ABSTACT

Portfolio management is a process encompassing many activities of investment is assets

and securities. It is a dynamic and flexible concept and involves regular and systematic analysis,
judgment, and action. A combination of securities held together will give a beneficial result if
they grouped in a manner to secure higher returns after taking into consideration the risk
elements
The main objective of the Portfolio management is to help the investors to make wise
choice between alternate investments without a post trading shares. Any portfolio management
must specify the objectives like Maximum returns, Optimum Returns, Capital appreciation,
Safety etc., in the same prospectus.
This service renders optimum returns to the investors by proper selection and continuous
shifting of portfolio from one scheme to another scheme of from one plan to another plan within
the same scheme.

INDEX
Chapters
Chapter-I

Description

Pg. No.

Introduction to the study

Need of the study

Objective of the study

Scope of the study

Importance of the study

Research methodology of study

Limitation of the study

Chapter II

Literature Review

9 - 24

Chapter-III

Industry profile

25 - 33

Chapter-IV

Company Profile

34 - 53

Chapter-V

Data Analysis & Interpretation

54 - 92

Chapter-VI

Findings , suggestions

93 - 96

Conclusion

97

Bibliography

98

INTRODUCTION OF PORTFOLIO
MANAGEMENT
A portfolio refers to a collection of investment tools such as stocks, shares,
mutual funds, bonds, and cash and so on depending on the investors
income, budget and convenient time frame. The art of selecting the right
investment policy for the individuals in terms of minimum risk and maximum
return is called as portfolio management. Portfolio management refers to
managing an individuals investments in the form of bonds, shares, cash,
mutual funds etc so that he earns the maximum profits within the stipulated
time frame.
Portfolio management refers to managing money of an individual under the
expert guidance of portfolio managers. Portfolio management refers to the
management or administration of a portfolio of securities to protect and
enhance the value of the underlying investment. It is the management of
various securities (shares, bonds etc) and other assets (e.g. real estate), to
meet specified investment goals for the benefit of the investors. It helps to
reduce risk without sacrificing returns. It involves a proper investment
decision with regards to what to buy and sell. It involves proper money
management. It is also known as Investment Management.

PMS SERVICES OFFERED BY

PORTFOLIO MANAGERS
1. Personal Relationship Manager
The portfolio manager acts as a personal relationship manager that enables
the client to interact with the fund manager at any given point of time
depending on his preference.
2. Monthly Discussion
3

Clients can discuss any concerns or issues related to the money or savings
with their appointed portfolio manager on monthly basis. The client can
interact and discuss regarding any major changes related to the investment
strategies and asset allocation.

3. Asset Allocation
Portfolio Manager assists in the allocation of assets or savings of clients by
advising regarding the investments in stocks, bonds or equity funds. The
Asset allocation plan is customized as per the risk preference and goals of
the clients. This plan is designed by doing the detailed analysis and
evaluation of the clients risk taking capacity, savings pattern, and
investment goals.
4. Timing
Portfolio managers help the clients in taking timely decisions and thereby
preserving their money on time. Portfolio management service assists in the
allocating of money at precise time in suitable saving plan. Thus, portfolio
managers offer their professional and proficient advice to the clients and
suggest when the money should be invested in equities or bonds and when it
should be taken out from a particular saving plan. Portfolio managers give
their recommendations after analyzing the market thoroughly. They ask the
clients to withdraw their money from market in times big risk in stock market
and prevents heavy losses.
5. Flexibility
Portfolio managers have detailed knowledge of the market conditions and
they are the experts of field. They can plan the savings of the client
according to his preferences and requirements. It is possible that portfolio
managers can invest the clients money according to his preference as they
are specialists of the market. Thus, clients can provide flexibility to the
portfolio managers to manage their investment with complete efficiency and
effectiveness.

6. Administration handling
4

Portfolio management service (PMS) involves handing and care of all type of
administrative work by the portfolio managers such as opening a new bank
account or taking financial settlement, etc.

NEED FOR PORTFOLIO MANAGEMENT

Portfolio management presents the best investment plan to the

individuals as per their income, budget, age and ability to undertake

risks.
Portfolio management minimizes the risks involved in investing and

also increases the chance of making profits.

Portfolio managers understand the clients financial needs and suggest
the best and unique investment policy for them with minimum risks

involved.
Portfolio management enables the portfolio managers to provide
customized investment solutions to clients as per their needs and
requirements.

SWOT ANALYSIS: PORTFOLIO

MANAGEMENT SERVICES
A) Strength:
Diversified Investment - PMS are having a number of investment
objectives from which an investor can choose according to his requirements,
time to get returns etc.
5

Easy procedure - The procedure involved for purchasing or selling

shares is not very easy. Individual investor can also easily understand and
can himself buy or sell shares.

Professional

Management - The

service

provides

professional

management of portfolios with the objective of delivering consistent longterm performance while controlling risk.

Continuous Monitoring - It is important to recognize that portfolios

need to be constantly monitored and periodic changes made to optimise the
results.

Risk Control - A research team responsible for establishing the

clients investment strategy and providing the PMS provider real time
information to support it backs any firms portfolio managers.

Hassle Free Operation - Portfolio Management Service provider

gives the client a customized service. The company takes care of all the
administrative aspects of the clients portfolio with a periodic reporting
(usually daily) on the overall status of the portfolio and performance.

Flexibility - The Portfolio Manager has fair amount of flexibility in

terms of holding cash (can go up to 100% also depending on the market
conditions). He can create a reasonable concentration in the investor
portfolios by investing disproportionate amounts in favour of compelling
opportunities.

Transparency PMS provide comprehensive communications and

performance reporting. Investors will get regular statements and updates
from the firm. Web enabled access will ensure that client is just a
click away from all information relating to his investment. Your account
statements will give you a complete picture of which individual securities you
hold, as well as the number of shares you own. It will also usually provide:
a.

the current value of the securities you own;

b.

the cost basis of each security;

c.

details of account activity (such as purchases, sales and dividends

paid out or reinvested);

d.

your portfolios asset allocation;

e.
f.

your portfolios performance in comparison to a benchmark;

market commentary from your Portfolio Manager
Customised Advice - PMS give select clients the benefit of tailor

made investment advice designed to achieve his financial objectives. It can

be structured to automatically exclude investments you may own in another
account or investments you would prefer not to own. For example, if you are
a long-term employee in a company and you have acquired concentrated
stock positions over the years and have become over exposed too little
companys stock, a separately managed account provides you with the
ability to exclude that stock from your portfolio.

Personalised Approach Some Portfolio Managers may provide a

personal investment management service to achieve the clients investment
objective. In PMS, you may gain direct personalised access to the
professional money managers who actively manage your portfolio. This
interaction may come in various different ways including in-person meetings,
conference calls, written commentary, etc with the fund management team.
B) Weakness:

Market risk - The capital market is highly volatile in nature. No matter

how much one is precautious, he will always be under threat of incurring
losses.

No control over cost - There is not much control over the cost of
operations as the market is volatile and the cost increases quickly or dawn
rapidly.

High risk - The share market is a place where price of the shares goes up
& down rapidly so its always create a high risk.
7

Ticket size Most of the Portfolio Management Schemes have ticket size
in more than few Lakhs and Crores in compare with other Financial
Instrument like MF which is less attract small investors towards investing
PMS.

Profit Sharing Most of the companies are in the term of profit sharing
with their clients and for that they do hedge in the equity market to generate
the profit which is very risky.

C) Opportunities:

Growing PMS Market with Capital Market - PMS market in India is

growing at a very fast pace with the Indian Capital Market and if this pace
continuous then Indian PMS and capital market will be one of the strongest
economies of the world and investment in this today will then be very
fruitful.

Branch expansion - Large no. of branches are opening day by day which
are trapping the countries having almost same type of socioeconomic
condition & even same culture etc.

Untapped Retail Investors Most of the companies are only doing

niche marketing for their portfolio schemes and they are targeting maximum
to the high net worth investors. So, retail investors are getting less attention
for that which can be also a part of getting huge market.

