MERCHANT BANKING
History
Merchant banks, now so called, are in fact the original "banks". These were invented in the Middle Ages by Italian grain merchants. As the Lombardy merchants and bankers grew in stature on the back of the Lombard plains cereal crops many of the displaced Jews who had fled persecution after 613 entered the trade. They brought with them to the grain trade ancient practices that had grown to normalcy in the middle and far east, along the Silk Road, for the finance of long distance goods trades.
The Jews could not hold land in Italy, so they entered the great trading piazzas and halls of Lombardy, along side the local traders, and set up their benches to trade in crops. They had one great advantage over the locals. Christians were strictly forbidden the sin of usury. The Jewish newcomers, on the other hand, could lend to farmers against crops in the field, a high-risk loan at what would have been considered usurous rates by the Church, but did not bind the Jews. In this way they could secure the grain sale rights against the eventual harvest. They then began to advance against the delivery of grain shipped to distant ports. In both cases they made their profit from the present discount against the future price. This two-handed trade was time consuming and soon there arose a class of merchants, who were trading grain debt instead of grain.
It was a short step from financing trade on their own behalf to settling trades for others, and then to holding deposits for settlement of "billete" or notes written by the people who were still brokering the actual grain. And so the merchant's "benches" (bank is a corruption of the Italian for bench, as in a counter) in the great grain markets became centers for holding money against a bill (billette, a note, a letter of formal exchange, later a bill of exchange, later still, a cheque).
These deposited funds were intended to be held for the settlement of grain trades, but often were used for the bench's own trades in the meantime. The term bankrupt is a corruption of the Italian banca rotta, or broken bench, which is what happened when someone lost his traders' deposits. Being "broke" has the same connotation.
A sensible manner of discounting interest to the depositors against what could be earned by employing their money in the trade of the bench soon developed; in short, selling an "interest" to them in a specific trade, thus overcoming the usury objection. Once again this merely developed what was an ancient method of financing long distance transport of goods.
Islamic banking has the same constraints against usury as Christianity and from the same old testament notions. Whether the insistence that money cannot be earned from deposits held as debt will be relaxed as Islam ages and matures is unknown.
The medieval Italian markets were disrupted by wars and in any case were limited by the fractured nature of the Italian states. And so the next generation of bankers arose from migrant Jewish merchants in the great wheat growing areas of Germany and Poland. Many of these merchants were from the same families who had been part of the development of the banking process in Italy. They also had links with family members who had, centuries before, fled Spain for both Italy and England.
This course of events set the stage for the rise of banking names which still resonate today: Schroders, Warburgs, Rothschilds, even the ill-fated Barings, were all the product of the continental grain trade, and indirectly, the early Iberian persecution of Jews.
Modern practices
The definition of merchant banking has changed greatly since the days of the Rothschilds. The great merchant banking families dealt in everything from underwriting bonds to originating foreign loans. Bullion trading and bond issuing were some of the specialties of the Rothschild family. The modern merchant banks, however, tend to advise corporations and wealthy individuals on how to use their money. The advice varies from counsel on M&A to recommendation on the type of credit needed. The job of generating loans and initiating other complex financial transactions has been taken over by investment banks and private equity firms.
Today there are many different classes of merchant banks. One of the most common forms is primarily utilized in America. This type initiates loans and then sells them to investors (Fitch 2000). Even though these companies call themselves "Merchant banks," they have few if any of the characteristics of former Merchant banks.
A more traditional form of Merchant bank is not as widely used. This genre of merchant banking is seen in companies such as Blackstone Group [1], LCF Rothschild Group [2], Chinavest [3]and Goldman Sachs [4]. Their activities include private banking, fund management, and advisory services. Though these organizations are holding companies, their operations are essentially those of the original Merchant banks.
