1.

Introduction to present financial market in India

• General Overview

As might be expected, the main impact of the global financial turmoil in India has
emanated from the significant change experienced in the capital account in 2008-09
so far, relative to the previous yeari. Total net capital flows fell from US$17.3 billion
in April-June 2007 to US$13.2 billion in April-June 2008. While Foreign Direct
Investment (FDI) inflows have continued to exhibit accelerated growth (US$ 16.7
billion during April-August 2008 as compared with US$ 8.5 billion in the
corresponding period of 2007), portfolio investments by foreign institutional
investors (FIIs) witnessed a net outflow of about US$ 6.4 billion in April-September
2008 as compared with a net inflow of US$ 15.5 billion in the corresponding period
last year.

Similarly, external commercial borrowings of the corporate sector declined from US$
7.0 billion in April-June 2007 to US$ 1.6 billion in April-June 2008, partially in
response to policy measures in the face of excess flows in 2007-08, but also due to the
current turmoil in advanced economies. Whereas the real exchange rate appreciated
from an index of 104.9 (base 1993-94=100) (US$1 = Rs. 46.12) in September 2006 to
115.0 (US$ 1 = Rs. 40.34) in September 2007, it has now depreciated to a level of
101.5 (US $ 1 = Rs. 48.74) as on October 8, 2008.
 • Primary Market

Primary Market may be defined as a market for new issues. 1 The primary market is
the pacesetter for mobilizing resources by corporates.2 The bull-run in the secondary
market enabled and emboldened companies to enter the market with big issues and
attract investors and traders to invest in public issues to reap high profits following
their listing.

The companies profitability performance was also good. The market, however,
underwent turmoil as soon as an FII-driven crisis developed in the secondary market
and the mega crash occurred in January second week

Presently, the primary market is in a bearish mood and this can be seen from the
way the issues of Wockhardt Hospital and Emaar MGF have gone.

There are two factors for this depressing outlook

• Continuing uncertainties; and

• Further crash of the stock prices and hesitation on the part of investors due to
fall in shares of Reliance Power as soon as they were listed. Investors lost
nearly Rs 70 per share on listing of Reliance Power.

Only 19 companies have entered the capital market in the current financial year so far,
mobilizing Rs 1,968 crore, the lowest since 2003-04. Interestingly, of these 19 public
offers, only four are trading above the issue prices while 13 are trading at discounts.
Two are not yet listed. IPO investors have become cautious as 70 per cent public
offers made last financial year are currently trading at a discount.

Following this poor show of public offers and a slippery secondary market, several
Indian promoters have withdrawn their plans to raise funds through public offers. The
Securities and Exchange Board of India (Sebi) data show that 24 promoters, who
were planning to raise Rs 21,300 crore, have either put their plans on hold or have
withdrawn their offer documents after submitting the red-herring prospectus.3
1

3
According to Prime Database, four companies, collectively planning to raise Rs 4,517
crore, have withdrawn their offer documents since April 2008. This includes JSW
Energy (Rs 4,000 crore), RNS Infrastructure (Rs 300 crore), Cellebrum Technologies
(Rs 200 crore) and Elysium Pharmaceuticals (Rs 17 crore).

Many real estate and financial services sector companies have postponed or cancelled
their IPO plans after stocks from these sectors reported more than 50 per cent erosion
in their market value. Promoters of Emaar MGF Land, Wockhardt Hospitals and
SVEC Constructions pulled out their IPOs, amounting to Rs 1,317 crore, due to low
response from retail investors. There are over 100 companies such as Essar Power,
GMR Energy, ICICI Securities, Lodha Builders, Sterlite Energy and SRL Ranbaxy,
which had announced their IPO intentions but have now stalled their plans.

• Secondary Market

The sensex climbed at a rapid rate, touching record heights in 2007 -2008. The
average Indian investor who traditionally has been a very conservative investor
became more confident and started investing heavily in the stock market. The stock
market grew in leaps and bounds and its growth in the last five years itself has been a
phenomenal twenty five per cent.

The BSE Sensex increased significantly from a level of 13,072 as at end-March 2007
to its peak of 20,873 on January 8, 2008 in the presence of heavy portfolio flows
responding to the high growth performance of the Indian corporate sector. With
portfolio flows reversing in 2008, partly because of the international market turmoil,
the Sensex has now dropped to a level of 11,328 on October 8, 2008, in line with
similar large declines in other major stock markets.