Untapped rural market - Rural market in India is still not covered fully
by the various AMCs. Rural market in India is a very big market and if this
market is tapped then awareness about PMS can boost a lot.

Debt fund oriented schemes As the day to day changing scenario of

Stock market, risk is increasing. So, for that companies should focus in the
purely Debt fund oriented schemes which is less focused by most of the
companies in the present time.
8

D) Threats:

Tough competition - There is very tough competitions because of

large number of companies are providing Portfolio Services these days.

New Entrant As per the SEBI data of growth of PMS market year by
year, numbers of new companies which include foreign companies are
entering in this part of the Investment as there is a huge potential in India in
the future and also which create the very tough competition.

Unawareness Major percent of population is not aware of PMS, so

its hard to convince people.
Changing scenario - Our market scenario is changing day by day i.e. our
market is fluctuating, so this makes investor hard to invest in shares though
in PMS too.
RESEARCH METHODOLOGY OF THE STUDY
Research design or research methodology is the procedure of collecting, analyzing and
interpreting the data to diagnose the problem and react to the opportunity in such a way where
the costs can be minimized and the desired level of accuracy can be achieved to arrive at a
particular conclusion.
The methodology used in the study for the completion of the project and the fulfillment of the
project objectives, is as follows:

Market prices of the companies have been taken for the years of different dates, there by
dividing the companies into 5 sectors.

A final portfolio is made at the end of the year to know the changes (increase/decrease) in
the portfolio at the end of the year.

DATA COLLECTIONS:
Primary data:
The primary data information is gathered from HDFC by interviewing HDFC executives.
9

Secondary data:
The secondary data is collected from various financial books, magazines and from stock lists of
various newspapers and HDFC as part of the training class undertaken for project.

10

CHAPTER - II
LITERATURE REVIEW

11

It is essential for individuals to invest wisely for the rainy days and to make their future secure.
What is a Portfolio?
A portfolio refers to a collection of investment tools such as stocks, shares, mutual funds, bonds,
cash and so on depending on the investors income, budget and convenient time frame.
Following are the two types of Portfolio:
1. Market Portfolio
2. Zero Investment Portfolios
What is Portfolio Management?
The art of selecting the right investment policy for the individuals in terms of minimum
risk and maximum return is called as portfolio management.
Portfolio management refers to managing an individuals investments in the form of bonds,
shares, cash, mutual funds etc so that he earns the maximum profits within the stipulated time
frame.
Portfolio management refers to managing money of an individual under the expert guidance of
portfolio managers.
In a laymans language, the art of managing an individuals investment is called as portfolio
management.
Types of Portfolio Management
Portfolio Management is further of the following types:
Active Portfolio Management: As the name suggests, in an active portfolio management
service, the portfolio managers are actively involved in buying and selling of securities to ensure
maximum profits to individuals.
Passive Portfolio Management: In a passive portfolio management, the portfolio manager
deals with a fixed portfolio designed to match the current market scenario.
Discretionary Portfolio management services: In Discretionary portfolio management
services, an individual authorizes a portfolio manager to take care of his financial needs on his
behalf. The individual issues money to the portfolio manager who in turn takes care of all his

12

investment needs, paper work, documentation, filing and so on. In discretionary portfolio
management, the portfolio manager has full rights to take decisions on his clients behalf.
Non-Discretionary Portfolio management services: In non discretionary portfolio
management services, the portfolio manager can merely advise the client what is good and bad
for him but the client reserves full right to take his own decisions.
Who is a Portfolio Manager?
An individual who understands the clients financial needs and designs a suitable investment
plan as per his income and risk taking abilities is called a portfolio manager. A portfolio manager
is one who invests on behalf of the client.
A portfolio manager counsels the clients and advises him the best possible investment plan which
would guarantee maximum returns to the individual.
A portfolio manager must understand the clients financial goals and objectives and offer a tailor
made investment solution to him. No two clients can have the same financial needs.
Roles and Responsibilities of a Portfolio Manager
A portfolio manager is one who helps an individual invest in the best available investment plans
for guaranteed returns in the future.
Let us go through some roles and responsibilities of a Portfolio manager:
A portfolio manager plays a pivotal role in deciding the best investment plan for an
individual as per his income, age as well as ability to undertake risks. Investment is essential
for every earning individual. One must keep aside some amount of his/her income for tough
times. Unavoidable circumstances might arise anytime and one needs to have sufficient funds to
overcome the same.
A portfolio manager is responsible for making an individual aware of the various
investment tools available in the market and benefits associated with each plan. Make an
individual realize why he actually needs to invest and which plan would be the best for him.
A portfolio manager is responsible for designing customized investment solutions for the
clients. No two individuals can have the same financial needs. It is essential for the portfolio
manager to first analyze the background of his client. Know an individuals earnings and his
capacity to invest. Sit with your client and understand his financial needs and requirement.
13

 A portfolio manager must keep himself abreast with the latest changes in the financial
market. Suggest the best plan for your client with minimum risks involved and maximum
returns. Make him understand the investment plans and the risks involved with each plan in a
jargon free language. A portfolio manager must be transparent with individuals. Read out the
terms and conditions and never hide anything from any of your clients. Be honest to your client
for a long term relationship.
ELEMENTS OF PORTFOLIO MANAGEMENT
Portfolio management is on-going process involving the following basic tasks:

Identification of the investors objectives, constraints and preferences.

Strategies are to be developed and implemented in tune with investment policy

formulated.

Review and monitoring of the performance of the portfolio.

Finally the evaluation of the portfolio.

RISK
Risk is uncertainty of the income / capital appreciations or loss or both. All investments are risky.
The higher the risk taken, the higher is the return. But proper management of risk involves the
rights choices of investments whose risks are compensating. The total risks of two companies
may be different and even lower than the risk of a group of two companies if their companies are
offset by each other.
The two major types of risks are

Systematic or market related risk.

Unsystematic or company related risks.

Systematic risks
Systematic risks affected from the entire market are (the problems, raw material availability, tax
policy or government policy, inflation risk, interest risk and financial risk). It is managed by the
use of Beta of different company shares.
Unsystematic risks
Unsystematic risks are mismanagement, increasing inventory, wrong financial policy, defective
marketing etc. this is diversifiable or avoidable because it is possible to eliminate or diversify
14

away this components of risks to a considerable extents by investing in a large portfolio of

securities. The unsystematic risk stems from inefficiency magnitude of those factors different
from one company to another.
RETURNS ON PORTFOLIO
Each security in a portfolio contributes returns in the proportion of its investments in security.
Thus the portfolio expected return is the weighted average of the expected return, from each of
the securities, with weights representing the proportions share of the security in the total
investment. Why does an investor have so many securities in his portfolio? If the security ABC
gives the maximum return why not he invests in that security all his funds and thus maximize
return?

The answer to this questions lie in the investors perception of risk attached to

investments, his objectives of income, safety, appreciation, liquidity and hedge against loss of
value of money etc. this pattern of investment in different asset categories, types of investment,
etc, would all be described under the caption of diversification, which aims at the reduction or
even elimination of non-systematic risks and achieve the specific objectives of investors.
RISK ON PORTFOLIO
The expected returns from individual securities carry some degree of risk. Risk on the portfolio
is different from the risk on individual securities. The risk is reflected in the variability of the
returns from zero to infinity. Risk of the individual assets or a portfolio is measured by the
variance of its returns. The expected return depends on the probability of the returns and their
weighted contribution to the risk of the portfolio. These are two measures of risk in this context
one is the absolute deviation and other standard deviation.
RISK RETURN ANALYSIS
All investment has some risk. Investment in shares of companies has its own risk or
uncertainty; these risks arise out of variability of yields and uncertainty of appreciation or
depreciation of share prices, losses of liquidity etc.
The risk over time can be represented by the variance of the returns. While the return
over time is capital appreciation plus payout, divided by the purchase price of the share

