Indian Economy, 5th edition (66 page)

Micro insurance has evolved in the past two decades of research in micro finance and has seen growth in countries like Sri Lanka, Philippines in the last decade
16
. Here NGOs and people’s organisations are allowed to register themselves as micro insurance companies which sell such insurance. As they cover the risk themselves, they are allowed to
reinsure
with one of the large global companies like
s
wiss Re or Munich Re. Same model is suggested for India but for this to happen drastic changes in the existing insurance rules are required
17
.

5.
Many of the experts believe that insurance industry should benefit the insurers, reinsurers as well as the insured. The
social purpose
of the insurance sector is never praiseworthy to be marginalised by the corporate interests (be domestic or foreign)—at least it does never taste good in India which needs a strong social safety net.
18

6.
Almost all of the private insurance companies in India have been demanding that the government-owned insurance companies (i.e. LIC and the four general insurance companies) should be converted into private sector companies. Their reasons are logical as in comparison with the government-owned insurance companies, private companies are always ready with highly attractive and lucrative insurance schemes but they have not been able to attract the clients for them. Therefore, the private insurance companies have been fetching huge operational losses due to lack of the desired level of their expansion and the overhead expenditure.
19

Insurance Penetration

The growth in the insurance sector is internationally
measured
based on the standard of insurance penetration. Insurance penetration is defined as the ratio of premium underwritten in a given year to the gross domestic product (GDP). Likewise, insurance density is another well recognized benchmark and is defined as the ratio of premium underwritten in a given year to total population (measured in US dollars for convenience of comparison). The Indian insurance business has in the past remained under-developed with low levels of insurance penetration. Post liberalization
20
the sector has succeeded in raising the levels of insurance penetration from 2.3 (life 1.8 and non-life 0.7) in 2000 to 5.1 (life 3.4 and non-life 0.7) in 2011.

As per the
Economic Survey 2012-13
, despite the growth in the insurance sector that was witnessed during the last few decades, insurance penetration and density remained low as compared to other developing countries of the world. It was felt that various legislative provisions were archaic and needed revision in line with the changing market conditions. Accordingly, the government introduced the Insurance Laws (Amendment) Bill 2008 in the Rajya Sabha on 22 December 2008. Based on the recommendations of the Standing Committee, the official amendments to the Insurance Laws (Amendment) Bill 2008 are proposed to be introduced at the earliest. The
Survey
further adds that

i.
limited choice and high cost of providing covers, and

ii.
assessing claims

are some of the issues that need to be suitably addressed to make insurance funds an effective means of channellizing savings to investments.

Policy Initiatives

Committed to expand and strengthen the insurance industry in the country (following the recommendations of the Malhotra Committee Report, 1993), the GoI has taken the following policy initiatives
21
in the recent years:

1.
Health Insurance:
The Insurance Regulatory Development Authority
(
IRDA) has been taking a number of proactive steps as part of the initiatives for the spread of health insurance. It had set up a National Health Insurance Working Group in 2003, which provided a platform for the various stakeholders in the health insurance industry to work together and suggest solutions on various relevant issues in the sector. The IRDA is also co-ordinating with and supporting insurance industry initiatives in standardizing certain key terminology used in health insurance documents, for better comprehension and in the interest of policyholders. The
General Insurance Council,
comprising all non-life insurers, evolved a consensus on a uniform definition of ‘preexisting diseases’ and its exclusion wording, which has earlier been an expression with many definitions, still more interpretations, and certainly a whole lot of grievances. Such standardization, effective 1 June 2008 will help the insured by minimizing ambiguity and also by better comparability of health insurance products. Also, with effect from 1 October 2011, portability in health insurance has been started in which an insured, if not happy with services or the product of the existing insurer, can change to another insurer whilst enjoying the benefits (especially that of pre-existing diseases) of her/his existing policy.

2.
Micro Insurance:
Micro insurance regulations issued by the IRDA have provided a fillip to propagating micro insurance as a conceptual issue. With the positive and facilitative approach adopted under the micro insurance regulations, it is expected that all insurance companies would come out with a progressive business approach and carry forward the spirit of regulations thereby extending insurance penetration to all segments of society. Presently, there are 10,482 micro insurance agents operating in the micro insurance sector.

