Current Economic Statistics and Review For the Week 
Ended April 2, 2005 (14^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

CORPORATE SECTOR

Policy issues
The JJ Irani committee, appointed by the government to suggest changes in the Companies Act, has recommended that companies should mandatorily take insurance cover on deposits accepted by them. This is expected to protect small depositors who are currently treated as unsecured creditors and who find it difficult to recover their money in case of company defaults. 

Domestic ventures
Petroleum
Oil & Natural Gas Corporation (ONGC) has roped in the Hinduja group for implementation of its Rs 25,000 crore project involving an LNG terminal, power plant and petrochemicals complex. 

India’s state-owned oil companies have so far been largely confined to selling just petroleum products. But that is about to change. Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) want to service cars and trucks by setting up service stations. These authorized service stations will not only offer services to customers but also give genuine spare parts.

The bio-diesel pilot project of Indian Oil Corporation (IOC) entails usage of 10 per cent blended bio-diesel fuel for its 43 staff buses. Bio-diesel can only be used in blended form.

Energy
The Rs 11,000 crore proposal of Reliance Energy Generation for setting up a multi-product special economic zone near Dadri in Uttar Pradesh has been cleared by the Board of Approval under the Commerce and Industry Ministry. 

Tata Power Company (TPC) has entered into a 74:26 joint venture with Damodar Valley Coproation (DVC) for a proposed 1,000 MW project in Jharkhand. This agreement is the first initiative in public-private partnership in the area of generation under the provisions of the Electricity Act 2003.

Airline
Royal Airways Ltd plans to raise funds to support the financing of the fleet and route expansion plans of its low cost service, Spicejet. As a part of this move, the company, which is listed on the Bombay Stock Exchange, is looking at a second public offer. 

Air Deccan, the country’s first of budget airlines, has charted out a mega expansion plan. The company plans to set up two new simulators at a total investment of around $ 25 million for its Airbus and ATR fleet. 

Others
Hindalco Industries Ltd, the flagship company of the Aditya Birla Group, signed a memorandum of understanding with the Jharkhand government for setting up an aluminium smelter project of capacity of 3,25,000 tonne per year with a 600 mw captive thermal power plant in Jharkhand. The total investment in the project would be about Rs 7,800 crore. 

Pharmaceuticals major Dr Reddy’s laboratories has entered into an $ 56 million deal with ICICI Ventures for the development and commercialization of abbreviated new drug applications to be filed in the next two years. For the first time, a private equity investor will be funding a company’s drug development plans, which are largely focused on the US generic drugs market. 

ITC will invest 20-30 per cent of its Rs 14,000 crore investment, translating to Rs 2,800-Rs 4,200 crore, in its tobacco business. The company has allocated 20-30 per cent of its investment in tobacco business and the capital expenditure would go towards technology upgradation and enlargement of existing facilities. 

IT solutions provider Satyam Computer Services anticipates a capital expenditure of $ 40 million during the calendar year 2005 for its expansion activities. 

ITC Ltd will invest Rs 14,000 crore to expand existing businesses, acquire suitable ventures and modernize plants in the next five years in keeping with the Vision 2010 policy chalked out by the company ahead of its centenary in that year.

Joint ventures with international partners within India
State-owned companies Saudi Armaco and Indian Oil Corporation (IOC) have begun discussion on setting up of the storage facility in India. The commercial storage facility would be owned by Saudi Aramco and IOC jointly while the crude would be owned by the Saudi company. 

Oil India (OIL) plans to join hands with a foreign exploration company to explore for oil and gas in the thrust belt in Assam and Arunachal Pradesh.

After receiving approval for the 2000 megawatt Subansiri hydro project from a high-powered inquiry panel, state-run National Hydroelectric Power Corporation signed the agreement for the Rs 1,600 crore contract with French major Alstom. 

Textile major Raymond signed a Rs 200 crore deal with Italian company Gruppo Zambaiti to jointly set up a greenfield facility in Maharashtra for manufacturing cotton-shirting fabric. 

Ventures by International companies in India
DSP Merrill Lynch is planning to set up a wholly-owned subsidiary in the form of a non-banking finance company (NBFC). 

Gulf Oil Corporation has tied up with the US-based Graco Inc to distribute and market their lubrication systems in India. 

Pepsi Co will invest $ 300-500 million in India over the next three to five years and take Kurkure, the snack food it has developed in India, to overseas markets like the US, UK, Australia, South Africa and West Asia, which have large populations of Indians. At present the company has over a half a million. The company is planning to triple the business in the next 3-4 years. With 60 per cent of this investment will go into beverages, the remaining 40 per cent will be in snack foods.

TVS Motor Company has launched its entry level 4–stroke motor-cycle, TVS Star, in Maharashtra. 

Royal Philips Electronics is investing euro 2.5 million to launch its new brand campaign ‘sense and simplicity’ in India. In two weeks, Philips India will launch the campaign, which is in line with its parent company’s changing image to become market-led. 

Cognizant Technology Solutions will scale up its infrastructure for outsourcing related business in Chennai and set up its first tier-two city development facility in Coimbatore, as part of its $ 76 million expansion. It will construct a complex in Siruseri (near Chennai) and also build a software development block on a six acre area adjacent to its existing complex in Thorapakkam. 

The Switzerland-based Signity, a player in exact-cut gemstones, is making a foray into the Indian jewellery market. It has approached the Foreign Investment Promotion Board (FIPB) for setting up a wholly-owned subsidiary to carry out wholesale ‘cash and carry’ trading in gemstones, cubic zirconia (American stones), synthetic stones, alpinites and components. 

International ventures by Indian companies
Saudi Aramco, the world’s largest oil firm, has offered Indian companies a stake up to 50 per cent in its upcoming Yanbu Refinery on the Red Sea and is keen on building crude oil storages in India. 

Indian Hotels is set to acquire a hotel in New York. 

Tata Motors was in talks with a Thai partner to set up a plant to assemble pickup trucks in Thailand. A factory in Thailand will give the company a foothold in a region with a combined population of 500 million people. 

Bharat Petroleum Corporation Ltd (BPCL) is planning to expand its retail business to south Asian countries starting with petroleum retailing Singapore. It’s first overseas foray – into Sri Lanka – is caught in a trade union issue. It planned to run 100 retail outlets in Sri Lanka – earlier being owned by Ceylon Petroleum Corporation – has been delayed. Sri Lankan government is trying to find way forward. BPCL is targeting the Singapore market through acquisitions. 

Tamilnadu Petroproducts plans to invest about Rs 1,750 crore to build linear alkyl benzene (LAB) plants in Singapore and Saudi Arabia in a bid to get about 10 per cent of the global market share and enhance its competitiveness. The Singapore venture would be followed in a year by another plant in Saudi Arabia, in association with the Al Zamil group. 

Company issues
Legislative matters
The department of telecommunications opposed a proposal of the Singapore Technologies Telemedia (STT) and TM International (TMI) consortium to acquire 47.7 per cent stake in Idea Cellular. At a meeting of the Foreign Investment Promotion Board (FIPB), the department’s representatives said STT was wholly owned by Singapore-based Temasek Holdings. Temasek also owns 63 per cent of Singapore Telecom (SingTel), which is the largest shareholder in Bharti Televentures with a 28.22 per cent stake.