Against this backdrop the unthinkable happened, the stock market Of the United
states of America or Wall street stock exchange crashed due to a crisis in the housing
finance sector of its leading banks, caused due to delinquency and non-repayment of
housing loans. This resulted in a panic in the world market including India. The
Foreign Investment also came down heavily due to a liquidity crunch in the major
companies. The banks stopped lending to the bankers and in effect the market came to
a sudden stop. The Indian investor panicked again and started selling like crazy.
Major companies started making announcements like job layoffs to minimize their
losses.4

• Money Markets

Money markets are the markets for short-term, highly liquid debt securities. Examples
of these include banker’s acceptances, repos, negotiable certificates of deposit, and
Treasury Bills with maturity of one year or less and often 30 days or less. Money
market securities are generally very safe investments, which return relatively, low
interest rate that is most appropriate for temporary cash storage or short term time
needs. Whereas capital markets are the markets for intermediate, long-term debt and
corporate stocks. The National Stock Exchange, where the stocks of the largest
Indian. Corporations are traded, is a prime example of a capital primary market.
Regarding timing, there is no hard and fast rule on this, but when describing debt
markets, short term generally means less than one year, intermediate term means one
to five years, and long term means more than five years.

o Impact on money market

Money Market is actually an inter-bank market where banks borrow and lend money
among them to meet short-term need for funds. Banks usually never hold the exact
amount of cash that they need to disburse as credit. The ‘inter-bank’ market performs
this critical role of bringing cash-surplus and cash-deficit banks together and
lubricates the process of credit delivery to companies (for working capital and
capacity creation) and consumers (for buying cars, white goods etc). As the housing
loan crisis intensified, banks grew increasingly suspicious about each other’s solvency
and ability to honor commitments. The inter-bank market shrank as a result and this
began to hurt the flow of funds to the ‘real’ economy. Panic begets panic and as the
loan market went into a tailspin, it sucked other markets into its centrifuge.

The liquidity crunch in the banks has resulted in a tight situation where it has become
extremely difficult even for top companies to take loans for their needs. A sense of
disbelief and extreme precaution is prevailing in the banking sectors. The global
investment community has become extremely risk-averse. They are pulling out of

4
assets that are even remotely considered risky and buying things traditionally
considered safe-gold, government bonds and bank deposits (in banks that are still
considered solvent).

As such this financial crisis is the culmination of the above-mentioned problems in

the global banking system. Inter-bank markets across the world have frozen over. The
meltdown in stock markets across the world is a victim of this contagion.

Governments and central banks (like Fed in US) are trying every trick in the book to
stabilize the markets. They have pumped hundreds of billions of dollars into their
money markets to try and unfreeze their inter-bank and credit markets. Large financial
entities have been nationalized. The US government has set aside $700 billion to buy
the ‘toxic’ assets like CDOs that sparked off the crisis. Central banks have got
together to co-ordinate cuts in interest rates. None of this has stabilized the global
markets so far. However, it is hoped that proper monitoring and controlling of the
money market will eventually control the situation.

2. Reasons for this turmoil

The turmoil in the international financial markets of advanced economies that started
around mid-2007 has exacerbated substantially since August 2008. The financial
market crisis has led to the collapse of major financial institutions and is now
beginning to impact the real economy in the advanced economies. As this crisis is
unfolding, credit markets appear to be drying up in the developed world.

Why did this huge fall happen?

Many factors. The global crisis can be said to be a fault of the Federal Bank of USA.
One, there is a change in the global investment climate. One of the primary triggers is
the huge fear of the United States' economy going into a recession with foreign
institutional investors trying to reallocate their funds from risky emerging markets to
stable developed markets. Analysts are now expecting a cut in US interest rates.

• Bad lending policies

In 2005-07 the property markets were on a high growth path. The property prices kept
increasing. A sense of complacency had set in the real estate markets. It was assumed
that the residential property prices would keep increasing forever. Mortgage lenders
relaxed lending standards. Billions of dollars of sub-prime loans were to given
borrowers with the sketchiest credit histories on recommendations of mortgage
brokers who were more interested in their commission.

Loans were structured very innovatively. Some gave borrowers the ability to skip
repayments and some had interest rates that rose over the life of the loan. Lenders
were not worried about repayments as defaults if any, on loans, could be recouped
from the property itself.

