The origins of India’s financial services sector go back before Independence, but the origins of reforms and changes that have shaped it into what it is today coincide with our economic journey from 1991. When India gained independence, disorder ruled in almost every segment. In life insurance, for instance, there were around 200 insurers and little accountability. Defaults and disappearances were common. In 1956, to regulate insurers and protect individuals, the government in line with its socialist ideology took over the operations of the 245 life insurers and set up Life Insurance Corporation (LIC). Similarly, general insurance was nationalised in 1972, when 107 insurers were merged to form General Insurance Company (GIC) and its four subsidiaries. Along with bank deposits, life insurance policies — which provided both insurance and investment products — were the top investment choices for households. Not stocks, as private enterprise was stifled, and there weren’t too many listed companies. Not mutual funds (MFs) which debuted only in 1964 with Unit Trust of India (UTI) and US-64, a monopoly that stayed till 1987. Gradually, stocks caught the imagination of the public, and once again it was the government flexing its control fingers. In the early 1970s, the government, under the now-defunct Foreign Exchange Regulation Act (Fera ), made it mandatory for multinational companies (MNCs) operating in the country to sell 40 per cent of their equity to the public. Many investors, who sought and held on to those shares into the 1990s, created tremendous wealth as several of these companies were leaders in their respective fields and issued dividends, bonuses and rights issues liberally. MNCs cultivated the equity habit but it was Dhirubhai Ambani and Reliance Industries, which first went public in 1977, that made stocks a household name. In the 1980s, the number of companies listed on Indian exchanges nearly trebled, from 2,265 to 6,229. The number of stock exchanges grew to 23 in the early 1990s but were devoid of transparency. Says Society for Capital Market Research and Development director L C Gupta: “The price brokers would tell investors they had bought their shares at would be the highest for the day. For sales, it would be the lowest. Investors couldn’t tell and brokers made extra profits.” As the first winds of liberalisation blew and Harshad Mehta played Pied Piper on the stock markets, chaos broke out. The markets crashed; fly-by-night companies and intermediaries decamped with initial public offer (IPO) funds and investors’ wealth. Characteristically, it took a crisis to make the markets safer and pave the way for good practices. Market regulator Securities and Exchange Board of India (Sebi ) was born in this backdrop. Perhaps the biggest change agent was the formation of the National Stock Exchange (NSE) in 1994, which revolutionised the way investors bought and sold shares, and wiped out inefficient and opaque regional exchanges. Screen-based trading replaced the open outcry system, settlement cycles were reduced from 15 days to a day, electronic entries replaced share certificates. At the turn of the century, investors were trading in derivatives — over the Internet from home. Competition also changed the mutual fund and insurance sectors, for the better. Here, competition was the outcome of privatisation. Private fund houses, on the strength of performance and services, not only weaned away investors from public sector players but also drew in new investors. They set the standards in customer orientation, forcing even public players to shape up. Today, most mutual funds offer a suite of products to investors — from replicating market indices (index funds) to investing in gold in demat form (gold funds), from cashing in on differentials in the cash and futures market (arbitrage funds) to investing in other emerging markets (overseas funds). Coming up are real estate funds. Says Bajaj Capital managing director Rajiv Deep Bajaj: “New asset classes will increase the percentage of household savings coming to the market from the current 4 per cent to 10 per cent.” Similarly, after the two insurance segments were opened up to private insurers in the year 2000, products and services improved. Pure life cover is now readily available. Unit-linked insurance plans (Ulips) are more transparent than endowment and money-back plans, though they still have their shortcomings. In the non-life space, the freedom insurers have to price their products has progressively increased, and complete decontrol is just one step and less than a year away. Come April 1, 2008, insurers will also be able to change the terms and conditions of a policy. Change has, however, eluded one sector, pensions, though it’s only a matter of time before that too alters. The Employees’ Provident Fund (EPF), set up in 1952, remains the government’s sole retirement planning offering but covers only employees in the organised sectors. However, this can hardly work as a pension product as it is full of loopholes, which make it easy for members to dip into the fund even before retirement. EPF and government pension together cover only 13 per cent of the work force and the mounting liabilities from their “defined benefit” nature are a big drain on the Exchequer. The New Pension System (NPS), which was envisaged in 2000 to cater to both government servants and the remaining 87 per cent work force, is based on a “defined contribution” system and allows subscribers to decide the asset allocation pattern for their retirement funds. After much plodding, the government is on the verge of starting operations for government employees who joined service after January 1, 2004, with SBI, LIC and UTI Mutual Fund as fund managers. However, all other citizens of the country will have to wait for the Pensions Bill, which is stuck because a section of parliamentarians likes guarantees and dislike stocks, to be cleared. Once the Pensions Bill goes through, it will signal the completion of big-bang reforms in the personal finance space. THE PERSONAL FINANCE TIMELINE 1952: Employees Provident Fund formed 1956: Life Insurance Corporation formed 1964: Unit Trust of India is India's first mutual fund 1971: Family Pension System linked to EPF 1972: General Insurance Corporation and its four subsidiaries formed 1973: Passage of Fera forces MNCs to go public 1977: Dhirubhai Ambani takes Reliance Industries public, makes history 1980: Number of stock exchanges increases from nine to 20 1987: PSUs enter mutual funds 1991: Indian economy starts to open up 1992: Harshad Mehta fuels equity cult, busted 1992: Sebi set up to regulate capital market 1993: Private entry into mutual funds allowed 1994: NSE set up and electronic trading commences on NSE 1995: Family pension system replaced by Employees pension system 1996: NSDL brings in dematerialisation 2000: Insurance Regulatory & Development Authority formed 2000: New Pension System proposed 2007: Non-life insurance gets de-tariffed in motor, fire and marine segments 2007: PFRDA appoints fund managers and a CRAto manage funds of government employees