The settlement of the dispute over the ownership of the Reliance group between the two brothers Reliance Industries Chairman and Managing Director Mukesh D Ambani and Reliance Industries Vice-Chairman and Managing Director Anil D Ambani - would take three or four months, but both sides seem to have dropped demands for a non-complete clause and have instead tacitly agreed that they will not enter each other’s areas of business for five years.

Financial institutions (FIs) have found the UB group’s offer to buy out the controlling stake in Shaw Wallace & Company (SWC) from the promoters at a higher price and a subsequent open offer, meant for minority shareholders, at a lower price , as “unfair”.

The company law board (CLB) has ordered an investigation into the Usha group following a petition filed by the Industrial & Financial Corporation of India (IFCI) charging the management with fraud and siphoning off funds. 

Maharashtra’s Food and Drugs Administration (FDA) has set a deadline of March 31 for pharmaceutical major Johnson & Johnson to respond to its demand for an explanation as what it can do to correct the defective labelling of its products. 

Kochi Refinery Investors Forum is planning to go to court against the swap ratio for the merger of Kochi Refinery with BPCL.

Debt refinancing
India Cements informed the BSE that it has arranged for a one-time settlement of a part of its debt at a discount of Rs 80.41 crore. The one-time settlement includes the debt of the Unit Trust of India. 

Industrial Development Bank of India (IDBI) and State Bank of India have sanctioned a Rs 400 crore loan to Jindal Vijayanagar Steel Ltd (JVSL). JVSL, which has embarked on a Rs 1,700 crore refinancing programme.

Other issues
Ranbaxy UK Ltd, the British subsidiary of Ranbaxy Laboratories Ltd, will pay the National Health Service (NHS) of the UK Rs 36.5 crore in settlement of charges of overpricing of generic medicine. 

In a temporary victory for BPL group patriarch T P G Nambiar, the company law board, Chennai, asked BPL’s telecom division to furnish shareholding pattern in BPL Communication, BPL Mobile Communication and BPL Mobile Cellular, run by his son-in-law. 

With the UB group acquiring a controlling stake in Shaw Wallace, the strategic alliance between Shaw Wallace and the Scotland-based Whyte & Mackay (formerly known as Kyndal) may be reviewed. Under the agreement, Shaw Wallace will use its infrastructure to bottle and distribute Whyte & Mackay’s international brands in the Indian market. 

After the buyout of its Indian partner-the Delhi-based Shriram group - in Daikin Airconditioning India, the Japanese consumer durable company is chalking out an expansion strategy to boost its revenues. 

With a strategy to broaden its beverages portfolio in place, PepsiCo India plans to bring down the share of Pepsi, its flagship brand, in its total sales to 40-45 per cent in the next five years. 

BK Birla group is not likely to offload its stake in the group chemical outfit Century Enka in the open offer to Acordis BV of Netherlands, the joint venture partner of the company.

Mergers & Acqusitions in India
Mahindra & Mahindra has sold the 15.88 per cent stake it held in Ford India Pvt.Ltd. The company hasn’t disclosed the amount for which it sold its stake. US-based car maker sold its 5.16 per cent stake in the Indian firm for Rs 288.85 crore. 

After the UB group’s acquisition of Shaw Wallace, Vijay Mallya has been planning to rope in an overseas equity partner in the UB Group’s spirits business to be called United Spirits, after McDowell, Herbertsons, Triumph Distilleries & Vintners and Shaw Wallace are merged, similar to what group has done in the beer business. In the beer business, the UB group had entered into a joint venture with British brewer Scottish & Newcastle. 

Saudi Aramco is likely to pick up stake in Hindustan Petroleum Corporation Ltd’s Vizag Refinery in Andhra Pradesh as part of a barter deal where the Indian firm will get an equity in the world’s largest oil firm’s upcoming refinery on the Red Sea. 

Financial institutions including ICICI, Banks and Industrial Finance Corporation of India (IFCI) have sold the Rs 500 crore plus pharmaceutical ingredients (API) facility at Indore to Unichem Laboratories under the Securitisation Act. The unit has been acquired at an investment of Rs 15 crore.

Sun network, the second largest television network in India, is in the final stages of negotiations to acquire the Kolkata-based multi-system operator (MSO), Indian Cable Net (formerly called RPG Netcom). This comes in the wake of its plans to launch a Bengali channel called Surjo - its first foray outside South India. Sun network has 12 channels in all the southern languages and four FM radio plans.

Mergers & Acqusitions abroad
Escorts, the country’s second largest tractor company, announced that its wholly-owned subsidiary, Escorts Agri Machinery Inc, USA, has acquired 100 per cent equity in Farmtrac Tractors Europe Sp.zo.o (FTES), a Polish company in which it already has a 64 per cent stake. The final tranch of the acquisition was for a sum a little over half a million dollars. 

Glenmark Pharmaceuticals and Shasun Chemicals and Drugs Ltd announced that they have entered into a collaboration for joint development, filing and marketing of 12 generic pharmaceutical products for the US market. 

Company results (third quarter of 2004-05)
Pharmaceutical
Aventis Pharma India has reported a 33.5 per cent growth in its net profit to Rs 40.6 crore for the third quarter of financial year 2004-05. The company’s marketing strategy has helped it to grow its net sales by 15.11 per cent in the third quarter. Profit growth has also been aided by the company’s ‘other income’ rising 93.5 per cent to Rs 6 crore during the period. This income stream has grown due to increased interest and dividend income. 

Company results (2004-05)
Bharat Heavy Electricals (Bhel) has reported a 52 per cent rise in net profit to Rs 1,002 crore during 2004-05 against Rs 658 crore in 2003-04. Turnover rose 21 per cent from Rs 8,662 crore in 2003-04 to Rs 10,520 crore in 2004-05, the highest turnover growth rate in the last two decades. 

Hindustan Aeronautics Ltd (HAL), recorded with profit before tax (PBT) of Rs 630 crore during 2004-05 on total sales of Rs 4,425 crore. The PBT has increased by 5.1 per cent and sales increased 16.4 per cent over the previous year. During the year, the firm handed over its first batch of indigenously produced Su-30 Mk I multi-role fighter air-craft to the Indian Air Force. Orders it won included those for 1,000 doors for Airbus’ A320 aircraft, assemblies and components for Eurocopter’s Fennec helicopter, tail rotor blade assemblies for Bell’s helicopters and avionics for RAC-MiG’s MiG 29 fighter aircraft. 

Disinvestment
The center has begun the disinvestment process for the next fiscal year with the finance ministry circulating a cabinet note for the sale of around 15 per cent stake in Shipping Corporation of India (SCI). At present, the government holds an 80.1 per cent stake in SCI. 

BANKING HIGHLIGHTS

Punjab National Bank (PNB) has returned three crore equity shares to government of India aggregating Rs.1153.01 crore capital, including premium, following its second public offer. With the return of shares, the total paid-up capital of the bank was reduced to Rs.315.3 crore from Rs.345.3 crore and the government holding was reduced to Rs.182.4 crore (57 per cent) from Rs.212.24 crore (80 per cent). Post-issue, holdings of foreign institutional investors (FIIs) and non-resident Indian (NRIs) in PNB have gone up from 14.16 per cent to 18.66 per cent.