Contrary to this assumption, the property bubble burst leading to sharp depreciation in
property prices. As loans were given to people who could not repay it in the best of
time, mortgage repayments defaults kept increasing, triggering off a chain of events
that led to the bankruptcies of the hallowed institutions of Wall Street.

The rise in default rates in the sub-prime market is essentially due to two things. Most
borrowers got into adjustable rate mortgages where the interest rates were reset
periodically. Second, as the US Fed relentlessly hiked policy rates (17 times
between 2004 and 2006), mortgage rates rose as much as 40 per cent. Sub-prime
borrowers, characterized by low and often volatile incomes, found that they
could not service their loans any longer. The result is the large default across the
board, which plagues the markets. Therefore, the Fed has to shoulder at least part of
the blame for the current mess.

Perhaps the US central bank could have been a little more prescient and figured out
that the series of rate hikes had the potential to trigger a crisis of this kind. The
existence of the large quantum of sub-prime assets and the impact of mortgage rate
resets should have figured more actively in their monetary policy discussions much
earlier. Finally, if the Fed had felt that the excess liquidity was whipping up too much
froth in the housing market, it should have excised the problem much earlier than
allowing festering.
As growth slows in the U.S. and Europe, emerging economies' exports to them will
slow. In the past, a 1 percent decline in U.S. growth has led to a decline in growth in
emerging economies by 0.5 to 1 percent, depending on trade and financial links with
the United States.

The present crisis is the result of a perfect storm: a macroeconomic environment with
a prolonged period of low interest rates, high liquidity and low volatility, which led
financial institutions to underestimate risks, a breakdown of credit and risk
management practices in many financial institutions, and shortcomings in financial
regulation and supervision.5

• This environment both fueled a U.S. housing boom and encouraged banks and
other institutions to take on excessive leverage to generate high returns.
• Financial institutions weakened their lending standards and took on excessive
risk. The most obvious example is the US sub-prime mortgage market, but the
holders of these risks were not only in the United States, and problems may also
surface in other kinds of lending—for example leveraged loans and consumer
credit—or other countries. Nor is the problem confined to industrial countries.
For example loose credit in some emerging economies may lead to problems
down the road.6
• A bleaker economic outlook would in turn make it more difficult to get out of the
financial crisis, because it worsens the prospects of businesses and individuals.
This is one reason that equity markets have fallen as the risks of a U.S. recession
and a global downturn have grown

3. Are Foreign Investors Responsible for this crisis

• Introduction

FII (Foreign Institutional Investors) is used to denote an investor, it is mostly of the

form of a institution or entity which invests money in the financial markets of a

6
country. The term FII is most commonly used in India to refer to companies that are
established or incorporated outside India, and is investing in the financial markets of
India. These investors must register with the Securities & Exchange Board of India
(SEBI) to take part in the market.

• Influence of FIIs on Indian Stock Market

The current investments of FIIs is Rs. 2,55,464.40 Crores. This is almost 9% of the
total market capitalization.7

• They increased depth and breadth of the market.

• They played major role in expanding securities business.
• Their policy on focusing on fundamentals of the shares had caused efficient
pricing of shares.

These impacts made the Indian stock market more attractive to FIIs and also domestic
investors, which involve the other major player MF (Mutual Funds). The impact of
FIIs is so high that whenever FIIs tend to withdraw the money from market, the
domestic investors become fearful and they also withdraw from market.

• Major Collapses in BSE Sensex

Just to show the impact, we analyze below the 10 biggest falls of stock market:8 -

Day (Points Loss in Gross Purchases Gross Sales (Rs. Net Investments (Rs.

8
Sensex) (Rs. Crores) Crores) Crores)
21/01/2008 (1408) 3062.00 1060.30 2001.80
22/01/2008 (875) 2813.30 1618.20 1195.10
18/05/2006 (856) 761.80 527.40 234.40
17/12/2007 (826) 670.00 869.00 -199.00
18/10/2007 (717) 1107.00 1372.50 -265.50
18/01/2008 (687) 1077.20 1348.40 -271.20
21/11/2007 (678) 640.70 791.80 -151.10
16/08/2007 (643) 989.50 750.30 239.20
02/08/2007 (617) 534.50 542.00 -7.50
01/08/2007 (615) 809.40 956.90 -147.50

From this table, we can see that the major falls are accompanied by the withdrawal of
investments by FIIs. Take the case on January 18, 2008, the Sensex lost almost 687
points. Here, the net sales by FIIs was Rs. 1348.40 Crores. This is a major contributor
to the fall on that day. But contrary to that day, take the case on January 21, 2008, the
Sensex lost 1408 points and the gross sales was Rs. 1060.30 Crores and the purchases
were Rs. 3062.00 Crores. So this can be concluded that after the fall of market, FIIs
had invested again into the market. From this, we can see the effect of FIIs.

