Non-banking Finance Companies
In the case of new NBFCs seeking registration with the RBI, the requirement of minimum net owned funds, has been raised to Rs.2 crores.
Until recently, the money market in India was narrow and circumscribed by tight regulations over in¬terest rates and participants. The secondary market was underdeveloped and lacked liquidity. Several mea¬sures have been initiated and include new money market instruments, strengthening of existing instruments and setting up of the Discount and Finance House of India (DFHI).
The RBI conducts its sales of dated securities and treasury bills through its open market operations (OM 0) window. Primary dealers bid for these securi¬ties and also trade in them. The DFHI is the princi¬pal agency for developing a secondary market for money market instruments and Government of India treasury bills. The RBI has introduced a liquidity ad¬justment facility (LAF) in which liquidity is injected through reverse repo auctions and liquidity is sucked out through repo auctions.
On account of the substantial issue of government debt, the gilt- edged market occupies an important po¬sition in the financial set- up. The Securities Trading Corporation of India (STCI), which started operations in June 1994 has a mandate to develop the second¬ary market in government securities.
Long-term debt market: The development of a long¬term debt market is crucial to the finanCing of infra¬structure. Mter bringing some order to the equity mar¬ket, the SEBI has now decided to concentrate on the development of the debt market. Stamp duty is being withdrawn at the time of dematerialisation of debt in¬struments in order to encourage paperless trading.
The Capital Market
The number of shareholders in India is estimated at 25 million. However, only an estimated two lakh persons ~ctively trade in stocks. There has been a dra¬matic improvement in the country's stock market trading infrastructure during the last few years. Ex-pectations are that India will be an attractive emerg¬ing market with tremendous potential. Unfortunately, during recent times the stock markets have been con¬strained by some unsavoury developments, which has led to retail investors deserting the stock markets.
Mutual Funds
The mutual funds industry is now regulated un¬der the SEBI (Mutual Funds) Regulations, 1996 and amendments thereto. With the issuance of SEBI guidelines, the industry had a framework for the es¬tablishment of many more players, both Indian and foreign players
The Unit Trust of India remains easily the biggest mutual fund controlling a corpus of nearly Rs.70,OOO
crores. but its share is going down. The biggest shock to the mutual fund industry during recent times was the insecurity generated in the minds of investors re¬garding the US 64 scheme. With the growth in the se¬curities markets and tax advantages granted for in¬vestment in mutual fund units, mutual funds started becoming popular.
The foreign owned AMCs are the ones which are now setting the pace for the industry. They are intro¬ducing new products. setting new standards of cus¬tomer service. improving disclosure standards and ex¬perimenting with new types of distribution.
The insurance industry is the latest to be thrown open to competition from the private sector includ¬ing foreign players. Foreign companies can only enter joint ventures with Indian companies. with participa¬tion restricted to 26 per cent of equity. It is too early to conclude whether the erstwhile public sector mo¬nopolies will successfully be able to face up to the competition posed by the new players. but it can be expected that the customer will gain from improved service.
The new players will need to bring in innovative products as well as fresh ideas on marketing and dis¬tribution. in order to improve the low per capita in¬surance coverage. Good regulation will, of course, be essential.
Overall approach to reforms
The last ten years have seen major improvements in the working of various financial market partici¬pants. The govemment and the regulatory authorities have followed a step-by-step approach. not a big bang one. The entry of foreign players has assisted in the introduction of intemational practices and systems. Technology developments have improved customer ser¬vice. Some gaps however remain (for example: lack of an inter-bank interest rate benchmark. an active cor¬porate debt market and a developed derivatives mar¬ket). On the whole. the cumulative effect of the de¬velopments since 1991 has been quite encouraging. An indication of the strength of the reformed Indian fi¬nancial system can be seen from the way India was not affected by the Southeast Asian crisis.
However, financialliberalisation alone will not en¬sure stable economic growth. Some tough decisions still need to be taken. Without fiscal control. finan¬cial stability cannot be ensured. The fate of the Fis¬cal Responsibility Bill remains unknown and high fis¬cal deficits continue. In the case of financial institu¬tions. the political and legal structures hve to ensure that borrowers repay on time the loans they have taken. The phenomenon of rich industrialists and bankrupt companies continues. Further. frauds can¬not be totally prevented. even with the best of regu¬lation. However. punishment has to follow crime. which is often not the case in India.