Corporation Bank has launched an agricultural product loan scheme, whereby farmers and traders can avail of loans against produce they store in a warehouse. This scheme is aimed at helping farmers sell their product at a time of their choice and realise better price, instead of making distress sale after harvest. With a minimum margin of 20 per cent of the agriculture produce value, the loan can be availed against warehouse receipts.

The appointed date was fixed as October 1, 2004 for the merger of IDBI and IDBI Bank. On this date, the RBI began reporting IDBI financial data along with those for IDBI Bank as part of banking and monetary statistics. However, RBI has cleared the amalgamation scheme of IDBI Bank with IDBI with effect from April 2, 2005. The merged entity will be the seventh largest bank in terms of assets at Rs.80,000 crore. IDBI and IDBI Bank will now have to prepare two separate balance sheets for the fiscal year ended March 31, 2005. This would have a combined balance sheet for 2004-05. Recently, IDBI has extended its accounting year to 18 months from April 2003 to September 2004.

Punjab National Bank (PNB) and Allahabad Bank plan a 60:40 joint venture in Kazakhstan at an initial investment of Rs.100 crore in the next two months. The banks have already got the RBI’s nod to float a subsidiary in Kazakhstan.

Vijaya Bank will assign the task of preparing a detailed report on manpower restructuring and human resource (HR) planning to the National Institute of Bank Management (NIBM).

The global remittance market is estimated at $110 billion with approximately $20 billion a year, coming into India. Around 1.5 million non-resident Indians (NRIs), living in the US, remit over $7 billion to India annually. In an attempt to tap the $20 billion Indian remittance market, ICICI Bank and IndusInd Bank have separately rolled out new products to enable expatriate Indians to send money to their home country. ICICI Bank has signed an agreement with Wells Fargo Bank, while IndusInd Bank has joined hands with Bank of New York for this purpose. ICICI Bank also plans to open a branch in Hong Kong; it has already received RBI’s approval and is awaiting the approval of Hong Kong Monetary Authority. 

Card-to-card money transfer is gaining ground in India with more banks foraying into this business. Recently IDBI bank has tied up with Visa International and was the first bank to launch this facility. Among others, HDFC Bank, ICICI Bank and Citibank, are rolling out a similar product. This transfer system reduces transaction cost compared to traditional money transfer services currently being offered like cheques, demand drafts, telegraphic transfers and electronic funds transfer.

National Bank for Agriculture and Rural Development (Nabard)’s loan assistance to Uttar Pradesh (UP) during fiscal 2004-05 included 39 per cent growth in agricultural credit over the previous year upto December 31. As far as overall loan assistance to the state and to commercial banks in UP, Nabard extended Rs.2,545 crore during 2004-05 as against Rs.2,181 crore during 2003-04.

Union Bank of India has announced that its total deposits and advances (i.e. business) have crossed Rs.1 lakh crore as on 31st March 2005.

Housing

IDBI Home Finance Ltd. has raised its retail prime lending rate (R-PLR) by 25 basis points to 9.5 per cent with effect from March 31, 2005, in view of the firming up of interest rate. This will affect 88 per cent of over Rs.900 crore loan portfolio of the housing finance subsidiary of IDBI. The rest of the portfolio is at a fixed rate, adjustable every three years.

Insurance

The Insurance Regulatory and Development Authority (Irda) has set up an 11-member committee under former chairman of Life Insurance Corporation of India (LIC), Shri K.P. Narasimhan, to prepare a comprehensive report on insurance laws. The committee would primarily focus on areas like investment, solvency margin and tariff advisory committee (TAC). The committee would also study and take into account the report on insurance laws submitted by the Law Commission last year, and in addition, study the distribution pattern between the shareholders’ and policyholders’ funds. 

Information Techonology

According to Manufacturers Association of Information Technology (MAIT) and (India Market Research Bureau) IMRB report, the PC sales growth, which was 23 per cent per annum since 1999, has seen a growth of over 30 per cent since last two years. The report estimated a growth of 32 per cent to touch four million PCs in 2005 as small and medium businesses are expected to lead the PC sales. In the fiscal year 2004-05, over 3 million PCs have been sold.

Telecom

According to the report of the department of telecommunications (DoT), the Indian telecom industry received a total of Rs.10,273 crore as foreign direct investment (FDI) inflow since August 1991. However, since August 1991 to August 2004 the amount of FDI approved was Rs.41,368 crore. Mauritius is the largest source of FDI into the Indian telecom industry. It has been the highest contributor for the period, August 1991 to August 2004. Investments via Mauritius amounted to Rs.7501.12 crore, translating to over 73 per cent of the total FDI received in telecom by India since 1991. United Kingdom is second on the list for telecom FDI with investments of Rs.887.58 crore, accounting for 8.64 per cent, followed by Netherlands, Thailand and Sweden with shares of 3.07, 2.15 and 1.49 per cent, respectively.

French telecom major Alcatel and government-owned Centre for Development of Telematics (C-DoT) have signed a memorandum of understanding for setting up a joint global research and development (R&D) centre in Chennai, for emerging technologies like WiMAX.

FINANCIAL MARKET DEVELOPMENTS

Capital Markets

Primary Market

Shringar Cinemas Ltd is to issue 81.5 lakh shares of face value Rs 10 each through 100 per cent book building process in a price band of Rs 47 to Rs 53 per share. The issue is to open on April 5 and close on April 11. 

Sebi has doubled the investment limit for retail investors from Rs 50,000 to Rs 1 lakh and has raised the allocation limit in the IPOs and public offers from 25 per cent to 35 per cent. However, the Income Tax department has mandated for every investor to attach a copy of his/ her permanent account number (PAN) with every application exceeding Rs 50,000. 

Allahabad Bank is to offer 10 crore equity shares of Rs 10 each through 100 per cent book building process. As per the new Sebi norms, the 35 per cent of the net issue to public is available to the retail investors. The issue is to open on April 6 and close on April 12.

Sebi has given permission to various small size issues that have expressed intentions to enter the market to raise capital. They include Saksoft Limited (Rs 7.5 crore), Nandan Exim (Rs 12 crore) and Shree Ganesh Forgings (Rs 15 crore). 

Secondary Market
The BSE sensex (1978-79=100) was closed ended April 2 in a positive territory after having closed in negative zone for the past two weeks. It registered a gain of 162.17 points to end at 6605.04. The broader 50-share S&P CNX nifty of NSE ( November 3, 1955-100) has also gained 52.25 points to close at 2067.65. The markets were marked with volatility as some investors entered the market due to low levels of prices and others selling due to year-end considerations. 

Among the sectoral indices of BSE, consumer durables index outperformed the other indices by gaining 5.6 per cent. BSE IT and BSE Teck also gained in excess of 4 per cent each as the technology stock firmed up on expectations of good quarterly results. 

There was a record FII outflow of Rs 1,724 crore on March 29 primarily due to the proceeds received by FIIs for shares offered by them in the sponsored ADR issue of ICICI bank. Between March 28 and March 31, the FIIs were net sellers to the extent of Rs 820.7 crore, and on April 1, they were net buyers to the extent of Rs 358.60 crore. In the first three months of the calendar year 2005, the net FII investment in equities has been US $ 3,728 million or Rs 16,335 crore. 

The Sebi has capped the broker funding for Margin trading at 50 per cent; hence, the brokers have floated non-banking financial companies to finance the remaining part. As margin trading provides a good leverages to investors such as day trades as they account for about 20-25 per cent of the turnover on the bourses. 