• Net Investments of FII from 2003-089

Year Net Investment

2003 30458.7
2004 38965.1
2005 47181.2
2006 36539.7
2007 71486.5
2008 (10/08/08) -29169

From this, we can see that there is an increase in net investments till 2005 and there
9
was small decrease in investments in the year 2006. But there was a steep increase in
the year 2007-08. This was the best period in Indian stock market where stock prices
were increased and the market was in good mood.

When we take the investments in 2008, the net investments are negative. And we
know the market is volatile in this year. So we find that there is direct relation
between net investments and movement of stock market.

From all the above discussions and data analysis, we conclude that FII has a major
impact in Indian stock market. Particularly, the fall on October 17, 2007, in which just
a peculation about governments plan to control P-Notes had caused the biggest fall in
Indian stock market, even market had to be closed for one hour without trade. The
impact is that even the domestic players and MFs also follow a close look on FIIs. So
if FIIs are confident in Indian markets, there is a general perception that market is on
a song.

Furthermore, Depreciation in rupee value has added to the worries of FIIs.

Depreciation in currency leads to losses (in dollar terms) for the FIIs, as they have to
periodically represent to market value of their investments overseas. Many analysts
fear the rupee may depreciate even more against the dollar. If that happens, FIIs will
have to report huge losses on the currency account, and hence are pulling out from the
domestic markets.

Also, Analysts are projecting a slowdown in the economic growth here due to
macroeconomic issues. The RBI has also downgraded the growth projections to below
eight percent this year, based on the interim data released last month. Although
inflation is looking flattened out at around 12 percent, the depreciation in the rupee
value will again give an upward push to it.

The softening crude oil prices has provided a bit of relief, but the rupee value
depreciation is a very big issue as it is countering a large portion of savings resulting
from lower crude oil prices.

It has also been found that the major (almost 50%) of FIIs' investments are from P-
Notes. So it implies that major forces behind the FII investments are anonymous. This
has a negative impact on stock market. Because money launders and even terrorists
use this facility to pump money to Indian market and their sudden withdrawal causes
volatility in markets.

4. Policy followed by government for investors

In early 2008, the government liberalised its policy towards foreign investment in the
following key economic sectors by increasing the maximum permitted foreign
investment to:
• 49 per cent for commodity exchanges
• 49 per cent for credit information companies
• 74 per cent for non-scheduled airlines (however, foreign airlines are not
allowed to invest in a scheduled airline company in India), and
• 100 per cent in titanium mining with prior Indian Government approval.

• Participatory Notes

In October last year, the markets regulator had put a 40 per cent cap on FIIs’ total
asset holding via participatory notes or overseas derivatives instruments and stopped
them from issuing fresh P-notes or renewal of old ones with an 18-month deadline
ending in March 2009 to do the needful. The moved was aimed to keep track of
foreign flows into the country. SEBI has now decided to do away with the conditions
limiting FIIs’ allocation of funds between debt and equity to provide greater flexibility
and investment options to overseas investors.

SEBI had done away with the existing limit on distribution of FII investment a day
after the government doubled the cap on their investment in corporate debt to $6
billion. The decision came in the wake of FIIs pulling out of the Indian equity market
and pumping money in the debt market. FIIs have taken out US$11.56 billion from
equity market and bought net debt worth US$1.8 billion since January. However,
another regulation that FIIs investing up to 100 per cent in the debt market will have
to form a 100 per cent fund for this purpose and get it registered with Sebi remains,
the central bank said.10

10
 • Security Receipts

So far as security receipts issued by the Asset Reconstruction Companies (ARCs) are
concerned, the total holding of a single FII in each tranche of scheme must not exceed
10 per cent of the issue. Besides, the total holding of all FIIs put together must not
exceed 49 per cent of the paid up value of each tranche of scheme of security receipts
issued by ARCs. The relaxation, according to Sebi, is aimed at according “greater
flexibility to the FIIs to allocate investments across equity and debt.”