FINANCIAL SERVICES
Financial sector
he Indian financial sector is in for an overhaul. Financial sector reforms have long been regarded as an integral part of the overall policy reforms in India. India has recognized that these reforms are imperative for increasing the efficiency of resource mobilization and allocation in the real economy and for the overall macroeconomic stability. The reforms have been driven by a thrust towards liberalization and several initiatives such as liberalization in the interest rate and reserve requirements have been taken on this front. At the same time, the government has emphasized on stronger regulation aimed at strengthening prudential norms, transparency and supervision to mitigate the prospects of systemic risks. Today the Indian financial structure is inherently strong, functionally diverse, efficient and globally competitive. During the last fifteen years, the Indian financial system has been incrementally deregulated and exposed to international financial markets along with the introduction of new instruments and products.
Banking Sector:
The banking sector is the most dominant sector of the financial system in India. Significant progress has been made with respect to the banking sector in the post liberalization period. The financial health of the commercial banks has improved manifolds with respect to capital adequacy, profitability, asset quality and risk management. Further, deregulation has opened new opportunities for banks to increase revenue by diversifying into investment banking, insurance, credit cards, depository services, mortgage, securitization, etc. Liberalization has created a more competitive environment in the banking sector. The aggregate foreign investment (FDI plus FII) limit for the private sector banking has been raised to 74 percent in the recent country budget. The competition has increased within the banking sector (with the emergence of new private banks and foreign banks) as well as from other segments of the financial sector such as mutual funds, Non Banking Finance Companies, post offices and capital markets.
Capital Market:
India has a long tradition of functioning capital markets. The Bombay stock exchange is over a hundred years old and the volume of activity has increased in the recent years. The process of reform of capital markets started in 1992 and aimed at removing direct government control and replacing it by a regulatory framework based on transparency and disclosure. The first step was taken in 1992 when SEBI was elevated to a full-fledged capital market regulator.
An important policy initiative in 1993 was the opening of capital markets for foreign institutional investors and allowing Indian companies to raise capital abroad. FII registrations in the country have gone up significantly over the years. The number of registered FIIs has gone up from 823 in December 2005 to 972 in October 2006. FIIs had made $10.7 billion worth of investment (Rs 47,181 crore) in calendar 2005. The FIIs have been rewarded well by attractive valuations and increasing returns. The depository and share dematerialization systems have been introduced to enhance the efficiency of the transaction cycle.
A number of significant reforms have been implemented in the spot equity and related exchange traded derivatives markets since the early 1990s. For instance, spot prices are mostly market-determined, trading volumes in the derivatives market exceed those in spot markets and market practices such as speed of settlement and dematerialization are close to international best practices.
Insurance Sector:
There exists huge scope of investment in the insurance sector in India. India has an enormous middle-class that can afford to buy life, health and disability and pension plan products. Further, insurance is one of the most important tax saving instrument in the country.
Insurance sector has been opened up for competition from Indian private insurance companies with the enactment of Insurance Regulatory and Development Authority Act, 1999 (IRDA Act). As per the provisions of IRDA Act, 1999, Insurance Regulatory and Development Authority (IRDA) was established on 19th April 2000 to protect the interests of holder of insurance policy and to regulate, promote and ensure orderly growth of the insurance industry. IRDA Act 1999 paved the way for the entry of private players into the insurance market, which was hitherto the exclusive privilege of public sector insurance companies/ corporations. Under the new dispensation Indian insurance companies in private sector were permitted to operate in India on the fulfillment of certain prerequisites. A large number of public and private players are competing today in both life and general insurance segments. The FDI cap/ Equity in the insurance sector is 26 percent under the automatic route subject to licensing by the insurance regulatory and development authority.