The mutual funds are believed to witness huge redemption pressure of over Rs 7,000 crore due to advance tax outflows and also due to diversion of funds to banks as they are offering attractive rates of interest in order to give boost to their balance sheet ahead of the year-end. 

Derivatives 
The activity in F& O segment was focused around the expiry of the March contracts and rollover to the April contracts. The rollovers began on a subdued note, but later on gather momentum. Index and stock futures saw rollover of positions to the extent of 70 per cent. 

The trading in the derivatives segment of NSE during the week ranged between Rs 10,097 crore and Rs 19,622 crore. 

Government Securities Market
Primary Market
On April 5, the government is to re-issue 6.85 per cent 2012 and 7.95 per cent 2032 for an aggregate amount of Rs 8,000 crore. 

As per the indicative scheduled calendar of issuances, the central government will be borrowing through the dated securities in the first half of 2005-06 Rs 83,000 crore against Rs 59,000 crore in 2004-05. The government will issue 182-day treasury bills for Rs 1,000 crore under MSS and Rs 500 crore under normal borrowings. As per the indicative calendar for MSS borrowings, the RBI is planning to mop up Rs 32,500 crore in the first quarter of 2005-06. 

RBI has revised the aggregate normal ways and means advances (WMA) for the states from Rs 8,140 crore to Rs 8,935 crore, representing an increase of Rs 795 crore. In case of central government, the WMA limits have been retained at Rs 10,000 crore for the first half and Rs 6,000 crore for the second. 

Secondary Market
Following the larger than expected borrowing program of the central government, the secondary market yields on gilt-edged securities have hardened. Also, as the next week’s scheduled auctions are of illiquid securities, the market sentiments have turned subdued. The call borrowing rates have ruled firm due to temporary mismatches. 

Over the fiscal year 2004-05, the yield on 10-year benchmark security has appreciated by 144 basis points.

The RBI is expected to operationalise the dated security auction through the negotiated dealing system (NDS) from the first week of April; auction of treasury bills is already through the NDS 

Bond Market
In March, through private placemats and public issues, over Rs 7,000 crore have been mobilized. The major issues that have been successful in raising the targeted amounts have been of Food Corporation of India (FCI – Rs 4,000 crore), West Bengal Infrastructure Development finance Corporation (Rs 1,000 crore), Maharashtra Jeevan Pradikaran (Rs 600 crore), Andhra Pradesh Power Finance Corporation (Rs 350 crore), Dena Bank (Rs 165 crore) and Bank of Maharahstra (Rs 200 crore). Maharashtra Irrigation Development Corporation has raised so far Rs 100 crore against the targeted amount of Rs 500 crore. 

RBI has permitted trading in power bonds, which were introduced in 2003, with maturity ranging between October 1, 2009 and April 1, 2010. 

Foreign Exchange Market
CCIL’s forex segment recorded the highest gross volume of US $ 24.93 billion with highest number of deals at 20,438 being settled on March 31, 2005; the netting factor touched the all-time high of 96.89 per cent as a result of large number of transactions.

During the week, the rupee-dollar exchange rate has remained volatile. The week began at Rs 43.81, after fluctuating to a high of Rs 43.79 and a low of Rs 43.82, it ended the week at Rs 43.75. 

Commodities Futures derivatives.
As per the data released by Forward Markets Commission (FMC) for the period March 16 to March 31, the total value of trades on MCX and NCDEX has been Rs 15,271.24 crore and Rs 23,364.16 crore, respectively. Though 48 commodities were traded on MCX and 39 commodities on NCDEX. While trading in gold and silver is predominant in MCX, it is guar seeds and soya oil at NCDEX.

INFLATION

The annual inflation based on wholesale price index (WPI) has dropped marginally to 5.1 per cent during the week ended March 19, 2005 from 5.2 per cent registered during the previous week. The annual inflation was at 4.5 per cent in the corresponding week last year.

The WPI remained unchanged at 189.1 (Base: 1993-94=100) during the week under review. The index of primary articles’ group has declined marginally from the previous week to 185 due to a fall in the prices of both, food and non-food articles. The index of fuel, power, light and lubricants group has declined considerably by 0.7 per cent to 287 as compared to the previous week’s level of 289. The heavy-weighted (63.7 per cent) manufactured products’ group has risen marginally to 168.6 due to a rise in the price indices of beverages, tobacco and tobacco products, textiles, paper and paper products, chemical and chemical products, basic metals and machinery and transport equipments. 

The latest final index of WPI for the week ended January 22, 2005 has again been revised upwards; as a result, both the absolute index and the implied inflation rate, have moved up to 188.5 and 5.43 per cent instead of the provisional levels of 188.4 and 5.37 per cent, respectively. 

Maintaining the current moderate level of inflation in coming weeks would be a major challenge in front of the government. Inflation is expected to have ripple effects, if global crude oil prices remain stubborn at around $ 58 per barrel and are passed on to domestic sphere. 

PUBLIC FINANCE

20 states and most of the union territories have switched to the value added tax regime (VAT) on April. This would replace the existing sales tax and other levies like entry tax. Six BJP ruled states as well as Uttar Pradesh and Tamil Nadu have not shifted to this regime. The implementation of VAT was met by three-day nation wide bandh called by the traders.

The Institute of Chartered Accountants of India (ICAI) has approved the guideline note on accounting for state level VAT. The guidance note requires that the input tax paid on purchase of inputs and capital goods, which is available as VAT credit should not be included in the cost of purchase. The note also requires that the input credit available on opening stock at the commencement of the scheme should be credited to the opening stock account. The guidance note has specified that VAT collected from customers should not be included in the sales figures and similarly VAT paid should not be treated as expenditures in financial statements.

The World Bank and IMF have said that the new VAT tax regime in India will prevent evasion, push up revenue and help the cash starved government to come out of debt trap. According to the World Bank country director, a comprehensive VAT widens tax net as it makes tax evasion difficult.

Dry-fruit traders, who have come under 12.5 per cent tax under the new VAT system, have sought categorisation under the agricultural products as it would make them eligible for only 4 per cent VAT. 

Biscuit manufacturers are also against 12.5 per cent VAT on their products and have asked it to be scaled down to 4 per cent.

All- India Motor Transport Congress (Aimtc) has demanded a flat 4 per cent applicable VAT rate for diesel. The organisation has also protested against the decision of the Delhi government to hike sales tax on diesel from 8 per cent to 20 per cent. Currently, the product is exempted from VAT for the next five years. 

The Union Ministry of Finance will soon issue debt relief guidelines to the states on the basis of parameters set out by the Twelfth Finance Commission (TFC). As per estimates made by the ministry, most states would not require to go into the market borrowings in the fiscal year 2005-06. About Rs 29,000 crore will be available for the states as loan from centre. In addition, as per the recommendations made by the TFC, grants to states would also be increased. The ministry would issue guidelines to states to include five core aspects in their Fiscal Responsibility and Budget Management legislations by the month end. These include eliminating revenue deficit by 2008-09, reducing fiscal deficit to 3 per cent of the gross state domestic product or its equivalent defined as ratio of interest payment to revenue receipts, bringing out annual reduction targets of revenue and fiscal deficit, annual statement giving prospects for the state economy and related fiscal deficit, annual statement giving prospects for the state economy and related fiscal strategy and bringing out special statement along with the Budget giving in detail number of employees in government, public sector and aided institutions and related salaries. 