“It will have a two-way positive impact. This will enable FIIs to invest without any
obligation and will also enable Indian companies to get more funds for their
expansion plans,” observed Nexgen Capital Equity Head Jagannadham
Thunuguntla.11

• Corporate Debts

The move comes a day after government doubled the limit of FII investment in
corporate debts to US$6 billion. Finance Minister P Chidambaram, on Friday, said

“Sebi had informed me that it would address any request for relaxation in the
proportion of investment in equity and debt required to be maintained by an FII under
current regulations.”

Sebi said the enhanced limit for investment in corporate debts will be allocated among
the FIIs on a “first come first served” basis up to a ceiling of US$300 million per
entity.

• Two views

11
The Finance Minister P Chidambaram has urged banks to lower interest rates, in the
light of the steps taken by RBI both on liquidity and interest rate, and several public
sector banks have already announced plans on reducing their prime lending rates.
Banks have been asked to increase credit for productive purposes and ensure credit
quality. RBI has also suggested to banks to restructure the dues of small and medium
enterprises on merits.

The Reserve Bank of India had vigorously moved in October to bring down the cash
reserve ratio from a peak of 9 per cent to 5.5 per cent, reduce the key policy interest
rate from 9 to 7.5 per cent and also the statutory liquidity ratio by one percentage
point to 24 per cent of their net demand and time liabilities.

As part of measures to minimize the adverse impact of global crisis on domestic

economy, the Finance Minister has reduced certain duties to give relief to some of the
affected sectors like steel and aviation. On the budgetary side, higher allocations for
social sectors and rural employment and other flagship programmes should generate
consumption, which contributes to economy’s growth.

5. Suggestions and Lessons Learnt

1. Increase rupee liquidity

The demand for base money has increased. In order to hold interest rates at targeted
levels, the supply of base money needs to be increased. While there is a concern that a
massive injection of liquidity could find its way into runaway credit growth fuelling
inflation (which has declined only somewhat to below 12 percent on a year-on-year
basis in recent weeks) and sowing the seeds of the next asset price bubble, the central
bank has instruments within its existing framework (including tighter regulatory
requirements) to absorb liquidity if a particularly sharp acceleration in credit growth
is seen. In a financial crisis, other sources of financing have decreased. Thus a certain
robust credit growth is a goal of monetary policy. These are extraordinary
circumstances and it is preferable to err on the side of too much liquidity rather than
too little. There are several measures that the government and the RBI can implement
quickly to help restore liquidity in the system.

• A reduction of CRR
• A reduction of SLR. This should release substantial liquidity in the system.
• As the cost of interbank lending to some banks has risen sharply based on
fears that counterparty risk is difficult to gauge in the present circumstances,
the MoF/RBI could provide counterparty-risk insurance in interbank
transactions. This could be done at a market-discovered price as a percentage
of interbank lending, such that it is not seen as a blanket government
guarantee. This would help increase participation in the interbank market, and
thus increase liquidity in it. Even if the immediate need for this is not visible
right now, setting up such a useful mechanism now induces a reduction in the
perception of liquidity risk in the money market.
• Easing the barriers faced by banks and insurance companies from buying the
bonds of NBFCs and real estate companies.

2. Increase dollar liquidity

• Increase the avenues for capital inflows by raising the FII limit on corporate
bonds
• Remove restrictions on capital account transactions for NRI’s.
• The recent removal of capital controls against PNs was on the right track.
However, the PN market has collapsed owing to the heightened risk
perception of counterparties such as the large investment banks who were the
main producers of PNs. As a consequence, the unbanning of PNs will have no
impact on dollar flows into India. The customers of PNs are now using the
Nifty futures in SGX. Now the challenge lies in undertaking deeper reform of
the FII framework to make it easier for qualified market participants to
directly access the Indian market, and choose to do so instead of going to
 global venues such as SGX, NYSE, LSE, NASDAQ, etc.

3. Exchange rate policy

Almost all economists now agree that when conditions change, the central bank must
not stand in the way of adjustment by the exchange rate. Sustained exchange-rate
misalignment is extremely damaging for the economy, either in terms of
undervaluation or in terms of overvaluation. Adjustment by the currency is a shock
absorber. When times are good, an INR appreciation is a stabilizing influence, and
when times are bad, INR depreciation is a stabilizing influence. By allowing the
exchange rate to fluctuate, we reduce the fluctuations of the economy. Conversely,
exchange rate rigidity forces the real economy to adjust since the currency market was
prevented from adjusted by the central bank.

