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Financial Services

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Financial Services

April, 2011

The financial sector in India includes services like broking firms, investment services, financial consulting, national banks, private banks, mutual funds, car and home loans, equity market and other banking services. Financial services have grown immensely in the last few years.

Finding India as a promising market, foreign institutional investors (FIIs) have purchased stocks and debt securities worth US$ 223.26 billion in the fiscal 2010-11, according to the latest available data with Securities and Exchange Board of India (Sebi).

Market analysts say that FII inflows into the country will continue to rise this year as well because Indian market continues to be attractive.

Average assets under management (AUM) of the Indian mutual fund industry stood at 7,036.7 billion (US$ 158.26 billion) during January to March 2011, according to the Association of Mutual Funds in India (AMFI).

India's foreign exchange reserves stood at US$ 308.2 billion as on April 8, 2011, according to the data in the weekly statistical supplement released by the Reserve Bank of India.

India has emerged as an attractive investment destination for global investors as 61 per cent of merger and acquisition deals in the first quarter of 2011 were done by foreign firms of Indian entities. The trend, going forward, is likely to heat up further. Out of the 57 deals that took place during January to March 2011, 35 deals had foreign bidders, according to merger markets, the M&A intelligence service provider in India. Energy, Insurance and Information Technology (IT) sectors accounted for most of the amount. According to merger markets, India M&A Q1 2011 round-up, cross-border deals dominate the top deals table, with four inbound and one outbound deals qualifying as the five largest deals announced in Q1 2011. As many as 57 deals totalling US$18.3 billion were recorded in Q1, 2011, a 270.6 per cent rise in value as compared to the same quarter last year.

Driven by huge investments from infrastructure and manufacturing funds, private equity (PE) firms' investments in the country reached an impressive US$ 3.3 billion in January-March, 2011. PE investments in the January-March quarter of calendar year 2011 were about 57 per cent higher than the US $ 2.1 billion registered in the year-ago period and more than double the US$ 1.5 billion investments in October-December 2010, according to data provided by Venture Intelligence.

The amount invested by PE firms in Q1 2011, was the highest since Q1 2008, according to Venture Intelligence MD and CEO Arun Natarajan. The total deal count also increased to 83 equity deals in the first quarter of 2011 from 81 deals in the corresponding period a year ago.

Moreover, upbeat by expectations of nearly 9 per cent growth in India’s Gross Domestic Product (GDP), venture capital (VC) and PE investors are optimistic that deal activity will not only continue in 2011, but also rise from 2010 levels, according to a survey by Bain and Co.

“India continues to be a very attractive destination for PE investments, locally and from abroad. Pent-up demand is poised to help propel 2011 past 2010 as an investment year,” said Sri Rajan, Managing Director of Bain in India.

As the economy grows, investors view banking and financial services, healthcare and consumer products as the most attractive sectors. Infrastructure and energy are also expected to see a strong influx of investment, with nearly 40 per cent of all PE investments in India targeting infrastructure projects, according to the report.

Investment Scenario

Foreign investors see huge long-term growth possibilities that India presents according to Ernst & Young’s 2011 Indian Attractiveness Survey. The growing corporate interest in India is explained not only by the country’s economic growth potential, but also by perceptions about how the country will change as its GDP grows over the next decade.

Seventy-five percent of the global businesses already present in India, and which formed part of the survey, indicated that they would expand their operations. The survey confirms that India is undergoing a transition, both in terms of investor perceptions of its market potential, and in reality.

“With economic growth GDP projected to surpass 8 per cent annually and the number of people in the Indian middle class set to treble over the next 15 years, with a corresponding impact on disposable income, domestic demand is expected to grow exponentially. India’s young demographic profile also helps it provide an increasingly well-educated and cost-competitive labour force. These factors put India in a good position to attract an increasing proportion of global FDI”, said Rajiv Memani, Country Managing Partner at Ernst & Young India.

Stock markets

The share of Indian equities in global market is increasing. Market capitalisation of India as a proportion of world market cap has risen to a record high. The country's market capitalisation as a proportion of the world market cap was 3.34 per cent as on September 22, 2010. India's market-cap as on September 22, 2010 was US$ 1.55 trillion as compared with world market-cap of US$ 46.5 trillion. This was higher than the 3.12 per cent share India enjoyed at the market peak of January 2008.