Some of the major private players in the sector are:
In Life insurance Sector:
· Bajaj Allianz Life Insurance Corporation
· Birla Sun Life Insurance Co. Ltd. (BSLI)
· HDFC Standard Life Insurance Co. Ltd. (HDFC STD LIFE)
· ICICI Prudential Life Insurance Co. Ltd. (ICICI PRU)
· ING Vysya Life Insurance Co. Pvt. Ltd. (ING VYSYA)
· Max New York Life Insurance Co. Ltd. (MNYL)
· MetLife India Insurance Co. Pvt. Ltd. (METLIFE)
· Kotak Mahindra Old Mutual Life Insurance Co. Ltd. SBI Life Insurance Co. Ltd. (SBI LIFE)
· TATA AIG Life Insurance Co. Ltd. (TATA AIG)
· AMP Sanmar Assurance Co. Ltd. (AMP SANMAR)
· Aviva Life Insurance Co. Pvt. Ltd. (AVIVA)
· Sahara India Life Insurance Co. Ltd. (SAHARA LIFE)
· Shriram Life Insurance Co. Ltd
In General Insurance sector:
· Bajaj Allianz General Insurance Co. Ltd. (BAJAJ ALLIANZ)
· ICICI Lombard General Insurance Co. Ltd. (ICICI LOMBARD)
· IFFCO Tokyo General Insurance Co. Ltd. (IFFCO TOKIO)
· Reliance General Insurance Co. Ltd. (RELIANCE)
· Royal Sundaram Alliance Insurance Co. Ltd.
· TATA AIG General Insurance Co. Ltd. (TATA AIG)
· Cholamandalam MS General Insurance Co. Ltd.
· HDFC Chubb General Insurance Co. Ltd. (HDFC CHUBB)
Venture Capital:
India is prime target for venture capital and private equity today, owing to various factors such as fast growing knowledge based industries, favourable investment opportunities, cost competitive workforce, booming stock markets and supportive regulatory environment among others. The sectors where the country attracts venture capital are IT and ITES, software products, banking, PSU disinvestments, entertainment and media, biotechnology, pharmaceuticals, contract manufacturing and retail. An offshore venture capital company may contribute upto 100 percent of the capital of a domestic venture capital fund and may also set up a domestic asset management company to manage the fund. Venture capital funds (VCFs) and venture capital companies (VCC) are permitted upto 40 percent of the paid up corpus of the domestic unlisted companies. This ceiling would be subject to relevant equity investment limit in force in relation to areas reserved for SSI. Investment in a single company by a VCF/VCC shall not exceed 5 percent of the paid up corpus of a domestic VCF/VCC. The automatic route is not available.
Financial services (banking and non-banking)
Promising sub-sectorsCapital markets / Venture banking
Consumer financing / Mutual funds
Infrastructure financing
Just opened up!
Insurance
· India has one of the most developed financial markets in the developing world. Tremendous scope exists for both banking and non-banking financial institutions from other countries. The insurance sector, nationalised suinmce 1971, has been opened up according to an announcenebt made in November 1998. A legislation to to this effect is expected by early 1999.
· Top companies from the United Kingdom and the United States among others are already active in India's financial markets. markets. Some of the big names are: Merrill Lynch, Oppenheimer, J.P. Morgan, Morgan Stanley, Grindlays, Standard Chartered, Hong Kong and Shanghai Banking Corporation among others.
· Foreign institutional investors (FIIs) have been allowed to invest in the stocks and securities markets with rights of full repatriation and withdrawal. Their presence has added a new dynamism to the market.Click here to view opportunities for foreign investors in Indian stock markets
· India already has foreign exchange reserves of US$27 billion which is considered very comfortable, but the country needs to use foreign skills and networks to be able to manage the huge sums for its development needs.
· Local financial Institutions such as the Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Finance Corporation of India , Unit Trust of India and the Shipping Credit and Investment Corporation of India have raised billions through the most sophisticated financial instruments including Deep Discount Bonds.
· Indian firms are showing increasing liking for Global Depository Receipts (GDR) listed in London. American institutions are trying to promote American Depository Receipts (ADR) listed in New York.
· After much dithering, India has finally opened up the insurance sector to private and foreign investors.
Financial Services
The banking sector witnessed strong growth in deposits and advances during the year 2004-05. As of March 2005, the number of commercial banks stood at 289. The aggregate deposits of scheduled commercial banks increased from US$ 331 billion in March 2004 to US$ 374 billion in March 2005. Credit of commercial banks in India saw an increase from US$ 185 billion in March 2004 to US$ 242 billion in March 2005. Investments of scheduled commercial banks (SCBs) also saw an increase from US$ 149 billion in March 2004 to US$ 162 billion in March 2005.