Development of Derivative Markets in India

Derivatives markets have been in existence in India in some form or other for a long time. In the area of commodities, the Bombay Cotton Trade Association started futures trading in 1875 and, by the early 1900s India had one of the world’s largest futures industry. In 1952 the government banned cash settlement and options trading and derivatives trading shifted to informal forwards markets. In recent years, government policy has changed, allowing for an increased role for market-based pricing and less suspicion of derivatives trading. The ban on futures trading of many commodities was lifted starting in the early 2000s, and national electronic commodity exchanges were created.

In the equity markets, a system of trading called “badla” involving some elements of forwards trading had been in existence for decades. However, the system led to a number of undesirable practices and it was prohibited off and on till the Securities and Exchange Board of India (SEBI) banned it for good in 2001. A series of reforms of the stock market between 1993 and 1996 paved the way for the development of exchange-traded equity derivatives markets in India. In 1993, the government created the NSE in collaboration with state-owned financial institutions. NSE improved the efficiency and transparency of the stock markets by offering a fully automated screen-based trading system and real-time price dissemination. In 1995, a prohibition on trading options was lifted. In 1996, the NSE sent a proposal to SEBI for listing exchange-traded derivatives. The report of the L. C. Gupta Committee, set up by SEBI, recommended a phased introduction of derivative products, and bi-level regulation (i.e., self-regulation by exchanges with SEBI providing a supervisory and advisory role). Another report, by the J. R. Varma Committee in 1998, worked out various operational details such as the margining systems. In 1999, the Securities Contracts (Regulation) Act of 1956, or SC(R)A, was amended so that derivatives could be declared “securities.” This allowed the regulatory framework for trading securities to be extended to derivatives. The Act considers derivatives to be legal and valid, but only if they are traded on exchanges. Finally, a 30-year ban on forward trading was also lifted in 1999.

The economic liberalization of the early nineties facilitated the introduction of derivatives based on interest rates and foreign exchange. A system of market-determined exchange rates was adopted by India in March 1993. In August 1994, the rupee was made fully convertible on current account. These reforms allowed increased integration between domestic and international markets, and created a need to manage currency risk. The easing of various restrictions on the free movement of interest rates resulted in the need to manage interest rate risk.

Derivatives Instruments Traded in India

In the exchange-traded market, the biggest success story has been derivatives on equity products. Index futures were introduced in June 2000, followed by index options in June 2001, and options and futures on individual securities in July 2001 and November 2001, respectively.

Derivatives on stock indexes and individual stocks have grown rapidly since inception. In particular, single stock futures have become equally popular to the index futures. In fact, NSE has the highest volume (i.e. number of contracts traded) in the single stock futures globally, enabling it to highest rank holder among world exchanges at point of time. While single stock options were less popular than stock futures, they have witnessed a high growth rate since starting of 2011 after they were changed to European style. On the other hand, index options are hugely popular than index futures. Now a days, index options turnover share the 2/3rd of the total F&O turnover. NSE launched interest rate futures in 2009 on 10 Year Notional Coupon-bearing Govt. of India Security & the recently introduced (2011) 91-day Govt. of India T-Bill; but in contrast to equity derivatives, there has been little trading in them. This particular segment is still in its nascent stage.

Regulators permitted the exchanges to launch currency derivatives contracts to start with USDINR currency pair in 2nd half of 2008. Later on three more currency pairs EURINR, GBPINR & JPYINR is allowed in Feb. 2010. Currency options contracts were launched on Oct. 29th 2010 on USDINR only & so far now this is the only option contract available in the segment. Since its launch forex derivatives have seen continuous activity & rising trading volumes than interest rate derivatives and any other segments.

Exchange-traded commodity derivatives have been allowed for trading only since April 2003. The number of commodities eligible for futures trading is 109 by 2011 on 21 recognized exchanges. Of all the commodities, bullion contracts shares 40.75%, most of the total turnover. Among all exchanges, MCX enjoys the biggest share of turnover of more than 82% of the total traded value.