3.
Insurance Laws (Amendment) Bill 2008:
The Bill aimed to amend the Insurance Act 1938, the General Insurance Business (Nationalisation) Act 1972, and the Insurance Regulatory and Development Authority Act 1999. The Standing Committee on Finance has submitted its report to the Parliament on 13 December 2011. The report of the Committee is under examination by the government. Amendments to the LIC Act 1956: The LIC (Amendment) Bill, 2011 was passed by Parliament on 12 December 2011. The amendments will enable the LIC to raise its equity capital from Rs. 5 crore to Rs. 100 crore and create a
reserve fund
to be used for its
business expansion
and meeting its
corporate social responsibility.

Definition

The segment of a financial market of an economy from long-term capital is raised via instruments such as shares, securities, bonds, debentures, mutual funds is known as the security market of that economy.

A security market has components such as a security regulator (SEBI in India), stock exchanges, different share indices, brokers, FIIs, jobbers, etc. There are different kinds of transactions which take place in a security market such as badla, reverse badla, future trading, insider trading (not allowed), private placement, etc.

Primary and Secondary
Markets

Every security market has two complementary markets—Primary and the Secondary. The market in which the instruments of security market are traded (procured) directly betweefn the capital-raiser and the instrument purchaser is known as the primary market.

As for example, a share being directly purchased by anybody from the issuer which may be the company itself. The person is known as the primary shareholder. The market where the instruments of security market are traded among the primary instrument holders is known as the
secondary market
. Such transactions need an institutionalised floor for their trading which is made available by the stock exchanges.

Stock Exchange

A physically existing institutionalised set-up where instruments of security stock market (shares, bonds, debentures, securities, etc.) are traded. It serves the following major functions:

(i)
Makes a floor available to the buyers and sellers of stocks and liquidity comes to the stocks. It is the single most important institution in the secondary market for securities.

(ii)
Makes available the prices of trading as an important piece of information to the investors.

(iii)
By following institutionalised rules and procedures, it ensures that the participants in the stock market live up to their commitments.

(iv)
Passes updated informations to the enlisted companies about their present stockholders (so that they can pass on dividends etc. to them).

(v)
By publishing its ‘Index’, it fulfills the purpose of projecting the moods of the stock market.

World’s first stock exchange was established in Antwerp, Belgium (then part of the Netherlands) in 1631, the London Stock Exchange opened in 1773 and then Philadelphia Stock Exchange (the first in the New World) opened in 1790.
1
The first stock exchange in India, the Bombay Stock Exchange known as
The Native
s
hare and
s
tock Brokers’ Association
was set up in 1870 (under a tree!).
2

Top five largest stock exchanges (on the basis of market capitalisation) of the world in their decreasing order are—the New York Stock Exchange, the NASDAQ, the Tokyo Stock Exchange, the London Stock Exchange and the Bombay Stock Exchange.
3

Trading in the stock exchanges takes place via the mediators known as the
brokers,
the
jobbers
, the
market-maker
(discussed later in this chapter).

As per the latest information
4
, presently, there are a total number of 26 stock exchanges operating in India – 7 at the national level and rest 19 at the regional level (one of it, Coimbatore Stock Exchange recently sought for withdrawal of recognition, the matter is sub-judice under SEBI). A brief account of the ‘national level stock exchanges’ is given below.

NSE

The National Stock Exchange of India Ltd. (NSE) was set up in 1992 and became operationalised in 1994. The sponsors of the exchange are financial institutions, including IDBI, LIC and GIC with IDBI as its promotor.

It has a 50 share index and a 500 share index known as S&P CNX-50 (Nifty Fifty) and S&P CNX-500, respectively.