15

16

Normally, the higher the risk that the investor takes, the higher is the return. There is, however, a
risk less return on capital of about 12% which is the bank rate charged by the R.B.I or long term,
yielded on government securities at around 13% to 14%. This risk less return refers to lack of
variability of return and no uncertainty in the repayment or capital. But other risks such as loss of
liquidity due to parting with money etc. may however remain, But are rewarded by the total
return on the capital. Risk-return is subject to variation and the objectives of the portfolio
manager are to reduce that variability and thus reduce the risk by choosing an appropriate
portfolio.
Portfolio Theories
MARKOWITZ THEORY
Markowitz approach determines for the investor the efficient set of portfolio through 3 important
variables, i.e., Standard Deviation, Covariance and Co-efficient of Correlation. Markowitz model
is called the Full Covariance Model. Through this method, the investor can with the use of
computer, find out the efficient set of portfolio by finding out the tradeoff between risk and
return between the limits of zero to infinity. According to this theory, the effects of one security
purchase over the effects of the other security purchase are taken into consideration and then the
results are evaluated.
Assumption under Markowitz Theory
Markowitz theory is based on the modern portfolio theory under several assumptions.
The assumptions are:1. The market is efficient and all investors have in their knowledge all the facts about the stock
market and so on investor can continuously make superior returns either by predicting past
behavior of stocks through technical analysis the intrinsic value of shares. Thus all investors
are in equal category.
2. All investor before making any investment have a common goal. This is the avoidance of risk
because they are risk averse.
3. All investors would like to earn the maximum rate of return that they can achieve from their
investments.

17

4. The investors base their decisions on he expected rate of return of an investment. The
expected rate of return can be found out by finding out the purchase price of a security
divided by the income per year and by adding annual capital gains. It is also necessary to
know the standard deviation of the rate of return, which is begin offered on the investment.
The rate of return and standard deviation are important parameters for finding out whether
investment is worthwhile for a person.
5. Markowitz brought out the theory that it was useful insight to find out how the security
returns are correlated to each other. By combining the assets in such way that they give the
lowest risk maximum returns could be brought out by the investor.
6. From the above it is clear that investor assumes that while making an investment he will
combine his investments in such a way that he gets a maximum return and is surrounded by
minimum risk.
7. The investor assumes that greater or larger the return that he achieves on his investments, the
higher the risk factor that surrounds him. On the contrary when risks are low the return can
also be expected to be below.
8. The investor can reduce his risk if he adds investments to his portfolio.
9. An investor should be able to get higher for each level of risk by determining the efficient
set of securities.
THE SHARPE INDEX MODEL
The investor always likes to purchase a combination of stock that provides the highest return and
has lowest risk. He wants to maintain a satisfactory reward to risk ratio. Traditionally analysis
paid more attention to the return aspect of the stocks. Now a days risk has received increased
attention and analysts are providing estimates of risk as well as return.
Sharp has developed a simplified model to analyze the portfolio. He assumed that the return
of a security is linearly related to a single index like the market index. Strictly speaking, the
market index should consist of all the securities trading on the exchange.
In the absence of it, a popular index can be treated as a surrogate for the market index.
SINGLE INDEX MODEL

18

Casual observation of the stock prices over a period of time reveals that most of the stock prices
move with the market index. When sensex increases, stock prices also tend to increase and viceversa. This indicates that some underlying factors affect the market index as well as the stock
prices. Stock prices are related to the market index and the relationship could be used to estimate
the return on stock. Towards this purpose, the following equation can be used.
i a
iR m e i
Rj a

Where

R = Expected return on security I

a i
a i

= Intercept of the straight line or alpha co-efficient

= Slope of straight line or beta co-efficient

Rm = The rate of return on marker index

ei = Error team
Corner Portfolio
The entry or exit of a new stock in the portfolio generates a series of corner portfolio. In a one
stock portfolio, itself is the corner portfolio. In a two stock portfolio, the minimum attainable risk
(variance) and the lowest return would be the corner portfolio. As the member of stocks increases
in a portfolio, the corner portfolio would be the one with lowest return and risk combination.
Sharpes Optimal Portfolio
Sharpe has provided a model for the selection of appropriate securities in a portfolio. The
selection of any stock is directly related to its excess return beta ration.
Ri Rf / ai

Where,

Ri = The expected return on stock i

Rf = The return on a risk less asset

ai

= The expected change in the rate of return on stock I associated with one unit
changer in the market return.

19

The excess return is the difference between the expected return on the stock and the risk less rate
of interest such as the rate offered on the government security or Treasury bill. The excess return
to beta ratio measures the additional return on security (excess of the risk less asset return) per
unit of systematic risk or non-diversifiable risk. This ratio provides a relationship between
potential risk and reward.
The steps for finding out the stocks to be included in the optimal portfolio are given below:
1. Finding out the excess return to beta ratio for each stock under consideration.
2. Rank them from the highest to the lowest
3. Proceed to calculate C for all the stocks according to the ranked order using the following
formula.

Ci 2 m N Ri Rf i / 2 ei /1 2 N i / 2 ei
4. The calculated values of Ci start declining after a particular Ci and that point is taken as
the cut-off point and that stock ratio is the cut-off ratio.
Capital Asset Price Theory
We have seen that diversifiable risk can be eliminated by diversification. The remaining risk
portion is the un-diversifiable risk i.e., market risk. As a result, investors are interested in
knowing the systematic risk when they search for efficient portfolios. They would like to have
assets with low beta coefficient i.e., systematic risk. Investors would opt for high beta coefficient only if they provide high rate of return. The risk were averse nature of the investors is
the underlying factor for this behavior. The capital asset pricing theory helps the investors top
understand and the risk and return relationship of the securities. It also explains how assets
should be priced in the capital market.
The CAPM Theory
Markowitz, William Sharpe, John Lintner and Jan Mossin provided the basis structure for the
CAPM model. It is a model of linear general equilibrium return. In the CAPM theory, the
required rate of return of an asset is having a linear relationship with assets beta value i.e.,
undiversifiable or systematic risk.

20

Lending and Borrowing

Here, it is assumed that the investor could borrow or lend any amount of money at risk less rate
of interest. When this opportunity is given to the investors, they can mix risk free assets with the
risk assets in a portfolio to obtain in desired rate of risk return combination.
The expected return on the combination of risky and risk free combination
Rp = RfXf + Rm(1 Xf)
Where,

Rp = Portfolio return
Xf = The proportion of funds invested in risk free assets
1 Xf = The proportion of funds invested in risk assets.
Rf = Risk free rate of return
Rm = Return on risky assets

This formula can be used to calculate the expected returns for different situation like mixing risk
less assets with risky assets, investing only in the risky asset and mixing the borrowing with risk
assets.
The Concept
According to CAPM, all investors hold only the market portfolio and risk less securities. The
market portfolio is a portfolio comprised of all stocks in the market. Each asset is held in
proportion to its market value to the all risky assets. For example, if Reliance Industry share
represents 20% of all risky assets, then the market portfolio of the individual investor contains
20% of Reliance Industry shares. At this stage, the investor has the ability to borrow or lend any
amount of money at the risk less rate of interest. The efficient frontier of the investor is given in
figure.
The figure shows the efficient of the investor. The investor prefers any point between B & C
because, with the same level of risk they face on line BA, they are liable to get superior profits.
The ABC lines show the investors portfolio of risky assets. The investors can combine risk less
asset either by lending or borrowing. This is shown in figure,

21

The line RfS represent all possible combination of risk less and risky asset. The S portfolio does
not represent any risk less asset but the line RfS gives the combination of both. The portfolio
along the path RfS is called lending portfolio i.e., some money is invested in the risk less asset or
may b deposited in the bank for a fixed rate of interest if it crosses the point S, it becomes
borrowing portfolio. Money is borrowed and invested in the risky asset. The straight lines are
called Capital Market Line (CML). It gives the desirable set of investment opportunities between
risk free and risky investments. The CML represents linear relationship between the required
rates of return for efficient portfolio and their standard deviations.
E R p

R f R m R f
p
m

E(Rp) = Portfolios expected rate of return

Rm = Expected return on market portfolio

= Standard deviation of market portfolio

= Standard deviation of the portfolio

For a portfolio on the capital market line, the expected rate of return in excess of the risk free rate
is in proportion to the standard deviation of the market portfolio. The slope of the line gives the
price of the risk. The slope equals the risk premium for the market portfolio R m Rf divided by
the risk or standard deviation of the market portfolio. Thus, the expected return of an efficient
portfolio is Expected return = Price of time + (Price of risk X amount of risk)
22