The ministries of finance and commerce are working out a formula to resolve the issue of income tax being charged, with retrospective effect, on reimbursement schemes like duty entitlement passbook and duty drawback. As per the formula, no interest would be charged or penalty imposed on income tax dues of exporters. Also, exporters would be allowed to pay their dues over 3-4 years rather than having to pay upfront.

The Supreme Court has ruled that the state government can impose “lifetime tax” on motor vehicles based on their weight or cost. The judgement said, “For administrative reasons in the matter of collection of tax, one-time payment of tax is convenient and at the same time, it is also beneficial to users who do not have to go to the office of the road transport every year to pay annual taxes. Both the state governments of Tamil Nadu and Karnataka had approached the Supreme Court, when their respective high courts had dismissed their rules for levy based on weight and price.

The centre has met with its disinvestment target for fiscal year 2004-05, with Punjab National Bank (PNB) returning Rs 1,153 crore to the government. This year’s realization from disinvestment is the third highest since 1995-96.

Lower growth in tax and non-tax revenue receipts has pushed revenue deficit higher than revised estimate of Rs 85,165 crore to Rs 92,674 crore for the period ending February.

LABOUR

The Union cabinet has amended the Factories Act, 1948 enabling women employees to work in late night shifts, provided the employers guarantee adequate safeguards for women workers in terms of dignity, honour and equal opportunity. Women can now work between 10. p.m to 6 a.m. The move is likely to benefit all factories engaged in manufacturing across sectors including textiles, auto, paper, cement, drugs and pharmaceuticals. However, Union Information and Broadcasting Minister, Mr. Jaipal Reddy made clear that the state governments will hold powers to provide exemptions in special cases such as Special Economic Zones (SEZ).

EXTERNAL SECTOR

Balance of Payments
The third quarter (October-December) balance of payments data released by the Reserve bank of India has disclosed a current account deficit of $5.4 billion on account of high oil prices and a capital account surplus of $12.2 billion and an overall balance of payment surplus of $6.6 billion. The trade deficit has touched a new high of $11.8 billion during October-December 2005 as compared to a deficit of $4.6 billion in October – December 2004. During the same period, capital account surplus has risen sharply to $12.2 billion as compared to a surplus of only $4.9 billion during October-December 04.

According to the latest external debt statistics released by the finance ministry, India’s external debt has risen by 7.2 per cent to approximately $121 billion at the end of December 2004 as compared with around $113 billion at the end of December 2003. A large part of this increase (almost 57 per cent or $4.1 billion out of $ 8 billion) is explained by the valuation change arising out of depreciation of the US dollar against other major international currencies. Short-term external debt, at $6.86 billion, has accounted for 5.7 per cent of the total external debt; it has remained at that level now for some years. Outstanding NRI deposits (at $32 billion, as at the end of December 04), which form a part of long-term external debt, accounted for 26.3 per cent of the total external debt. This share of NRI deposits in total external debt is marginally more than multilateral debt (26.2 per cent) and slightly more than external commercial borrowings (21 per cent).

According to IMF, India needs to accelerate the pace of its structural reforms to raise growth and employment. In its 61-page staff report, the IMF has asked India to speed up reforms including removal of trade barriers, liberalisation of FDI regime and easing of labour laws, to attain over 6 to 6.5 per cent GDP growth.

The government has cleared 25 FDI proposals on April 4, worth 394.8 crore. These include proposal of Swiss company Encotra to raise its equity in its Indian branch, Visa International, from 21 per cent to 74 per cent.

CREDIT RATINGS

Crisil has reaffirmed the AAA/stable rating assigned to the Rs. 362 crore NCD issues, the FAAA/stable rating assigned to the FD programme and the P1+ rating to the Rs. 850 crore short-term debt programme of Larsen & Toubro (L&T). The ratings continue to reflect L&T’s leadership position in the domestic engineering and construction segment, its highly diversified revenue base across segments and geographies and its robust growth prospects in the domestic and international infrastructure sector. Incidentally, AAA/stable rating earlier assigned to the Rs. 243 crore issue of the company has been withdrawn on redemption of the issue.

Icra has assigned an A1+ rating to the enhanced Rs. 20 crore CP programme of Tata Coffee (TCL), and simultaneously it has also reaffirmed the MAA rating assigned to the company’s NCD programme of Rs. 26 crore. The ratings take into account TCL’s integrated nature of operations in the coffee business, diversified revenue streams from other plantation products, favourable financial risks, comfortable liquidity position and its strong parentage. 

In an another exercise, Icra has assigned an LBBB+ rating to the proposed Rs. 20 crore subordinate debt bonds of Dhanalakshmi Bank.

Care has assigned a PR1 rating to the CP/STD programme of Rs. 50 crore of CEAT Ltd; the rating reflects the company’s experience in the Tyre industry, its strong brand image, improved operational performance during FY04 and encouraging demand outlook, following strong revival in the commercial vehicle and passenger car segments and the consequent rise in demand in the replacement market.

Theme of the week:

Insurance Industry in India

Insurance is a potent financial instrument conferring multiple benefits for the individual or corporates participating in it, for the financial markets pooling the resultant funds and for the society at large. For the individuals it is both a saving device and a device for protecting life against illness, injury and death. Both for individuals and corporates, insurance provides for risks against destruction of assets, due to natural calamities or thefts. For the financial markets, the insurance sector provides sizeable amounts of accumulated insurance fund for primary as well as secondary market transactions. Unlike, other financial institutions, the insurance sector provides almost the entire part of its funds as long-term sources for investment in infrastructure and other projects. For the society at large, it provides an endeavoring answer to the most delicate question of social security for its populace with the help of the latter’s own savings, thus serving as an instrument of domestic savings as well as protection against unforeseen events.

The core of insurance is risk management – the need to manage uncertainty on account of exposure to loss, injury and destruction. There are several ways to manage risks. An individual/business is always exposed to certain events that may happen infrequently but are severe and can potentially threaten the person’s/business’s economic security. Insurance is a way of financing these risks by which an insurer agrees to finance the losses arising out of the risk. 

The principal characteristic of insurance is the transfer of risks from an individual to a group. Insurance is a complex mechanism, and it is consequently difficult to define. However, in simple terms, it has two fundamental characteristics:

a) transferring or shifting of risks from one individual to a group;
b) sharing losses, on some equitable basis, by all members of the group, i.e., reimbursement in a situation of loss.

Insurance, in law and business, is a contractual arrangement between an individual/organisation (the insured) and the insurer (insurance company) for a consideration (the premium). The contractual terms including the premia are determined rather scientifically based on actuarial calculations. An insurer guarantees the insured for compensation if or when a specified set of circumstances occurs. Such circumstances may include death or personal injury, accident, unemployment or old age, loss of or damage to property, or any one of a number of instances that can be compensated financially. The life cycles of property as well as individuals as provided by historical and projected data constitute an important input for this purpose. 

Types of Insurance
The insurance business has been traditionally divided into life (personal) insurance and non-life insurance or general insurance. 

