CRKIMR- Khandelwal Case Study (KCS) Competition- Version 2010

Title:

Theme: “Making India ready for complex financial products”

Team Name: “Optimists”

Authors:

Bhawna Sajwani
PGDM- 1st Year
Welingkar Institute of Management Development and Research
E-mail: jasleenparmar@gmail.com
Contact No: +91 9819238150

Mayank Kumar
PGDM- 1st Year
Welingkar Institute of Management Development and Research
E-mail: mayank_kumar_mittal@yahoo.co.in
Contact No: +91 9820739811
EXECUTIVE SUMMARY
As global financial markets witness a sea
change, innovation remains a key
determinant of sustainable growth. The
future of financial markets will stand on four
pillars of innovation products, market
structure, technology, and regulation. These
four pillars need to evolve from an open
competitive environment spanning the entire
spectrum of products and services. Building
on these four pillars, we can achieve
transformed economies, empowered masses,
changed and better lives and can create
immense depth in the financial ecosystem.
INDIAN MODEL: TAPPING THE
POTENTIAL
Even the well-established segment of equity
presents immense opportunities. Today, only
about 1-1,5% of the population holds demat
accounts, of which about 600,000 are active
market participants on a given day,
representing only about 0,06% of the
population. In the developed nations, this
number is as high as 30%-40%.
equities, bonds, currencies, and commodities
markets; it will greatly augment the Indian
economy and enhance the returns on our
citizens savings. If we can succeed in
routing these domestic savings to corporate
growth, it will reduce India’s dependence on
foreign investments for capital mobilization,
Also see India graduating to the status of an
international financial powerhouse; a place
where multinational companies can look to
raise capital or use as a hub for their
regional capital deployment, India has the
potential to become an exporter of capital
rather than an importer. At the same time,
we as a nation need not have any fear about
foreign investments.
As the Raghuram Committee report says,
the primary lesson of the Asian financial
crisis is not that foreign capital or financial
markets are destabilizing, but that poor
governance, poor risk management, asset
liability mismatches, inadequate disclosure,
excessive related party transactions, and
murky bankruptcy laws, make an economic
system prone to crisis.

India has immense potential, and to tap it,

we intend to develop a new India Model,
Even if we can mobilize just 10% (US$ 30
billion) of the current household savings of
US$ 305 billion and channelize it into WHAT FUTURE STORES FOR INDIA
Convergence of value across asset classes
and geographies through modern tech-
centric financial markets is the cornerstone
for effective and efficient risk management.
This will minimize price volatility and
enhance value creation over time. Despite
the current trade contraction, the multiple
forces of globalization will continue to
integrate economies and reshape the world
economic order. Cross-listing,
clearing of products, global accessibility,
cross-margining, technology intensive
trading, and leveraging across time zones
will foster fund flows and liquidity. Change
always demands fresh thought. Market
reforms will involve strengthened capital
requirements for complex financial
instruments and derivatives, stringent new
rating norms without any conflicts of
interest, .greater transparency and strict
adherence to disclosure norms by all
financial players and counterparties. These
will become the essentials for the financial
market in India in the near future.
In April 2009, heads of nations at G-20
Summit in London highlighted some of
these measures for the future of financial
markets. While there is a thought about
moving towards a robust regulatory regime,
one needs to be wary of over-regulation, as
it might become a deterrent for growth. The
September 2008 report, titled A Hundred
Small Steps, by the Committee on Financial
Sector Reforms (CFSR) headed by Professor
Raghuram G.Rajan, under the aegis of the
Planning Commission, corroborates this
belief and cautions, .strict regulations on
participation are no guarantee that risks are
contained, in fact they may create additional
sources of risk,
cross- CONNECTING MARKETS THROUGH
EXCHANGES
As the world gets flatter, markets will be
better connected. Global operations and
network of exchanges will bring economies
of scale, and enable it to manage and
mitigate global risks on a real-time basis.
Thorough analysis reveals that exchange-
traded products provide an inherent
advantage over off-exchange or over-the-
counter (OTC) products. The former offer
mark-to-market valuation, clearing house
guarantee, fungibility, lower impact cost,
and higher liquidity—all without any
associated counterparty risk. They are
transparent and operate under proven
regulatory supervision.
The crux lies in leveraging the advantages of
these exchange traded products and building
value for all its stakeholders by creating new
exchanges, new markets, new products and also bring in innovations to offer a platform
investing in strategic geographies while for SMEs, and introduce new equity and
focusing on promoting an interconnected debt market products. MCX stock Exchange
and sophisticated marketplace, true value has already initiated its demutualization
ensues when we build on the four pillars of process by offering equity participation to
innovation, and create a trading platform strategic investors including leading
which can cater to the needs of all market domestic and international institutions,
participants. banks and stock exchanges.