Price of time is the risk free rate of return. Price of risk is the premium amount higher and above
the risk free return.
Security Market Line
The Capital Market Line measures the risk-return relationship of an efficient portfolio. But, it
does not show the risk- return trade off for other portfolio and individual securities. Inefficient
portfolios lie below the capital market line and the risk-return relationship cannot be established
with the help of his capital market line. Standard deviation includes the systematic and
unsystematic risk. Unsystematic risk can be diversified and it is not related to the market. If the
unsystematic risk is eliminated, then the matter of concern is systematic risk alone. This
systematic risk could be measured by beta. The beta analysis is useful for individual securities
and portfolio whether efficient or inefficient.
When an additional security is added to the market portfolio, an additional risk is also added to
it. The variance of a portfolio is equal to the weighted sum of the covariance of the individual
securities in the portfolio. If we add an additional security to the market portfolio, its marginal
contribution to the variance of the market is the covariance between the securitys return and
market portfolios return.
If the security is included, the covariance between the security and the market measures the risk.

Dividing it by standard deviation of market portfolio Cov

lm / m

can standardize covariance.

This shows the systematic risk of the security, and then the expected return of the security is
given by the equation.

Ri Rf

Rm Rf
Cov Vim / m
m

This equation can be rewritten as follows:

Ri Rf

Cov im
R m R f
2m

The first term of the equation is nothing but the beta coefficient of the stock. The beta coefficient
of the equation of SML is same as the beta of the market (Single index) model. In equilibrium,
all efficient and inefficient portfolio lie along the security market line, The SML line helps to
23

determine the expected return for a given security beta. In other words, when betas are given, we
can generate expected returns for the given securities. This is explained in figure. If we assume
the expected market risk premium to be 8% and the risk free rate of return to be 7%, we can
calculate expected return for A, B, C and D securities using the formula.

E R i Rf 1 E R m R f

Present Validity of CAPM

The CAPM is greatly appealing at an intellectual level, logical and rational. The basic
assumptions on which the model is built raise, some doubts in the minds of the investors. Yet,
investment analysis has been more creative in adapting CAPM for their uses.
1. The CAPM focuses on the market risk, makes the investors to think about the
riskyness of the assets in general CAPM provides basic concept, which is truly
fundamental values.
2. The CAPM has been useful in the selection of securities and portfolio. Securities with
higher returns are considered to be undervalued and attractive for buy. The below
normal excepted return yielding securities are considered to be overvalued and
suitable for sale.
3. In the CAPM, it has been assumed that investors consider only the market risk. Given
the estimate of the risk free rate, the beta of the firm, stock and the required market
rate of return, one can find out the expected returns for a firms security. This
expected return could be used as an estimate of the cost of retained earnings.
4. Even through CAPM has been regarded as useful tools to financial analysis; it has it
won critics too. They point out, when the model is ex-ante; the inputs also should be
ex-ante, i.e. based on the expecat5ions of the f8re. Empirical test and analysis have
used ex-post i.. Past data only:
5. The historical data regarding the market return, risk free rate of return and betas vary
differently for different periods. The various methods used to estimate these inputs
also affect the beta value. Since the inputs cannot be estimated precisely, the expected
return found out through the CAPM model is also subjected to criticism.
Arbitrage pricing theory
24

Arbitrage pricing theory is one of the tools used by the investors and portfolio managers. The
capital asset pricing theory explains the returns of the securities on the basis of their respective
bets. According to the previous model, the investor chooses the investment on the basis of
expected return and variance. The alternative model deployed in asset pricing by Stephen Ross is
known as Arbitrage Pricing Theory. The APT explains the nature of equilibrium in the asset
pricing in a less complicated manner with fewer assumptions compare to CAPM.
The Assumptions
1. The investors have homogeneous expectations.
2. The investor are risk averse and utility maxi misers
3. Perfect competition prevails in the market and there is no transaction cost.
The APT theory does not assume:
a) Single period investment horizon
b) No taxes
c) Investors can borrow and lend at risk free rate of interest and
d) The selection of the portfolio is based on the mean and variance analysis.
These assumptions are present in CAPM theory.
Arbitrage portfolio
According to the APT theory an investor tries to find out the possibility to increase returns from
his portfolio without increasing the funds in the portfolio. He also likes to keep the risk at the
same level.
For example, the investor holds A, B and C securities and he wants to change in proportion of
Xb

securities can be denoted by X,

XC

and

. The increase in the investment in security A could be

carried out only if he reduces the proportion of investment either in B or C because it has already
stated that the investor tries to earn more income without increasing his financial commitment.
Thus, arbitrage portfolio. If X indicates the change in proportion,
X A X B X C 0

25

The factor sensitivity indicates the responsiveness of a securitys return to a particular factor. The
sensitiveness of securities to any factor is the weighted average of the sensitivities of the
securities, weighted being the changes made in the proportion. For example, bA, bB and bC are
sensitive in an arbitrage portfolio the sensitive become zero.
b A X A b B X B b C X C 0

APT and CAPM

The simplest form of APT model is consistent with the simple form of the CAPM model, when
only one factor is taken into consideration, the APT can be stated as.
Ri 0 biI

It is similar to the capital market line equation:

R i R f i (R m R F )

, Which is similar to CAPM MODEL?

APT is more general and less restrictive than CAPM, in APT, the investor has no need to hold
the market portfolio because it does not make use of the market portfolio concept. The portfolios
are constructed on the basis of the factors eliminate arbitraged profits. APT is based on the law of
one price to hold for all possible portfolio combinations.
The APT model takes on to account of the impact of numerous factors on the security. The |
Macro economic factors are taken into consideration and it is closer to reality then CAPM.
The market portfolio is well defined conceptually. In APT model, factors are not well specified.
Hence, the investor finds it difficult to establish equilibrium relationship. The well defined
market portfolio is a significant advantage of the CAPM leading to the wide usage of the model
in the stock market.
The factors that have impact on one group of securities may not affect other group securities.
There is a lack of constituency in the measurement of the APT model. Further, the influences of
the factors are not independent of each other. It may be difficult to identify the influence
corresponds exactly to each factor. Apart from this, not all variable that exerts influence on factor
measurable.
26

CHAPTER III
INDUSTRY PROFILE
27

INDUSTRY PROFILE:
I. EVOLUTION OF BANKING IN INDIA
Modern banking in India could be traced back to the establishment of Bank of Bengal (Jan 2,
1809), the first joint-stock bank sponsored by Government of Bengal and governed by the royal
charter of the British India Government. It was followed by establishment of Bank of Bombay
(Apr 15, 1840) and Bank of Madras (Jul 1, 1843). These three banks, known as the presidency
banks, marked the beginning of the limited liability and joint stock banking in India and were
also vested with the right of note issue.
In 1921, the three presidency banks were merged to form the Imperial Bank of India, which had
multiple roles and responsibilities and that functioned as a commercial bank, a banker to the
government and a bankers bank. Following the establishment of the Reserve Bank of India
(RBI) in 1935, the central banking responsibilities that the Imperial Bank of India was carrying
out came to an end, leading it to become more of a commercial bank. At the time of
independence of India, the capital and reserves of the Imperial Bank stood at Rs 118 mn,
deposits at Rs 2751 mn and advances at Rs 723 mn and a network of 172 branches and 200 sub
offices spread all over the country.
In 1951, in the backdrop of central planning and the need to extend bank credit to the rural areas,
the Government constituted All India Rural Credit Survey Committee, which recommended the
creation of a state sponsored institution that will extend banking services to the rural areas.
Following this, by an act of parliament passed in May 1955, State Bank of India was established
in Jul, 1955. In 1959, State Bank of India took over the eight former state-associated banks as its
subsidiaries. To further accelerate the credit to flow to the rural areas and the vital sections of the
economy such as agriculture, small scale industry etc., that are of national importance, Social
Control over banks was announced in 1967 and a National Credit Council was set up in 1968 to
assess the demand for credit by these sectors and determine resource allocations. The decade of
1960s also witnessed significant consolidation in the Indian banking industry with more than 500
banks functioning in the 1950s reduced to 89 by 1969.