1) Life Insurance: The insurance business that covers life and confers benefits on a person’s death (natural or accidental), is usually called life insurance. There are varieties of life insurance policies like whole life assurance, endowment assurance, term assurance, life annuity and pension plans. There are now life group insurance plans which insurance companies confer on groups of employees belonging to specific companies or institutions. In the US, health insurance is classified as life insurance, but in India it is classified as non-life insurance. 

2) General Insurance: As per the Insurance Act, 1938, the general/non-life insurance industry in India has being classified into three major categories namely,

a) Fire insurance: This covers damage to the property caused by fire, lightening or explosion.
b) Marine insurance: Marine policies relate to three areas of risks, namely, the hull, cargo and freight. The risk includes fire, theft, collision and a wide range of other perils. 
c) Miscellaneous insurance: This is described in the Insurance Act as any general insurance business other than fire and marine insurance business. This residual business covers a wide range of insurance like motar insurance, theft insurance, money insurance, health insurance, engineering insurance, personal accident insurance etc.

3) Direct Insurance and Reinsurance

a) Direct Insurance: An insurance contract in which the insurer agrees to pay the insured for a designated loss. Insurance sold to the public and to non-insurance businesses is classified as direct insurance. 
b) Reinsurance: The process of insurance companies insuring underwritten policies with other institutions in order to offset exposure. Insurance companies to reduce outright risks associated with underwritten policies by spreading risks across alternative institutions use this procedure. It's like buying an insurance policy for an insurance policy.

History and Development of Life Insurance in India 
Life insurance in its present form came to India from the United Kingdom (UK) with the establishment of a British firm, Oriental Life Insurance Company, in the year 1818 in Calcutta. This was followed by the formation of Bombay Life Insurance Company in 1823, the Madras Equitable Life Insurance Company in 1829 and the Oriental Government Security Life Insurance Company in 1874. 

Even though the first life insurance company was established as early as 1818, there was no exclusive legislation to govern the activities of insurance companies during the nineteenth century. The Indian Companies Act 1866 regulated all companies, including the insurance companies. 

The ten-year period 1929–1938 witnessed the establishment of as many as 172 companies and also witnessed liquidation of 61 of them, almost all of them even before a valuation was performed. This spate of liquidations resulted in the introduction of a comprehensive bill in 1937 for controlling life and general insurance business, and soon this bill resulted into the Insurance Act, 1938 (IA 1938). Some important features of the act are:

o Compulsory registration of insurance companies,
o Control on investment of funds,
o Prohibition of rebates, and
o Filing of policy conditions and premium rates duly certified by an actuary (in the case of life business).

However, the introduction of this comprehensive legislation did not prevent proliferation of new companies and failures. In April 1945, a committee under the chairmanship of Sir Cowasji Jehangir was appointed to enquire into the undesirable developments in the management of insurance companies and recommend suitable remedial measures. On the basis of the recommendations of this committee, a Bill was introduced in 1950 and passed in the same year as the Insurance (Amendment) Act, 1950. The salient features of this Act were:

o Minimum capital requirement,
o Stricter control on investments and submission of periodical returns on investments,
o Ceiling on expenses of management and agency commission, and
o Appointment of administrators for mismanaged companies.

During the ten-year period 1945–1954, around 533 valuation reports were submitted to the Controller of Insurance. Of these, 86 valuations showed a deficit, which was not covered by the free paid-up capital, around 25 insurers went into liquidation and an equal number had to transfer their business to other companies.

By 1956, 154 Indian insurers, 16 non-Indian insurers and 75 provident societies were carrying on life insurance business in India. The persistent problem of insolvency of life insurers continued and in due course led to the nationalisation of insurance business in India. Life Insurance Corporation of India (LIC) was incorporated, by an Act of Parliament (viz. LIC Act, 1956) with a capital contribution of Rs.5 crore by the Government. 

On 19th January 1956, the management of the entire life insurance business of 229 Indian insurers, 16 foreign insurance companies then operating in India and provident insurance societies, was taken over by the central government and then nationalised into Life Insurance Corporation of India. 

Evolution of General Insurance in India
General insurance would appear to have developed with the industrial revolution in the West and consequent growth of foreign trade and commerce in the seventeenth century. Like life insurance, general insurance also came to India from UK with the establishment of the first general insurance company, Triton Insurance Company Ltd., in the year 1850 in Calcutta. Later on in the year 1907, the first insurance company to be set-up by Indians for transacting all classes of general insurance business Indian Mercantile Insurance Company Ltd. was established.

In 1957, the General Insurance Council, a wing of the Insurance Association of India, framed a code of conduct for ensuring fair conduct and sound business practices in general insurance industry. Further, in order to increase retention of general insurance business in India, the insurers started a reinsurance company, viz. India Reinsurance Corporation Ltd. in 1965, to which all general insurance companies voluntarily ceded 10 per cent of their gross direct business. 

In 1968, the Insurance Act was amended again to regulate investments and set minimum solvency margins, thus providing extension of social control over insurers transacting general insurance business. As also, a Tariff Advisory Committee was set up. 

However, before the general insurance companies could be effectively controlled under the new law, the management of non-life insurers was taken over by the central government in 1971 as a prelude to nationalisation. The General Insurance Business (Nationalisation Act, 1972) nationalised the general insurance business in India. General Insurance Corporation (GIC) and its four subsidiaries thus came into being from 1st January 1973. GIC has been acting as the Indian reinsurer since then. The GoI subscribed to the capital of GIC while GIC subscribed to the capital of the four companies. 

In 1973 the erstwhile 107 Indian and foreign insurers which were operating in the country prior to nationalisation, were grouped into four operating companies, namely, 

(i) National Insurance Company Limited; 
(ii) New India Assurance Company Limited;
(iii) Oriental Insurance Company Limited and
(iv) United India Insurance Company Limited. 

All the above four subsidiaries of GIC operate all over the country competing with one another and underwriting various classes of general insurance business except for aviation insurance of national airlines and crop insurance both of which are handled by the GIC. GIC has been acting as the Indian reinsurer since then. 

Structure of the insurance market in India
The LIC, for life assurance business, and GIC and its subsidiaries, for general business, were the main providers of insurance in India. As for life insurance the Postal Life Insurance Scheme also provides life insurance coverage to government and public sector employees as also for the general public in rural areas. 

Postal Life Insurance (PLI): Started in 1884 as a welfare measure for the employees of Posts and Telegraphs Department. Subsequently, due to popularity of its schemes, various departments of central and state governments were extended its benefits. Now PLI is open for employees of all central and state government departments, nationalized banks, public sector undertakings, financial institutions, local bodies like municipalities and Zila Parishad and educational institutions aided by the Government. The PLI has continued to expand and by March 31,2001, it had procured 2.51 million policies with an aggregate assured sum of Rs.10,405 crore.

Rural Postal Life Insurance (RPLI): On 24th March 1995, the benefits of Postal Life Insurance were extended to rural populace of the country under the banner of Rural Postal Life Insurance (RPLI). Since inception, RPLI has also gathered momentum. Approximately 820,000 RPLI policies were secured with an aggregate sum assured of Rs.2,898 crore by March 2001. As a result, Indian Post has decided to employ external agents to sell its PLI and RPLI schemes.