Following are milestones covered by MCX

The Indian financial market is increasingly
 MCX was ranked the fourth-largest
underpinned by technology that creates,
commodity exchange in Asia by
integrates, innovates, drives, and makes
Futures Industry Association (FIA),
markets more accessible to everyone. It is a
Washington DC; it is also the
well known and proven fact that exchanges
seventh- largest commodity
based on such technology offer transaction
exchange in the world
platforms that are fast, secure, transparent,
and regulated.  MCX, in August 2008, became the
first Indian commodity exchange to
receive membership of the
MCX: A SUCCESS IN INDIA
International Organization of
MCX have promoted a new-generation
Securities Commission (IOSCO).
stock exchange, MCX Stock Exchange,
 MCX Stock Exchange, which
which currently offers currency derivatives
commenced operations in October
trading, and is poised to offer equity,
2008, has already established itself
exchange-traded interest rate derivatives and
as the leading exchange in the
other exchange-traded financial products.
currency derivatives segment, with
around 50% market share (as on
The new exchange has sought the regulators
March 2009) and daily average
permission to facilitate trade in equity (cash
volume of 261,820 contracts valued
and F&O) and interest rate derivatives.
at Rs 13 billion.
Going forward, MCX stock Exchange will
  MCX Stock Exchange has initiated
its - divestment process to meet
regulatory guideline on shareholding
in exchanges. The Exchange has
already placed its equity through
primary and secondary market
placements to a clutch of Indian
banks and financial institutions,
respectively.
NEED OF SECURTISATION IN
INDIA[ CITATION Rag08 \l 1033 ]
Trade credit is a critically important source
of finance for Indian firms across the board.
For all firms together, the share of trade
credit in total corporate financing has grown
steadily from 7.25 percent to almost 16 per
cent during 2001–05.
In 2005, it was the biggest funding source.
Further, the proportion was much higher
(26percent) for SME’s. SMEs could reduce
their investment in working capital, and thus
their need for finance, significantly if the
receivables due to them from large firms
could be securitized.
In principle, such receivables, if accepted,
are essentially commercial paper with the
high credit ratings of the large firms.
Further, if the SME can securitize and sell
its receivable claim, its resulting smaller and
better capitalized balance sheet would
improve its credit worthiness.
Though the securitization process is similar
to factoring, it could be more cost effective
than bank funding, factoring, and letters of
credit. This is an innovative way to look at
complex instrument like securitization;
which could be an important way of
refinancing small and medium lenders such
as cooperatives in rural and semi-urban
areas, as is already the case in urban areas.
BRING INNOVATION THROUGH
FINANCIAL ENGINEERING
Financial engineering is, in essence, the
phenomenon of product and/or process
innovation in the financial industries - the
development of new financial instruments
and processes that will enhance
shareholders', issuers' or intermediaries'
wealth. It can be classified into three
principal types of activities: securities
innovation; innovative financial processes;
and creative solutions to corporate finance
problems.
 All these innovations are implemented
using a few basic techniques, such as
increasing or reducing risk (options, futures
and other more exotic derivatives), pooling
risk (e.g. MUTUAL FUNDS), swapping
income streams (interest rate swaps),
splitting income streams ('stripped' bonds),
and converting long-term obligations into
shorter-term ones or vice versa (maturity
NEW CHALLENGES BRING NEW
transformation). But to be truly innovative, a
OPPTURNITY
new security or process must enable issuers
or investors to accomplish something they Subprime crisis has shaken the entire world.
could not do previously, in a sense making Many Economists believe that 2008
markets more efficient or complete. recession was magnified on account of
complex instruments like Collateralized debt
BIGGEST CHALLENGE: FINANCIAL
obligations (CDOs). But what went wrong is
LITERACY
underestimating the lying blunder of
Significant investment in financial literacy is securitization of sub-prime loans. Lessons
required if the poor are to make effective use are learnt and underlying problems are
of various initiatives to foster financial understood. It is believed that India was
inclusion. A good understanding of the costs unaffected because of its conservative
and benefits of various financial services, economy
the impact of inflation on savings, and the
The Indian economy is breathing again.
trade-off between risk and return can help
Riding on the back of resilient domestic
households choose the right products for
demand, the Indian economy recorded a
their needs and weed out dubious schemes
better than expected growth rate of about
from truly beneficial ones. This will
6% in the fourth quarter of 2008-09. The
encourage common man as they understand
economy grew by an aggregate of 6.7% for
the market dynamics, risk involved and
the fiscal 2008-09. Formation of the new
returns. This change will lead to increase in
government at the Centre has boosted the
demand of financial instruments and thus the
confidence level of industries, and with
supply in generally risk averse Indian
falling interest rates, controlled inflationary
society. Today when Indians are getting
pressures, thrust on rural development and
exposed to impact of global economy and
the infrastructure sector getting the attention
higher education there is increased
it deserves, there is a new-found optimism
awareness of markets and returns which is a
on the economic outlook and the future of
sign for shoot up of demand of such
financial markets in India. The Economic
financial instruments.
Survey, released in July 2009, projects In India, today, the bond market is still at an
India’s GDP growth at an average 9% per incipient stage. The Raghuram Committee
annum for the next few years. report of September 2008 validates the case
for development of the bond market in India,
The vision of various companies spread
It recommends, a corporate bond market
across varied sectors is to continue to build a
could serve as a useful buffer between
strong and. profitable network of exchanges;
financial institutions and be an important
to expand and provide liquidity and risk
source of stability in the current
management solutions to the developing and
environment,
emerging economies; and identify national
and regional markets for their products
through the interface of Indian financial INDIAN FINANCIAL MARKET VALUES

