An idea at midnight and some after thoughts…

08 Dec 09 An idea at midnight and some after thoughts…

Few days ago a high school buddy of mine called me (woke me up rather) from the U.S at the middle of the night to ask and discuss his idea of doing business in India. He is a tech geek and his business idea is about creating a comprehensive online financial intermediation platform. My friend sounded convinced of the derived demand from the future capital resources calling to be arranged, managed, assured and advised. Although half asleep, I managed to carry on a sounding-to-be-knowledgeable conversation, talking about the legal aspects and licensing (read hurdles and delays), competition, corporate governance etc. He was particularly interested about licensing and competition since he thought I could add some on-the-ground knowledge to his already well-done homework.

The Joshua Tree effect

Financial intermediation segment Number of new applications during 2009
Stock Brokers

27

Merchant Bankers

10

Mutual Funds

5*

Foreign VCs

12

Portfolio Managers

23

A couple of days later, I had to go to the Mumbai airport and during the way I kept on thinking (and looking around for clues) about what my friend had mentioned. And I realized that financial intermediation could indeed be a big thing in India. I

passed by many larger than life billboards carrying advertisements of the financial intermediaries (that usually carry FMCG ads). And I am not talking about the ICICIs or the Morgan Stanleys but the second rung or emerging players that are expanding aggressively. Also the new entrants in the Indian market. Even on the television or over the internet you will get to see these names flashing over. And then you realize it is ubiquitous, from railway platforms to the on-the-street-light-banners, retail malls to bus stands. I have compiled a list of the number of fresh applicants for financial intermediation during this year, and most of these applications have been made since May 09 by a mix of foreign and Indian entities.

Source: SEBI

* There are more than 14 other asset managers that had earlier applied for a license and had stalled their plans during the financial crisis that have now evinced fresh interest. Some of them have already received in-principle nod from SEBI recently.

The measure of business attractiveness of India

The opportunity aspect is fine. But what about the enabling environment? More so for a foreign investor looking to do business in India. While looking for a comprehensive online source of information on Indian business environment I came across this FICCI initiative called indiainbusiness.nic.in and I was heartened to find a resourceful, updated government website on the legal, procedural and related aspects of doing business in India. And I think this will well supplement ibef.org in promoting the India information.

The Ease of Doing Business Index (the World Bank’s Doing Business project initiative that publishes quantitative measures of business environment in its 182 member countries) shows a consolidated ranking of the Indian attractiveness for doing business at 133. So are we so unattractive (there are 132 countries that rank above us)? There are some other measures including Economist Intelligence Unit’s Business Environment Ranking and Heritage Foundation’s Index of Economic Freedom (that measure business freedom, trade freedom, investment freedom, property rights etc) that similarly down rated India among the featured countries. But if we look at the swelling capital flows through the FII and FDI routes, it might tell a different story. Also, think how India sill remains at the top of the preferred destinations for IT and other process offshoring (Cost is no longer the prime driver).

Conflicting data and rankings exist and it would take much more on-the-ground research to take an informed decision. More over, these indices are not complete guides as they are biased in basing the outcome on few of the influencing factors in their attempt to make the measures universal. Moreover, their rating methodologies differ and are at best only indicative. Now I know why my friend got lost in the sea of seemingly-contradicting information. And I am glad he is visiting India next month to take a closer look at the actual state of things.

Where do we go from here?

Coming back to financial intermediation, is the increasing competition an indicator of something big? Is this a harbinger of things to come? Well, I am trying to look beyond the product sophistication and pricing benefits for the consumers. Will this translate into financial inclusion as competing players try to increase the access to capital markets and investment products? Only time will tell. All I hope is that this growing interest in the Indian financial services market will help generate (and redistribute) broad based wealth in the years to come rather than help the fraudsters perpetrate another financial scam at the cost of gullible retail investors.

Ribhu Ranjan Baruah

Ribhu was a project manager at ValueNotes, managing a team that met the research needs of a global investment management firm. He has since moved on to pursue opportunities in impact investing.

1Comment
  • Sau Kriegshauser
    Posted at 06:27h, 20 November Reply

    Really good article. I really could not have detailed this better. I am not sure if every person will agree with you, nonetheless it probably makes no difference. Continue the excellent work.

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