28

For the Indian banking industry, Jul 19, 1969, was a landmark day, on which nationalization of
14 major banks was announced that each had a minimum of Rs 500mn and above of aggregate
deposits. In 1980, eight more banks were nationalized. In 1976, the Regional Rural Banks Act
came into being, that allowed the opening of specialized regional rural banks to exclusively cater
to the credit requirements in the rural areas. These banks were set up jointly by the central
government, commercial banks and the respective local governments of the states in which these
are located.
The period following nationalisation was characterized by rapid rise in banks business and
helped in increasing national savings. Savings rate in the country leapfrogged from 10-12% in
the two decades of 1950-70 to about 25 % post nationalisation period. Aggregate deposits which
registered annual growth in the range of 10% to 12% in the 1960s rose to over 20% in the 1980s.
Growth of bank credit increased from an average annual growth of 13% in the 1960s to about
19% in the 1970s and 1980s. Branch network expanded significantly leading to increase in the
banking coverage.
Indian banking, which experienced rapid growth following the nationalization, began to face
pressures on asset quality by the 1980s. Simultaneously, the banking world everywhere was
gearing up towards new prudential norms and operational standards pertaining to capital
adequacy, accounting and risk management, transparency and disclosure etc. In the early 1990s,
India embarked on an ambitious economic reform programme in which the banking sector
reforms formed a major part. The Committee on Financial System (1991) more popularly known
as the Narasimham Committee prepared the blue print of the reforms. A few of the major aspects
of reform included (a) moving towards international norms in income recognition and
provisioning and other related aspects of accounting (b) liberalization of entry and exit norms
leading to the establishment of several New Private Sector Banks and entry of a number of new
Foreign Banks (c) freeing of deposit and lending rates (except the saving deposit rate), (d)
allowing Public Sector Banks access to public equity markets for raising capital and diluting the
government stake,(e) greater transparency and disclosure standards in financial reporting (f)
suitable adoption of Basel Accord on capital adequacy (g) introduction of technology in banking
operations etc. The reforms led to major changes in the approach of the banks towards aspects
such as competition, profitability and productivity and the need and scope for harmonization of
29

global operational standards and adoption of best practices. Greater focus was given to deriving
efficiencies by improvement in performance and rationalization of resources and greater reliance
on technology including promoting in a big way computerization of banking operations and
introduction of electronic banking.
The reforms led to significant changes in the strength and sustainability of Indian banking. In
addition to significant growth in business, Indian banks experienced sharp growth in profitability,
greater emphasis on prudential norms with higher provisioning levels, reduction in the non
performing assets and surge in capital adequacy. All bank groups witnessed sharp growth in
performance and profitability. Indian banking industry is preparing for smooth transition towards
more intense competition arising from further liberalization of banking sector that was envisaged
in the year 2009 as a part of the adherence to liberalization of the financial services industry.
II. STRUCTURE OF THE BANKING INDUSTRY
According to the RBI definition, commercial banks which conduct the business of banking in
India and which (a) have paid up capital and reserves of an aggregate real and exchangeable
value of not less than Rs 0.5 mn and (b) satisfy the RBI that their affairs are not being conducted
in a manner detrimental to the interest of their depositors, are eligible for inclusion in the Second
Schedule to the Reserve Bank of India Act, 1934, and when included are known as Scheduled
Commercial Banks. Scheduled Commercial Banks in India are categorized in five different
groups according to their ownership and/or nature of operation. These bank groups are (i) State
Bank of India and its associates, (ii) Nationalised Banks, (iii) Regional Rural Banks, (iv) Foreign
Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector). All Scheduled
Banks comprise Schedule Commercial and Scheduled Co-operative Banks. Scheduled
Cooperative banks consist of Scheduled State Co-operative Banks and Scheduled Urban
Cooperative Banks.

30

Banking Industry at a Glance

In the reference period of this publication (FY06), the number of scheduled commercial banks
functioning in India was 222, of which 133 were regional rural banks. There are 71,177 bank
XIV offices spread across the country, of which 43 % are located in rural areas, 22% in semiurban areas, 18% in urban areas and the rest (17 %) in the metropolitan areas. The major bank
groups (as defined by RBI) functioning during the reference period of the report are State Bank
of India and its seven associate banks, 19 nationalised banks and the IDBI Ltd, 19 Old Private
Sector Banks, 8 New Private Sector Banks and 29 Foreign Banks.
Table 1: Indian Banking at a Glance

Source: Reserve Bank of India

Table 2: Number of Banks, Group Wise

31

Source:

Indian

Banks

Association/

* Includes Industrial Development Bank of India Ltd.

Table 3: Group Wise: Comparative Average

Source: Reserve Bank of India.

Table 4: Bank Groups: Key Indicators

32

Reserve

Bank

of

India.

Source: Reserve Bank of India.

Mergers & Acquisitions
During FY06, two domestic banks were amalgamated - Ganesh Bank of Kurundwad with
Federal Bank Ltd and Bank of Punjab Ltd with Centurion Bank Ltd to become Centurion Bank
of Punjab Ltd, while one Foreign bank UFJ Bank Ltd merged with Bank of Tokyo-Mitsubishi
Ltd. ING Bank NV closed its business in India. In Sept, 2006, The United Western Bank Ltd was
placed under moratorium leading to its amalgamation with Industrial Development Bank of India
Ltd. in Oct, 2006. On Apr 1, 2007, Bharat Overseas Bank an old private sector bank was taken
over by Indian Overseas Bank and on Apr 19, 2007, Sangli Bank, another old private sector bank
was merged with ICICI Bank, a new private sector bank.
Shareholding Pattern

33

As of Mar 2006, only four Nationalised Bank had 100% ownership of the Government. These
are Central Bank of India, Indian Bank, Punjab and Sind Bank and United Bank of India. As of
Mar 2006, the government shareholding in the State Bank of India stood at 59.7% and in
between 51-77% in other nationalised banks. In Feb 2007, Indian Bank came out with a public
issue thus leaving only three nationalised banks having 100% government ownership. Foreign
institutional holding up to 20% of the paid up is allowed in respect of Public Sector Banks
including State Bank of India and many of the banks have reached the threshold level for FII
investment. In respect of Private Sector Banks where higher FII holding is allowed, threshold
limit has been reached in the leading banks.
III. INDIAN BANKING AND INTERNATIONAL TRENDS
When compared to other emerging markets, the growth of Indian banking has been impressive
and compares favorably on several counts. A recent study by Bank for International Settlements
on the progress and the prospects of banking systems in emerging countries highlights the
following features of the performance of Indian banks:

Average growth rate of real aggregate credit in India rose from 6.1% during the period
1995- 99 to 14.6 % in 2000-04.

The average growth rate of real aggregate credit in India during 2000-04 in India is
higher as compared to major countries and regions in the emerging markets, such as
China (13.3%), Other Asia (4.7%), Latin America (4.5%), and Central Europe (9.6%).

Commercial banks in India account for a major share of the bank credit (97%) as
compared to Latin America (68%), Other Asia (74%) and Central Europe (83%).

Real bank credit to the private sector has shown sustained growth in India, and has
moved from 3.9% a year in 1990-94 to 6.9% a year in 1995-99 to 13.5 % a year in 200004. In 2005, real bank credit to the private sector in India showed a growth of 30% yearon-year as against 9.4% in China and 15.8% in emerging markets.

34

In India, during the period 1999 and 2004, non-performing loans as a percentage of total
commercial bank assets came down from 6.1% to 3.3%, capital asset ratios moved up
from 11.3% to 12.9% and operating costs as a percentage of total assets reduced from
2.4% to 2.3%. NPAs in China in 2004 stood at 6%.

In India, return on assets of banks during the period 1999-2004 moved up from 0.4% to
1.1%, and return on equity from 8.5% to 20.9% where as in China the former rose from
0.1% to 0.3%.