market. Introduction of trading in new asset

classes on its efficient tech-centric exchange The Indian financial market has tremendous

platforms in different regions as a part of the value and potential in today’s rapidly

market structure innovation, the SEBI changing global financial scenario. India,

vigorously pursues its avowed mission of apart from being an excellent investment

increasing access to markets by creating and paradise, also provides opportunities to a

operating exchanges that cater to the needs wide spectrum of companies spread over

of the micro, small and medium enterprise various sectors to expand and grow. The

(MSME) segment of the economy. monetary policy adopted by the RBI is in

complete compliance with the market
scenario and the government has also helped
The financial system develops efficient
by rolling out a comprehensive fiscal
markets in diversified asset classes such as
stimulus. Although a lot of due credit must
equities, interest-rate derivatives, credit
be given to the stringent norms followed by
default swaps, cross-currency derivatives,
Indian banks when it comes to issuing loans,
bonds, etc., depending on the regulatory
but still India has been mostly successful in
framework of respective countries. It will
keeping itself away from the after effects of
continue to tap new opportunities to develop
the asset bubble. Although India is running a
such markets
huge fiscal deficit currently, still rupee is
aptly stable compared to the US dollar.
A huge role is played the financial products
which have contributed immensely in the
smooth functioning of the Indian financial
market. Proper awareness, appropriately set
norms, rules and regulations by SEBI has
also reduced the friction and confusion in
the market which has lead to appropriate
understanding of the market structure and
research. Therefore, it can be safely
concluded that new financial products will
definitely enhance value of the Indian
financial market.