OTCEI

Though the
o
ver the
c
ounter Exchange of India Ltd (OTCEI) was set up in 1989, it could commence trading only in 1992. India’s first fully computerised stock exchange was promoted by the UTI, ICICI, SBI Cap among others, in order to overcome problems such as lack of transparency and delays in settlements prevalent in the older stock exchanges. Another important goal of the exchange was to allow stock market exposure to comparatively smaller companies (companies with paid-up capital from Rs. 30 lakh to Rs. 25 crore are enlisted here). Trading in this exchange takes place via market-makers and commission is fixed.

ISE

The Interconnected
s
tock Exchange of India (ISE) is basically a single floor of India’s 15 regional stock exchanges (RSEs), set up in 1998. The RSEs were provided increased reach through this. It is a web-based exchange.

BSE

The Bombay Stock Exchange Ltd. (BSE), earlier a regional stock exchange, converted into a national one in 2002. The
biggest
in India, it accounts for almost 75 per cent of total stocks traded in India and is the
fifth
largest in the world (on the basis of market capitalisation).

There are at present four Indices connected with the BSE:

(i)
Sensex:
The sensitive index (i.e. Sensex) is a 30 stocks index of the BSE which was enlarged to include 50 stocks in 2000 but soon was cut down to the original level. This index represents the Indian stock market.

(ii)
BSE-200:
This is a 200 stock share index of the BSE (including the 30 stocks of the Sensex) which has its Dollar version too—
the Dollex
.

(iii)
BSE-500:
In mid-1999, the BSE came up with a 500-stock index representing major industries and many sub-sectors of the economy with information technology getting a significant weightage.

(iv)
National Index:
An index of 100 stocks being quoted nationwide (Bombay, Delhi, Kolkata, etc.) was developed to give broader/wider representation of the stock market since the Sensex consists of only 30 stocks.
t
he 30 stocks of the sensex are included in the National Index.

This index is computed by the Statistics Department of the BSE hence it is called the BSE National Index (BSENI).

Indo Next

A new stock exchange to promote liquidity to the stocks of the small enterprises (SMEs) was launched in 2005 jointly and medium the BSE and the FISE (Federation of Indian Stock Exchanges, representing 18 regional stock exchanges).

•
It is better known as the
BSE Indo Next.
It was also an effort to rejuvenate the RSEs which were facing falling volumes of trading on their floors. Due to absence of trading at the RSEs, the stocks of the SME, has become illiquid.

The BSE will transfer all its B1 and B2 groups to this exchange. The RSEs also transfer their enlisted companies to the new exchange.

Now the RSEs will be able to use the BSE network online—the ‘Webex’.

SME Exchanges:
BSESME
and
Emerge
5

SME exchange is a stock exchange dedicated for trading the shares of small and medium scale enterprises (SMEs) who, otherwise, find it difficult to get listed in the main exchanges. The concept originated from the difficulties faced by SMEs in gaining visibility or attracting sufficient trading volumes when listed along with other stocks in the main exchanges.

To be listed on the SME exchange, the post-issue paid-up capital of the company should not exceed Rs. 25 crores. This means that the SME exchange is not limited to the small and medium Scale enterprises (which are defined under the ‘Micro, Small And medium enterprises Development Act, 2006’ as enterprises where the investment in plant and machinery does not exceed Rs. 10 crores). As of now, to get listed in the main boards like, National Stock Exchange, the minimum paid-up capital required is Rs. 10 cr and that of the BSE is Rs. 3 cr. Hence, those companies with paid-up capital between Rs. 10 cr to Rs. 25 cr have the option of migrating to the Main Board/or to the SME exchange. The companies listed on the SME exchange are allowed to migrate to the Main Board as and when they meet the listing requirements of the Main Board. There shall be compulsory migration of the SMEs from the SME exchange, in case the post-issue paid-up capital is likely to go beyond the Rs 25 crore limit.

World over, trading platforms/exchanges for the shares of SMEs are known by different names such as Alternate Investment Markets or Growth Enterprises Market, SME Board etc. Some of the known markets for SMEs are
AIM
(Alternate Investment Market) in UK,
TSX Ventures
in Canada,
GEM
(Growth Enterprise’s Market) in Hong Kong,
MOTHERS
(Market of the High-Growth and Emerging Stocks) in Japan,
Catalist
in Singapore and
Chinext
, the latest initiative in China [see ‘World Federation of Exchanges’ for latest comparative idea].