IV. BUSINESS OF COMMERCIAL BANKS

1. Balance Sheet Growth
In FY06, the aggregate balance sheet of the scheduled commercial banks increased by
18.4%, over a 19.3 % growth registered in FY05. The ratio of bank assets to GDP rose to
86.9% as compared to 82.8% in FY05. Banking industry gained from the by rapid rise in
the real economy, leading to surge in several areas of business.
2. Capital and Reserves
The capital of the scheduled commercial banks as on Mar 31, 2006 stood at Rs 252040
mn. During FY06, reserves and surplus of all scheduled commercial banks rose by
27.6%. Revenue and other reserves nearly doubled for the banks as a whole, with SBI
reporting four fold increase in this regard.
3. Deposits and Advances
Deposits of SCBs grew by 17.8 % in FY06 as against 16.6% in FY05, but the advances
growth outstripped this pace with a rise of 31.8% in FY06, over a 33.2% growth in FY05.
As per a recent RBI report, FY06 was the second consecutive year, when increase in
credit in absolute terms was more than the absolute increase in aggregate deposits.

35

Table 5: Deposits/Advances/Investments of Bank Groups in India (In Rs mn)

Source: Reserve Bank of India

4. Group-wise Performance
The growth in deposits across the different bank groups showed substantial variation.
Public Sector Banks with a deposit growth of 12.9% and Old Private Sector Banks with
11.4% showed a relatively subdued growth in deposits where as the New Private Sector
Banks with 50.7% and Foreign Banks with 31.7% showed a sharp rise. Borrowings of the
Public Sector Banks grew at 24%, but that of the Foreign Banks was much higher (30%).
Due to redemption of the India Millennium Deposits in Dec 2005, banks non-resident
foreign currency deposits showed a sizeable decline. Loans and advances growth too was
on similar trends. For Public Sector Banks, loan growth was 29.5% as compared to
34.9% in FY05, for Old Private Sector Banks, it was 21.5% as against 22.7% in the
previous year, for New Private Sector Banks it was 50.2 % as against 33% in FY05, and
for Foreign Banks it was 29.5% as against 24 % in FY05. In the non-food credit, apart
from retail credit which grew at 40.9%; infrastructure (24%), basic metals (14.1%) and
36

textiles (11.2%) were the other major sectors that received higher levels of incremental
credit.
5. Growth in Retail Lending
While total credit of the SCBs grew at 31% in FY06, credit to the new segments in the
retail banking showed still higher growth rates. In FY06, loans to housing rose by 33.4%,
credit card receivables by 47.9%, auto loans by 75%, and other personal loans by 39.1%
taking the growth of retail loans during the FY06 to 40.9%. Retail loans in FY06
constituted 25.5% of the total loans and advances of scheduled commercial banks.
Lending to sensitive sectors also rose significantly. Loans to capital market rose by
39.2%, to real estate markets by 81.78% and to commodities by 85.56% with the growth
in these three segments reaching to 77.65% in FY06.
Table 6: Advances to Sensitive Sectors as a percentage to Total Loans

Source: Reserve Bank of India

6. Priority Sector Advances
Credit to priority sector increased at a robust rate of 33.7% in FY06 on the top of 40.3%
in the previous year. A major portion of the credit growth in the priority sector is
accounted by agriculture and housing. Credit to SSI also grew sizeably.
37

Table 7: Priority Sector Lending

Source:

Reserve

Bank

of

India.

Figures in brackets are annual growth rate in %

7. Market Share
The share of Public Sector Banks showed deceleration in respect of major areas of
business, where as that of the new private sector and Foreign Banks earned higher share
of business. The market share of the Old Private Sector Banks too came under pressure.
Public Sector Banks hold 75% market share in major areas of business.

38

Table

8:

Major

Source:
*

Components

of

Reserve
Industrial

Business,

Bank

Bank

Development

Bank

GroupWise

of
of

(in

%)

India
India

Ltd

** Includes Industrial Development Bank of India Ltd

8. Access to Equity Markets
Banks have been increasingly accessing primary equity capital markets for raising
resources. In FY06, resource mobilization of banks through public equity markets rose by
24%. Resources raised by banks from public equity markets showed continuous increase,
from Rs 24560 mn in FY04 to Rs 89220 mn in FY05 to Rs 110670 mn in FY06.
Encouraged by the response to banks stocks, eleven banks, six in the public sector and
five in the private sector, raised Rs 110670 mn from the equity markets. The Public
Sector Banks which raised equity from the capital markets included Allahabad Bank,
Oriental Bank of Commerce, Syndicate Bank, Andhra Bank, Bank of Baroda and Union
Bank of India. The five Private Sector Banks were Lakshmi Vilas Bank Ltd, Yes Bank
Ltd, ICICI Bank Ltd., The South Indian Bank Ltd and The United Western Bank Ltd. The
size of the share issue of these banks was Rs 6270 mn where as the premium was at Rs
39

104400 mn. Banks also tapped private placement market for resource mobilization in a
big way by raising Rs 301510 mn of which Public Sector Banks accounted for 74%.
Bank stocks also emerged as an important portfolio for investment giving significant
returns. Returns from bank stocks as measured through BSE Bankex rose from 28.6% in
FY05 to 36.8 % in FY06 as compared to the benchmark index. Bank stocks still have
scope for further growth with lower valuation prevailing at present in many banks.

Source : Bombay Stock Exchange.

9. Asset Quality
There is a perceptible increase in the quality of bank assets. Standard assets as percent of
all assets for scheduled commercial banks moved from 94.9% in FY05 to 96.7% in FY
06, with decline in reported sub standard, doubtful and loss assets. The proportion of
standard assets rose across all the bank groups in FY06, showing improved management
of assets by banks. According to a report of the Reserve Bank of India, the gross non
performing assets of the scheduled commercial banks declined by Rs 73090 mn over and
above the decline of Rs 65610 mn in FY05.
As on 31 Mar 2006, gross NPAs of scheduled commercial banks stood at Rs 518150 mn
of which 26.4% are with State Bank group, 53% with the nationalised banks, 7.1% with
the Old Private Sector Banks, 7.3% with the New Private Sector Banks and 3.7% with the
Foreign Banks.
40

Scheduled commercial banks stepped up recovery efforts through numerous methods. In

addition to their own internal recovery processes, banks recovered to the tune of Rs 6080
mn through one-time settlement and compromise schemes, Rs 2230 mn though Lok
Adalats, Rs 47100 mn through Debt Recovery Tribunals and Rs 34230 mn through
SARFAESI Act. Asset Reconstruction Company of India Ltd (ARCIL) acquired 559
cases amounting to Rs 211260 mn from banks.
Table 9: Asset Classification in Banks (as % of Total Assets)

Source: Reserve Bank of India

10. Distribution of Network
The expansion in the distribution network of the banks is increasingly evident from the
growth of the automated teller machines. There is a surge in the growth of off-site ATMs
with their share in the total ATMs rising to 32% in respect of Public Sector Banks, 67% in
State Bank group, 32% in Old Private Sector Banks, 63% in New Private Sector Banks
and 73% in Foreign Banks. Computerisation of public sector bank branches is also
moving at rapid pace. In 2007 the pace of computerization progressed much further.
41

Public Sector Banks have 93 branches operating abroad in 26 countries. All scheduled
commercial banks together have 106 branches abroad.
Table

10:

Branches/ATMs/Staff

in

Banks

(Number)

Source: Reserve Bank of India

11. Major Trends in Business
Indian banking, in addition to improvements in performance and efficiency, has also
experienced significant changes in the structure of asset and liabilities. The major
changes on the liabilities side include relatively higher growth of demand deposits over
time deposits, and also, within time deposits, greater preference for short term over the
42

longer term deposits. The share of demand deposits in total deposits increased from
14.7% in FY01 to 17% in FY06. The share of short term deposits in total time deposits
increased from 43.8% in FY00 to 58.2% in FY06. The narrowing of interest rate spread
between short and long term deposits has reduced the preference for long term deposits.
Banks are moving away from investments to loans due to more lending opportunities
offered by the higher economic growth. The rate of bank credit growth which was at
14.4% in FY03 rose sharply to reach 30% each in the FY05 and FY06. Bank credit has
picked up momentum on the back of rising growth of real economy. A period of low
interest rates induced banks to shift their preference from investments to advances, which
led to the share of gross advances in total assets of all commercial banks reaching 54.7%
in FY06 from 45% in two years prior to that.
The sectors towards which the bank credit was directed has also shown significant
changes. Retail loans witnessed growth of over 40% in the last two years, and began
driving the credit growth to a significant extent. Retail loans as a percentage of Gross
Advances rose from about 22% in FY04 to 25.5% in FY06. Within the retail loans,
housing segment showed the highest growth of 50% in FY05 and 34% in FY06. As per
the RBI data, banks direct exposure to commercial real estate more than doubled in
FY06.
Despite sharp rise in the credit growth, improved risk management processes and
procedures of banks contained the surge in bad debts which is evident from the lower
levels of incremental nonperforming assets reported by the banks as also the rise in the
proportion of standard assets. Further improvement in risk management systems could
provide banks with more opportunities in expanding credit and pursuing higher levels of
growth in retail lending.