History of Indian Mutual Fund Industry

The idea of Mutual Fund had its formal origin in Belgium as investments in national industries associated with high risks. In 1860s this movement started in England. In 1868, the foreign and Colonial Government Trust was established to spread risks for investors over a large number of securities. In USA the idea took root in the beginning of the 20^th century. In Canada, during 1920, many close ended investment companies were organized. The first mutual fund in Canada to issue its share to general public was the Canadian Investment Fund (1932). Large number of mutual funds emerged and expanded their wings in the many countries in Europe, the Far East countries and Latin America. Countries in Pacific area like Hong Kong, Thailand, Singapore and Korea have also entered this field in a long way.

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. The history of mutual funds in India can be broadly divided into four distinct phases

First Phase – 1964-87 (Establishment & Growth of UTI)

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI.

The first scheme launched by UTI was Unit Scheme 1964, which attracted the largest number of investors in any single investment scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes during 1981-84, Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Mastershare (India’s first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. Since establishment UTI enjoyed complete monopoly and by the end of 1987, UTI's assets under management grew ten times to Rs. 6700 crores.

Second Phase – 1987-1993 (Entry of Public Sector Funds)

The Indian mutual fund industry witnessed a number of public sector players entering the market in 1987 including public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non-UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.

At the end of 1993, the mutual fund industry had assets under management increased by seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share.

Third Phase – 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of ` 1,21,805 crores. The Unit Trust of India with ` 44,541 crores of assets under management was way ahead of other mutual funds.

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of ` 29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than ` 76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth.

In this phase, the mutual fund industry witnessed several merger & acquisitions and simultaneous entry of international mutual fund players like Franklin Templeton, Fidelity, DSP BlackRock, HSBC, JP Morgan, Mirae Asset, AIG Global etc.

The industry witnessed a compounded annual growth rate of 31.25% from March 2003 to March 2011. The graph indicates the growth of assets over the years.

Survival of the Fittest

Life is all about growth and development. We tend to change along with the growth and our personality also develops with it. There are some changes which we bring intentionally to become smarter and confident in order to fulfill our dreams.

We all are different in some or the other manner.We all carry some unique qualities which are often called “skills”. Those unique qualities should be improved and satisfied with whatever role we are playing in current circumstances. We have to nurture the qualities we are born with. This is our fundamental objective. Most of the time our job doesn’t take care of our fundamental objective. So in order to nurture our inborn qualities we always have to find right career rather than choose right job.

Many times you would find yourself trapped in a job without enjoying your appropriate career and such things in life, when happens, cause various mental as well as physical problems and your family also share the stress with you. If you are qualified enough to have a handsome salary and good job but still finding some odd ratio between job and personal happiness than you must think over your goals. Find answers of such small questions - Why did you choose this job? What were your expectations then? And now, why are you not feeling happy? You may sometimes end up changing your job and feel like the problem will be solved. But your dreams can’t be achieved by just doing routine jobs. Your  job and life should actually revolve around your dreams or goals. You have to find out your expectations, your goals and your happiness through your professional career.

Improvement in these areas may require polishing of your skills. Education or your qualification plays vital role in choosing your right career. You can nourish your skills by doing some good professional courses and enhance your talent in respective field in order to achieve happiness and satisfaction. Then only you can align yourself onto right career path.

India is going through a major transaction phase. This era is more related to knowledge based economy and growth rather than industrial growth. This growth has further strengthened the financial sector revolving around financial markets. The new breed of entrepreneurs like major IT companies, service industry, etc. have taken advantage of this emerging sophistication in financial markets to raise fresh capital, hedge their foreign exposure using financial derivatives and have created opportunities for the investors at large. This domain has created more than 500,000 jobs in last decade. Still there is a huge demand for skilled professionals who can take this baton of India’s growth story forward.

Keeping this in mind. Intelivisto was incorporated to focus on financial education specially preparing and grooming students and professionals for building their careers in financial market domain. We offer trainings and workshops along with online test and assessment platform for various certifications like NISM and NCFM modules offered by NSE, MCX and SEBI. We are also be launching some advance trainings in the area of fundamental and technical analysis and some of the well respected international certifications in India.