
Promoter Holdings in 32 companies in 16 prominent family controlled Indian business groups. Figures in US$bn Group Tata Company Tata Steel TCS Tata Power Tata Motors Tata Chemicals Grasim Industries Aditya Birla Nuvo Hindalco Industries Ultra Tech Cement Godrej Consumer Godrej Industries Sundaram Clayton TVS Motors Carborundrum Universal Ltd. Tube Investments Bharti Airtel Reliance Industries IPCL Reliance Energy Reliance Communications Reliance Capital Adlabs Essar Steel Essar Shipping Sterlite Industries Hindustan Zinc Thermax Bajaj Auto Dabur India Limited Wipro Ltd. Apollo Hospitals Dr. Reddys Laboratories Ltd. Turnove r Latest available 4.53 3.79 1.33 7.03 1.03 2.23 0.89 4.78 1.23 0.2 0.21 0.22 0.98 0.12 0.43 4.51 28.21 2.85 1.65 3.25 0.22 0.03 2.28 0.26 3.1 2.21 0.55 2.52 0.45 3.51 0.23 1.02

Birla

Godrej TVS Murugapp a Bhart Reliance (MDA) Reliance (ADA)

PAT On 06 October 2007 1.06 0.94 0.17 0.48 0.11 0.38 0.06 0.64 0.2 0.03 0.02 0.02 0.02 0.01 0.04 1.01 2.99 0.29 0.2 0.6 0.16 0.01 0.11 0.03 0.2 1.11 0.05 0.31 0.06 0.71 0.03 0.29

MKT Cap Mar-07 11.5 26.2 4.7 7.5 1.7 8.1 4 5.2 3.4 0.8 1.2 0.4 0.4 0.4 0.3 47.2 86.8 3.6 8.3 33 10.3 0.6 1.3 0.4 10.7 8.9 2.2 6.6 2.4 16.8 0.6 2.7

Promoter holding 31% 82% 32% 33% 32% 25% 39% 27% 53% 68% 86% 80% 57% 43% 45% 45% 51% 47% 34% 67% 52% 55% 87% 47% 79% 65% 62% 30% 74% 80% 31% 25%

Essar Vedanta Thermax Bajaj Dabur Wipro Apollo Dr Reddys

Source: Corporate Governance and Related Credit Issues for Indian Family-Controlled Companies, October 2007, Special Comment, Moodys-ICRA Corporate Finance

51

Table 29 The Financial Development Report 2008, World Economic Forum Rankings of all countries

Factors, Policies and Institutions 1 2 3 Institutional environment 12 5 6 14 7 16 17 2 10 1 13 19 8 11 4 24 15 9 23 22 3 26 18 46 27 36 33 20 30 21 43 25 28 49 34 48 35 29 44 40 42 Business environment 12 11 10 16 8 15 6 4 7 1 14 24 5 17 3 18 20 13 9 23 2 29 19 35 36 21 31 26 33 22 45 38 27 50 25 34 40 49 32 37 30 Financial stability 10 23 6 8 14 20 2 17 7 1 21 22 13 11 4 9 16 5 32 18 15 24 30 19 26 12 3 25 29 31 28 49 46 37 34 33 47 43 52 44 38

Financial Intermediation 4 5 6 Nonbanks 2 1 7 4 5 3 18 13 8 19 6 9 20 17 24 39 26 30 11 35 29 14 27 15 23 52 49 25 37 44 16 34 32 42 48 10 41 46 28 21 43 Financial markets 1 2 7 5 13 4 3 11 9 6 8 14 12 26 25 10 16 24 20 23 18 15 33 30 28 19 29 32 36 40 22 27 35 17 31 41 38 46 21 34 39

Overall USA UK Germany Japan Canada France Switzerland Hong Kong Netherlands Singapore Australia Spain Sweden Ireland Norway UAE Belgium Austria Korea, Rep. Malaysia Finland Italy Israel China South Africa Kuwait Saudi Arabia Bahrain Thailand Chile India Panama Hungary Pakistan Czech Rep Russia Egypt Indonesia Turkey Brazil Poland 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41

Banks 1 3 9 8 6 14 27 5 19 32 21 10 31 12 20 4 17 18 11 2 40 16 26 7 22 24 23 43 15 30 50 29 33 25 44 45 34 13 37 52 38

Access 7 Size, depth, and access 8 4 9 10 5 11 1 3 2 7 14 6 13 15 18 23 16 19 20 12 22 25 17 24 21 29 32 30 26 35 28 27 34 33 40 45 31 42 39 37 44

52

Slovak Rep Mexico Colombia Kazakhstan Peru Argentina Philippines Vietnam Nigeria Ukraine Venezuela

42 43 44 45 46 47 48 49 50 51 52

37 31 38 47 32 45 41 50 39 51 52

28 44 43 47 41 39 48 46 52 42 51

36 27 35 45 42 50 48 40 39 51 41

35 49 36 41 51 46 42 28 48 39 47

51 38 36 12 31 22 40 50 47 33 45

48 45 47 44 49 37 42 52 50 51 43

41 48 43 49 47 46 38 36 52 50 51

53

Table 30 The Financial Development Report 2008, World Economic Forum Rankings of India on specific indicators
Overall Index 1st pillar: Institutional environment Capital account liberalization Corporate governance Legal and regulatory issues Contract enforcement Domestic financial sector liberalization 2nd pillar: Business environment Human capital Taxes Infrastructure Cost of doing business 3rd pillar: Financial stability Risk of a currency crisis Risk of systemic banking crisis Risk of sovereign debt crisis 4th pillar: Banks Size index Efficiency index Financial information disclosure 5th pillar: Non-banks IPO activity M&A activity Insurance Securitization 6th pillar: Financial markets Foreign exchange markets Derivatives markets Equity markets Bond markets 7th pillar: Size, depth, and access Size and depth Access 31 43 46 20 28 49 38 45 33 45 49 47 28 13 5 39 50 48 41 45 16 12 16 21 13 22 13 14 25 37 28 29 26

54