43

Chapter - IV
COMPANY PROFILE

COMPANY PROFILE
44

The Housing Development Finance Corporation Limited (HDFC) was amongst

the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to
set up a bank in the private sector, as part of the RBI's liberalization of the Indian
Banking Industry in 1994. The bank was incorporated in August 1994 in the name of
'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank
commenced operations as a Scheduled Commercial Bank in January 1995.
HDFC is India's premier housing finance company and enjoys an impeccable track
record in India as well as in international markets. Since its inception in 1977, the
Corporation has maintained a consistent and healthy growth in its operations to
remain the market leader in mortgages. Its outstanding loan portfolio covers well
over a million dwelling units. HDFC has developed significant expertise in retail
mortgage loans to different market segments and also has a large corporate client
base for its housing related credit facilities. With its experience in the financial
markets, a strong market reputation, large shareholder base and unique consumer
franchise, HDFC was ideally positioned to promote a bank in the Indian
environment.
HDFC Bank's mission is to be a World-Class Indian Bank. The objective is to build
sound customer franchises across distinct businesses so as to be the preferred
provider of banking services for target retail and wholesale customer segments, and
to achieve healthy growth in profitability, consistent with the bank's risk appetite.
The bank is committed to maintain the highest level of ethical standards,
professional integrity, corporate governance and regulatory compliance. HDFC
Bank's business philosophy is based on four core values - Operational Excellence,
Customer Focus, Product Leadership and People.

Capital Structure:As on 31st March, 2012 the authorized share capital of the Bank is Rs. 550 crore.
The paid-up capital as on the said date is Rs. 469,33,76,540 (234,66,88,270 equity
shares of Rs. 2/- each). The HDFC Group holds 23.15% of the Bank's equity and
about 17.29 % of the equity is held by the ADS / GDR Depositories (in respect of the
bank's American Depository Shares (ADS) and Global Depository Receipts (GDR)
Issues). 30.68 % of the equity is held by Foreign Institutional Investors (FIIs) and the
45

Bank has 4,47,924 shareholders

The shares are listed on the Bombay Stock Exchange Limited and The National
Stock Exchange of India Limited. The Bank's American Depository Shares (ADS) are
listed on the New York Stock Exchange (NYSE) under the symbol 'HDB' and the
Bank's Global Depository Receipts (GDRs) are listed on Luxembourg Stock Exchange
under ISIN No US40415F2002.

FINANCIAL RESULTS:
Profit & Loss Account: Quarter ended June 30, 2012
The Banks total income for the quarter ended June 30, 2012, was ` 9,536.9 crores as against `
7,098.0 crores for the quarter ended June 30, 2011. Net revenues (net interest income plus other
income) were at ` 5,013.5 crores for the quarter ended June 30, 2012, an increase of 26.3% over `
3,968.0 crores for the corresponding quarter of the previous year. Net interest income (interest earned
less interest expended) for the quarter ended June 30, 2012, grew by 22.3% to ` 3,484.1 crores. This
was driven by loan growth of 21.5% and a net interest margin for the quarter of 4.3%.
Other income (non-interest revenue) for the quarter ended June 30, 2012, was `
1,529.5 crores, up 36.6% over that in the corresponding quarter ended June 30,
2011. The main contributor to other income for the quarter was fees &
commissions of ` 1,143.3 crores, up by 23.9% over ` 922.7 crores in the
corresponding quarter ended June 30, 2011. The two other components of other
income were foreign exchange & derivatives revenue of ` 314.8 crores (` 230.1
crores for the corresponding quarter of the previous year) and profit on
revaluation / sale of investments of ` 66.5 crores (loss of ` 41.3 crores for the
quarter ended June 30, 2011).

Business:-

46

HDFC Bank offers a wide range of commercial and transactional banking services
and treasury products to wholesale and retail customers. The bank has three key
business segments:
Wholesale Banking Services

The

Bank's

target

market

ranges

from

large,

blue-chip

manufacturing

companies in the Indian corporate to small & mid-sized corporates and agribased businesses. For these customers, the Bank provides a wide range of
commercial and transactional banking services, including working capital
finance, trade services, transactional services, cash management, etc. The
bank is also a leading provider of structured solutions, which combine cash
management services with vendor and distributor finance for facilitating
superior supply chain management for its corporate customers. Based on its
superior product delivery / service levels and strong customer orientation, the
Bank has made significant inroads into the banking consortia of a number of
leading Indian corporates including multinationals, companies from the
domestic business houses and prime public sector companies. It is recognised
as a leading provider of cash management and transactional banking solutions
to corporate customers, mutual funds, stock exchange members and banks.

Retail Banking Services

The objective of the Retail Bank is to provide its target market customers a full
range of financial products and banking services, giving the customer a onestop window for all his/her banking requirements. The products are backed by
world-class service and delivered to customers through the growing branch
network, as well as through alternative delivery channels like ATMs, Phone
Banking, NetBanking and Mobile Banking.
The HDFC Bank Preferred program for high net worth individuals, the HDFC
Bank Plus and the Investment Advisory Services programs have been designed
keeping in mind needs of customers who seek distinct financial solutions,
47

information and advice on various investment avenues. The Bank also has a
wide array of retail loan products including Auto Loans, Loans against
marketable securities, Personal Loans and Loans for Two-wheelers. It is also a
leading provider of Depository Participant (DP) services for retail customers,
providing customers the facility to hold their investments in electronic form.

HDFC Bank was the first bank in India to launch an International Debit Card in
association with VISA (VISA Electron) and issues the Mastercard Maestro debit
card as well. The Bank launched its credit card business in late 2001. By March
2010, the bank had a total card base (debit and credit cards) of over 14 million.
The Bank is also one of the leading players in the merchant acquiring
business with over 90,000 Point-of-sale (POS) terminals for debit / credit cards
acceptance at merchant establishments. The Bank is well positioned as a leader
in various net based B2C opportunities including a wide range of internet
banking services for Fixed Deposits, Loans, Bill Payments, etc.

Treasury
Within this business, the bank has three main product areas - Foreign Exchange
and Derivatives, Local Currency Money Market & Debt Securities, and Equities.
With the liberalisation of the financial markets in India, corporates need more
sophisticated risk management information, advice and product structures.
These and fine pricing on various treasury products are provided through the
bank's Treasury team. To comply with statutory reserve requirements, the bank
is required to hold 25% of its deposits in government securities. The Treasury
business is responsible for managing the returns and market risk on this
investment portfolio.

Management:-

48

Mr. C.M. Vasudev has been appointed as the Chairman of the Bank with effect from
6th July 2010. Mr. Vasudev has been a Director of the Bank since October 2006. A
retired IAS officer, Mr. Vasudev has had an illustrious career in the civil services and
has held several key positions in India and overseas, including Finance Secretary,
Government of India, Executive Director, World Bank and Government nominee on
the Boards of many companies in the financial sector.