In the present situation, preventing rupee depreciation would set off a financial crisis
at home, for domestic and foreign economic agents would be selling shares,
companies, bonds, and real estate, trying to realize US dollars which would be pulled
out of the country and placed into US Treasury bills. All this would be driven by the
desire to profit from a coming depreciation of the rupee. If, in contrast, when bad
news strikes, it immediately generates an exchange rate depreciation after which both
appreciation or depreciation are equally likely, then it would not set off the process of
selling off assets in India in order to profit from a coming depreciation. There is thus a
strong case for RBI avoiding any sort of management of the exchange rate (in the
sense of the rupee-dollar rate).

4. Other Suggestions

• Focus more on growth by improving public and private investment continue to

take measures for improving liquidity; enhance investor confidence to ensure
growth of industry.
• All banks should be asked to make a liquidity plan and a solvency plan. RBI
should review these plans and insist that each of these plans have quantitative
monitorable actions and targets. As an example, the solvency plan should
 include suspension of payment of dividends; this is the sort of measure which
shareholders are unlikely to take on their own without a push from These
plans should be triggered when measures of illiquidity or insolvency are hit.

Lessons Learnt

The advantage of falling behind the curve in terms of financial market development is
that, hopefully, we get to learn from others’ mistakes. Indian markets can learn from
the current global financial crisis that has stemmed from large default in the American
mortgage market. It is important, however, that we learn the right lessons and not
allow events around lead us into an obscurantist financial policy regime.

Historically, Indian banks have stayed away from lending to segments that have had
the faintest whiff of risk. Given a chance, banks would prefer an asset of portfolio
consisting of stodgy low-return blue chips than take a chance with the odd promising
but risky entrepreneur. There was some change, though, in the last few years. Loan
securitization, for one, made some headway. Better credit information is now
available on both retail and smaller corporate borrowers. The credit boom in India of
the last four years has come not on the back of increased lending to blue-chip
companies or individuals with assured high-income streams. It was been driven by
banks’ willingness and enhanced ability to take more risk on their books. I would
argue that this was a critical ingredient in pushing us on to a new growth trajectory. If
we are to remain there, it is imperative to ensure that this process gains momentum.

What are the lessons to be learnt then? Clearly there is a message in all this for the
credit rating companies. I do not claim to be an expert but from whatever little I
understand of it there does not seem to be anything grossly wrong with the
methodology of rating these structured products. I certainly do not subscribe to the
now popular conspiracy theory that the rating companies in league with structured
product marketers vetted the issue of junk credit as high investment grade
instruments. The methodology and safeguards that were used are reasonably
transparent. Instead the key problem with the current paradigm of ratings that
the crisis puts its finger on is its inability to predict large-scale default adequately
ahead. 12

Following the sub-prime crisis in the US over a year ago, the approach of RBI was
cautious (non-reformist according to critics) on all fronts — whether in allowing the
hedge funds to invest in Indian equities and real estate, greater FDI in the banking
sector or allowing excessive capital inflows.

These lessons are particularly important for the RBI. If we do stay on the current
growth trajectory, there is bound to be much more expansion in credit to increasingly
riskier segments. The central bank will have to facilitate this expansion and balance
this with the more conventional role of inflation management. It has to make sure that
it doesn’t throw the baby out with the bathwater.

The present churnings in the global financial sector mainly the investment and
banking sector has exposed chinks in the Indian financial sector too in the form of
inadequacies within the system to contain losses mainly because of the absence of a
healthy and effective risk assessment and management system and to absorb the
losses there should be the presence of a strong capital base.

In financial market policies, emerging economies can learn from the risk-management
and regulatory failures of industrial economies. All emerging markets should build
regulatory capacities to safeguard against the risks associated with non-transparent
instruments and excesses in lending.

The present churnings in the global financial sector mainly the investment and
banking sector has exposed chinks in the Indian financial sector too in the form of
inadequacies within the system to contain losses mainly because of the absence of a
healthy and effective risk assessment and management system and to absorb the
losses there should be the presence of a strong capital base.

12
i