Progress of LIC and GIC, prior to deregulation
The main business of LIC is classified in two categories viz., Individual insurance and Group schemes. Since nationalization, LIC developed a vast network of branches and expanded its business. Over the period of 32 years from 1956 to 1988, LIC made rapid progress in both the categories. The new business for the year 1987-88 for individual insurance was around Rs.12,800 crore compared to Rs.278 crore in 1957, the first year of nationalisation. The total business in force for individual insurance as on 31st March 1987 stood at Rs.48,151 crore for 298.6 lakh policies. Under group schemes also LIC had made good progress. The Life Fund stood at Rs.14,502 crore as on 31st March 1987 and the accretion for the year was Rs.1,837 crore. The reversionary bonuses declared were Rs.72.50 per thousand sum assured per annum for whole life policies and Rs.58 for endowment policies. The government’s share of the surplus was around Rs.39.34 crore. The tax paid by LIC during the year 1986-87 was around Rs.69.12 crore. 

The total new business of the Corporation in the form of sum assured during 1998-99 was Rs 75,316 crore for 148.43 lakh policies. LIC’s group insurance business up to 31 March 1999 was Rs 66,085 crore (provisional) providing cover to 219 lakh people.

In 1973, the first year of nationalisation of general insurance, the gross direct premium was around Rs.184 crore. Over the period of 14 years from 1973 to 1987, GIC and its four subsidiaries has made immense progress and the premium income for 1987 was around Rs.1,535 crore. The investment income of general insurance rose from Rs.20 crore in 1973 to Rs.289 crore in 1986, and profits before tax from Rs.35 crore to Rs.318 crore. From 799 offices in 1973, the network grew to around 3000 offices with a workforce of close to 60,000 employees. The expansion of offices continued and at the end of March 1998, the network of offices stood at 4,208. 

Deregulation of the Insurance Sector
While effecting reforms in the banking sector and capital markets during the early 1990s, the GoI also recognised the importance of insurance as an important element of the overall financial system where it was necessary to undertake similar reform measures. Almost 300 million people in the country can afford to buy life insurance but of this only 20 per cent have an insurance cover, which suggests that there is a huge chunk of the population yet to be tapped. The industry has lot of potential and needs to be competitive and market-driven. It was perceived that entry of private players will lead to better competition in Indian insurance sector. A truly competitive industry will introduce new products and achieve low premiums and better services. 

In 1993, R. N. Malhotra Committee was formed to evaluate the Indian insurance industry and recommend its future direction. The committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at “creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognising that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms…”

In 1994, the committee submitted the report and some of the key recommendations included: 

1) Structure
o Government stake in the insurance companies to be brought down to 50 per cent
o Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations
o All the insurance companies should be given greater freedom to operate

2) Competition
o Private companies with a minimum paid up capital of Rs.100 crore should be allowed to enter the industry
o No company should deal in both Life and General Insurance through a single entity
o Foreign companies may be allowed to enter the industry in collaboration with the domestic companies
o Postal Life Insurance should be allowed to operate in the rural market

3) Regulatory Body
o The Insurance Act should be changed
o An Insurance Regulatory body should be set up
o Controller of Insurance (Currently a division from the Finance Ministry) should be made independent

4) Investments
o Mandatory investments of LIC Life Fund in government securities to be reduced from 75 per cent to 50 per cent
o GIC and its subsidiaries are not to hold more than 5 per cent in any company (There current holdings to be brought down to this level over a period of time)

5) Customer Service 
o LIC should pay interest on delays in payment beyond 30 days
o Insurance companies must be encouraged to set up unit linked pension plans
o Computerisation of operations and updating of technology to be carried out in the insurance industry

The committee emphasized that in order to improve the customer services and increase the coverage of the insurance industry it should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.100 crore. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body.

The Insurance Regulatory and Development Authority
Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. With the Insurance Regulatory and Development Authority (Irda) Act, 1999 coming into force, the insurance industry has been opened up for the private sector. The Act provides for the establishment of a statutory IRDA to protect the interests of insurance policy holders and to regulate, promote and ensure orderly growth of the insurance industry. As per the IRDA Act, to establish a new insurance company for conducting insurance business, it should satisfy the following conditions:

o The aggregate holding of equity shares by foreign company, either by itself or through its subsidiary companies or its nominees, should not exceed 26 per cent paid up equity capital of the Indian insurance company;
o Its sole purpose must be to carry on the life insurance business or general insurance business or reinsurance business;
o It must be formed and registered under the Companies Act, 1956;
o The company has a paid up equity capital of Rs.100 crore and
o For carrying on the reinsurance business, the company must have the minimum paid up equity capital of Rs.200 crore

The Reserve Bank of India (RBI) has also issued guidelines for banks’ entry into the insurance business. For banks, prior approval of the RBI is required to enter into the insurance business. The RBI would give permission to banks on a case-by-case basis, keeping in view all relevant factors, like banks having minimum net worth of Rs.500 crore and satisfying other criteria in respect of capital adequacy, profitability and non-performing assets. 

Market Structure following Deregulation
Following the passage of IRDA Act, private players were allowed into the insurance business in 2000. The Indian insurance sector is experiencing cosmic changes with the entry of new entities after liberalisation. In India the number of private players is growing in both the segments life and non-life. At the end of January 2005 there are 13 private players in the life insurance business and 8 private companies in non-life/general insurance business competing with LIC and GIC and its four subsidiaries.

Savings and Insurance
Composition of Gross Financial Savings of the Household Sector
India is known to have a fairly high level of financial savings. Gross financial savings constitute over 15 per cent of GDP. With relatively lower sensitivity to social security concerns, savings in the form of life insurance premia are yet to gain in importance in India. 

Relatively safer instruments of savings – bank deposits, provident funds and small savings – still dominate the financial savings by households. In fact, the share of bank deposits in household financial savings has increased over the past decade. Even so insurance constitutes an important and increasing proportion of the gross financial savings of the household sector. As in Table 1, the share of insurance funds has increased from 9.5 per cent in 1991 to 15.5 per cent in 2003. 

Market Growth and Share
Post-liberalisation, the life insurance industry in India has registered a high growth during 2003-04 as the private sector players recorded significant gains, because of market expansion. The policies written by the private sector players increased from 0.84 million during 2002-03 to 1.66 million during 2003-04.

Despite the opening up of the life insurance business to private companies, the business is still dominated by LIC, which has 7 zonal offices, 101 divisional offices and a vast network of 2048 branches and more than one million agents. 

LIC dominates the life insurance market with around 78 per cent of the total premium collected for January 2005. However, LIC’s market share in terms of premium collection came down to 87 per cent in 2003-04 from 94.3 per cent in 2002-03, according to data compiled by Irda (Table 2). The private insurers market share has gone up to 13 per cent in 2003-04 from 5.7 per cent in 2002-03. ICICI Prudential led the chart for private players with a market share of around 4 per cent followed by Birla Sunlife 2.4 per cent. 

As in the case with the life insurance business, new general insurers were registered towards the end of 2000 and were largely unable to commence full-scale business before the end of March 2001. Like life insurance, general insurance business too was dominated by GIC and its four subsidiaries up to end of March 2001. However, since then, the PSUs’ have lost market share to new private sector entrants. PSUs’ market share in terms of premium collection came down to 86 per cent in 2003-04 from 90.5 per cent in 2002 -03 (Table 3). The private insurers market share has gone up to 14.2 per cent in 2003-04 from 9.5 per cent in 2002-03. ICICI Lombard led the chart for private players with a market share of around 3.4 per cent followed by Bajaj Allianz registering 2.96 per cent.