Globally, most of these SME exchanges are still at an evolving stage considering the many hurdles they face –

•
Declining prices of listed stocks and their illiquidity,

•
A gradual reduction in new listings and decline in profits of the exchanges etc. (for instance,
AIM
had three predecessors;
CATALIST
succeeded
SESDAQ
with new regulations and listing requirements).

•
In most jurisdictions, idea of a separate exchange for SMEs have become unviable and hence tend to be platforms of existing exchanges, perhaps cross-subsidized by the main board/exchange.

In India, similarly, after the two previous attempts –
OTCEI
(Over the Counter Exchange of India, 1989) and
Indonext
– the market regulator, SEBI, on May 18, 2010 permitted setting up of a dedicated stock exchange or a trading platform for SMEs. The existing bourses/stock exchanges in India, BSE and NSE went live on 13 March, 2012 with a separate trading platform for small and medium enterprises (SMEs). BSE has named its SME platform as
BSESME
while NSE has named it as
Emerge
.

Unlike in India, many of these SME exchanges in various countries operate at a global level, due to smallness of the market, allowing for listing by both domestic as well as foreign companies. Though the names suggest that they are set up for SMEs, these exchanges hardly follow the definition of SMEs in their respective jurisdictions. Also, many of them follow a ‘Sponsor-supervised’ market model, where sponsors or nominated advisors decide if the listing applicant is suitable to be listed or not, i.e., generally no quantitative entry criteria like track record on profitability or minimum paid-up capital or net worth etc. are specified to be listed in these exchanges. Instead, they are designed as ‘buyers beware’ markets for informed investors. SEBI has also designed the SME exchanges in a similar format with provisions for
‘market making’
for the specified securities listed on the SME exchange.

As is the case globally, certain relaxations are also provided to the issuers whose securities are listed on the SME exchange in comparison to the listing requirements in Main Board (such as in BSE and NSE, in the case of India), which include –

(i)
Publication of financial results on ‘half yearly basis’, instead of ‘quarterly basis’, making it available on their websites rather than publishing it.

(ii)
Option of sending a statement containing the salient features of all the documents instead of sending a full Annual Report.

(iii)
No continuous requirement of minimum number of shareholders, though at the time of IPO there needs to be a minimum of 50 investors etc.

(iv)
The existing eligibility norms like track record on profits, net worth/net tangible assets conditions etc. have been fully relaxed for SMEs as is the case globally.

(v)
However, no compromise has been made to corporate governance norms.

Common Facts about the National Stock Exchanges

Before the arrival of national level stock exchanges, India was not having any exchange of national status—better say there was no Indian stock market but stock markets showing only regional pictures. Besides, the national stock exchanges did solve some major problems of stock market, we may also call their arrivals as part of the stock market reforms in India. The common features of these exchanges are:

(a)
all are situated in Mumbai;

(b)
all do screen-based trading (SBT);

(c)
all have their trading terminals in the major cities of the country;

(d)
all are web-enabled;

(e)
all are limited liability companies;

(f)
the brokers registered here have no say in either the ownership or the management of the exchanges;

(g)
All are counted among the best and the most technology-equipped stock exchanges in the world.
6

Players in the Stock Exchanges

Broker

Broker is a registered member of a stock exchange who buys or sells shares/securities on his client’s behalf and charges a commission on the gross value of the deal—such brokers are also known as
commission brokers
.

Brokers who offer services such as investment advice, clients’ portfolio planning, credit when a client is buying on margin other than their traditional commission job are known as
full service brokers
. In India such brokers are just coming up.

Jobber

A jobber is a broker’s broker or one who specialises in specific securities catering to the need of other brokers—in India also known as ‘
Taravaniwallah
’ (in the BSE).
7
A jobber is located at a particular trading post on the floor of the stock exchange and does buying and selling for small price differences, called the
spread
. He has no contact with the investing public.