Private general insurance companies have started garnering profits earlier than the projection made at the time of their entry. Out of the eight private sector companies, four companies, namely, ICICI Lombard, Bajaj Allianz General, Royal Sundaram Alliance and Tata AIG, have crossed the break-even point. When the private sector entered the insurance sector it was expected that these companies would take at least 5 years to earn profits. Three main factors which credited for the early break-even for the companies are the prudence of underwriting insurance policies resulting in lower claims, reducing management and acquisition costs and also contribution from group business to the premium income earned. Unlike public sector companies, the private sector companies are more stringent in managing their expenses, acquisitions cost and claims. Also, the management of private sector companies has greater accountability and answerability to their shareholders and promoters. Therefore, they are prudent in underwriting their portfolio. Whichever portfolio is loss-making they underwrite the minimum required by the regulator, as seen in the case of commercial vehicle segment under the motor portfolio. Public sector companies have no other option but to insure even loss-making portfolios, in addition their acquisitions costs are high due to large employee base. 

Facing stiff competition from new private entrants, in January 2001, Oriental Insurance Company (OIC) has entered into an agreement with the Department of Post (DoP) for sale of OIC’s non-life insurance products. As per the agreement between the two, DoP will market the products across 1.5 lakh post offices in the country while OIC will provide the after-sales service. These products include policies for hospitalisation, personal accident, household goods, private vehicles, shops, cattle, pumpsets and poultry amongst others. According to the insurance company, the revenue expected from this tie-up could exceed Rs.500 crore in the first year. 

Pattern of Investments of Life and General Insurance companies
According to the notification of IRDA (Investment) Regulation, 2000 dated August 14, 2000, investments of general insurance and reinsurance companies cannot be less than 

i) 20 per cent in Central government securities
ii) 30 per cent in State government and other guaranteed securities,
iii) 5 per cent in housing and loans to state governments for housing and fire fighting equipment, and
iv) 10 per cent in infrastructure and social sectors.

The balance of 55 per cent or less is governed by exposure norms.

Life insurance companies have to invest a minimum of 50 per cent of their controlled funds (other than funds related to pension and general annuity business and unit-linked life insurance business) in government securities or other approved securities (including at least 25 per cent in government securities). They are also required to invest a minimum of 15 per cent in infrastructure and social sectors, leaving the maximum of 35 per cent free for investments in other instruments. 

The funds raised by insurance companies are thus deployed in a range of investments. The investments of an insurance company are intended to protect the funds of the insured and to build up reserves and not to book short-term gains. Nevertheless, the investment regulations provide for balanced investment portfolios of insurance companies. The reserves provide a cushion for long-term contingencies. 

As indicated in Table 4, the investment pattern of LIC indicates that its investment in government and other approved securities has declined to 59.1 per cent of its life funds at the end of March 2004 compared to 64.7 per cent in March 2003. Similarly, the investment of private insurance companies has declined to 44 per cent in March 2004 compared to 51.6 per cent in March 2003 in government and other approved securities.

LIC – one of the largest investor in the debt market – is thus moving away from investment in government securities and increasing its exposure to the stock market. LIC is not the only life insurance company to reduce investment in government securities; even the private companies like Max New York Life, Kotak Mahindra Old Mutual Life, AMP Sanmar and ING Vysya have in absolute terms decreased their investment in government securities. The preference today is for investment in equity and corporate debt, which fetch higher returns. 

In addition, LIC is increasing its exposure to banks. The state-owned insurance wants to exploit the synergies between insurance and banking sectors by hiking its stake in commercial banks. It has recently almost doubled its holding in Bank of Maharashtra to over 2.0 per cent, from the earlier 1.09 per cent. 

LIC holds about 10 per cent in ICICI Bank, 5 per cent in SBI, 6.37 per cent in IDBI Bank and about 5 per cent in HDFC Bank. In these banks, LIC does not have any board representation despite a significant stake. 

The investment pattern of the Indian private general insurance companies is shown in Table 6. The public sector includes GIC and its four subsidiaries and the private sector includes 9 companies. The investment pattern of public sector companies indicates that it has increased the investment to 38.5 per cent of its funds at the end of March 2004 in government and other approved securities compared to 35.9 per cent in March 2003. As also, the private sector has increased its investment to 52.2 per cent in March 2004 as compared to 48 per cent in March 2003 in government and other approved securities.

Critical Issues of Concern
LIC’s claim repudiation ratio — the claims that are rejected, is lower than one per cent. Sources at Irda have found out that private sector life insurers, on the other hand, have a repudiation ratio of over 13 per cent. LIC’s death claims were being settled within 21 days and the outstanding claims as on March 2004 were at their lowest ever at 0.13 per cent. A low repudiation ratio indicates that the insurer is paying all claims which are payable under the policy’s terms. However, the settlement of any insurance claim also involves interpretation of a lot of technical conditions, which are generally used by the insurers to reject the claims. A high repudiation ratio may also explain the fact that private life insurers have low claim records in the post-liberalisation period. The private life insurers have maintained that the Indian life insurance market is a profitable one and two of the life insurance companies, Bajaj Allianz Life Insurance and Max New York Life Insurance have already announced profits within the first three years of their operation. Globally, life insurance companies take six to seven years to break-even. LIC is making efforts to bring its outstanding claims ratio to below 0.02 per cent in survival benefits (SB) and maturity and 1.5 per cent in death claims. 

In a move to enable speedy claim settlement, LIC is planning to centralize its claim processing system to manage over Rs.20,000 crore worth of claims out of the one crore policies annually. The new system is expected to be a big boost for its nearly 14 crore policy-holders who can then receive speedy claim settlement services. The Corporation is making all-out efforts to bring outstanding claims ratio to below 0.02 per cent in survival benefits (SB) and 1.5 per cent in death claims.

Deregulated market and competition
India is poised to experience major changes in its insurance market as insurers operate in an increasingly deregulated and liberalised environment. While public sector players are likely to lose market share, they would continue to hold a strong market position on account of their well-branded equity and distribution network. They are also accepting challenges of competition and effecting considerable improving their service to policy-holders. Nevertheless, given the enormous potential of the Indian market, it is expected that there will be enough business for the new entrants. For consumers, opening up of the insurance sector will mean new products, better pricing and improved customer service. 

Technological advances are expected to enable new distribution channels, while recent regulatory changes (banks’ entry into insurance) are expected to allow cross-selling between financial services companies. The use of the internet to distribute life insurance products has not made a significant impact so far, partly because of the substantial advisory component of most life insurance products. However, bancassurance is expected to gain considerable popularity. 

Intense competition in the urban market has forced private life insurers to look towards rural India for growth business. The insurance companies are exploring tie-ups with rural-based agencies like non-government organisations (NGOs), micro financing institutions, agriculture marketing and fertilizer co-operatives and banks for promoting their schemes. Life insurance companies like ICICI Prudential Life, Max New York Life and ING Vysya Life have designed rural-specific low-premium products targeting the rural households. HDFC Standard Life Insurance Company is now actively considering expansion of its wings in rural areas, by partnering with the Department of Posts and reputed NGOs. 

Competition in the insurance sector may further intensify once the government approves the enhancement in the foreign direct investment (FDI) cap for the sector from 26 per cent to 49 per cent, which is under its consideration. 

 

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

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