The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25
years, and before joining HDFC Bank in 1994 was heading Citibank's operations in
Malaysia.
The Bank's Board of Directors is composed of eminent individuals with a wealth of
experience in public policy, administration, industry and commercial banking. Senior
executives representing HDFC are also on the Board.
Senior banking professionals with substantial experience in India and abroad head
various businesses and functions and report to the Managing Director. Given the
professional expertise of the management team and the overall focus on recruiting
and retaining the best talent in the industry, the bank believes that its people are a
significant competitive strength.
Credit Rating
The Bank has its deposit programs rated by two rating agencies - Credit Analysis &
Research Limited (CARE) and Fitch Ratings India Private Limited. The Bank's Fixed
Deposit programme has been rated 'CARE AAA (FD)' [Triple A] by CARE, which
represents instruments considered to be "of the best quality, carrying negligible
investment risk". CARE has also rated the bank's Certificate of Deposit (CD)
programme "PR 1+" which represents "superior capacity for repayment of short
term promissory obligations". Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch
Inc.) has assigned the "AAA ( ind )" rating to the Bank's deposit programme, with
the outlook on the rating as "stable". This rating indicates "highest credit quality"
where "protection factors are very high"

49

The Bank also has its long term unsecured, subordinated (Tier II) Bonds rated by
CARE and Fitch Ratings India Private Limited and its Tier I perpetual Bonds and
Upper Tier II Bonds rated by CARE and CRISIL Ltd. CARE has assigned the rating of
"CARE AAA" for the subordinated Tier II Bonds while Fitch Ratings India Pvt. Ltd. has
assigned the rating "AAA (ind)" with the outlook on the rating as "stable". CARE has
also assigned "CARE AAA [Triple A]" for the Banks Perpetual bond and Upper Tier II
bond issues. CRISIL has assigned the rating "AAA / Stable" for the Bank's Perpetual
Debt programme and Upper Tier II Bond issue. In each of the cases referred to
above, the ratings awarded were the highest assigned by the rating agency for
those instruments?
Corporate Governance Rating
The bank was one of the first four companies, which subjected itself to a Corporate
Governance and Value Creation (GVC) rating by the rating agency, The Credit Rating
Information Services of India Limited (CRISIL). The rating provides an independent
assessment of an entity's current performance and an expectation on its "balanced
value creation and corporate governance practices" in future. The bank has been
assigned a 'CRISIL GVC Level 1' rating which indicates that the bank's capability
with respect to wealth creation for all its stakeholders while adopting sound
corporate governance practices is the highest.
On May 23, 2009, the amalgamation of Centurion Bank of Punjab with HDFC Bank
was formally approved by Reserve Bank of India to complete the statutory and
regulatory approval process. As per the scheme of amalgamation, shareholders of
CBoP received 1 share of HDFC Bank for every 29 shares of CBoP.
The merged entity will have a strong deposit base of around Rs. 1,22,000 crore and
net advances of around Rs. 89,000 crore. The balance sheet size of the combined
entity would be over Rs. 1,63,000 crore. The amalgamation added significant value
to HDFC Bank in terms of increased branch network, geographic reach, and
customer base, and a bigger pool of skilled manpower.

50

In a milestone transaction in the Indian banking industry, Times Bank Limited

(another new private sector bank promoted by Bennett, Coleman & Co. / Times
Group) was merged with HDFC Bank Ltd., effective February 26, 2000. This was the
first merger of two private banks in the New Generation Private Sector Banks. As
per the scheme of amalgamation approved by the shareholders of both banks and
the Reserve Bank of India, shareholders of Times Bank received 1 share of HDFC
Bank for every 5.75 shares of Times Bank.
HDFC Bank Ltd. (BSE: 500180, NYSE: HDB) is a commercial bank of India,
incorporated in August 1994, after the Reserve Bank of India allowed establishing
private sector banks. The Bank was promoted by the Housing Development Finance
Corporation, a premier housing finance company (set up in 1977) of India. HDFC
Bank has 1,412 branches and over 3,295 ATMs, in 528 cities in India, and all
branches of the bank are linked on an online real-time basis. As of September 30,
2010 the bank had total assets of INR 1006.82 billion. For the fiscal year 2011-12,
the bank has reported net profit of Rs.2,244.9 crore, up 41% from the previous
fiscal. Total annual earnings of the bank increased by 58% reaching at Rs.19,622.8
crore in 2011-12.
Business Focus
HDFC Bank deals with three key business segments Wholesale Banking Services,
Retail Banking Services, and Treasury. It has entered the banking consortia of over
50 corporates for providing working capital finance, trade services, corporate
finance and merchant banking. It is also providing sophisticated product structures
in area of foreign exchange and derivatives, money markets and debt trading and
equity research.
Wholesale Banking Services
The Bank's target m inroads into the banking consortia of a number of leading
Indian corporate including multinationals, companies from the domestic business
houses and prime public sector companies. It is recognized as a leading provider of
cash management and transactional banking solutions to corporate customers,
mutual funds, stock exchange members and banks.
51

Retail Banking Services

The objective of the Retail Bank is to provide its target market customers a full
range of financial products and banking services, giving the customer a one-stop
window for all his/her banking requirements. The products are backed by worldclass service and delivered to customers through the growing branch network, as
well as through alternative delivery channels like ATM, Phone Banking, Net Banking
and Mobile Banking.
HDFC Bank was the first bank in India to launch an International Debit Card in
association with VISA (VISA Electron) and issues the Master card Maestro debit card
as well. The Bank launched its credit card business in late 2001. By March 2012, the
bank had a total card base (debit and credit cards) of over 13 million. The Bank is
also one of the leading players in the merchant acquiring business with over
70,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant
establishments. The Bank is well positioned as a leader in various net based B2C
opportunities including a wide range of internet banking services for Fixed Deposits,
Loans, Bill Payments, etc.
Treasury
Within this business, the bank has three main product areas - Foreign Exchange and
Derivatives, Local Currency Money Market & Debt Securities, and Equities. These
services are provided through the bank's Treasury team. To comply with statutory
reserve requirements, the bank is required to hold 25% of its deposits in
government securities. The Treasury business is responsible for managing the
returns and market risk on this investment portfolio.
Distribution Network
HDFC Bank is headquartered in Mumbai. The Bank has a network of 1,725 branches
spread in 771 cities across India. All branches are linked on an online real-time
basis. Customers in over 500 locations are also serviced through Telephone
Banking. The Bank has a presence in all major industrial and commercial centres
across the country. Being a clearing/settlement bank to various leading stock
52

exchanges, the Bank has branches in the centre where the NSE/BSE has a strong
and active member base.
The Bank also has 3,898 networked ATMs across these cities. Moreover, HDFC
Bank's

ATM

network

Visa/MasterCard,

Visa

can

be

accessed

Electron/Maestro,

by

all

domestic

Plus/Cirrus

and

and

international

American

Express

Credit/Charge cardholders.

Housing Development Finance Corporation Limited or HDFC (BSE: 500010), founded 1977
by Ravi Maurya and Hasmukhbhai Parekh, is an Indian NBFC, focusing on home mortgages.
HDFC's distribution network spans 243 outlets that include 49 offices of HDFC's distribution
company, HDFC Sales Private Limited. In addition, HDFC covers over 90 locations through its
outreach programmes. HDFC's marketing efforts continue to be concentrated on developing a
stronger distribution network. Home loans are also Sharcket through HDFC Sales, HDFC Bank
Limited and other third party Direct Selling Agents (DSA).
To cater to non-resident Indians, HDFC has an office in London and Dubai and service
associates in Kuwait, Oman, Qatar, Sharjah, Abu Dhabi, Al Khobar, Jeddah and Riyadh in Saudi
Arabia.

Awards and Achievements - Banking Services

HDFC Bank began operations in 1995 with a simple mission: to be a "World-class

Indian Bank". We realized that only a single-minded focus on product quality and
service excellence would help us get there. Today, we are proud to say that we are
well on our way towards that goal.
It is extremely gratifying that our efforts towards providing customer convenience
have been appreciated both nationally and internationally.

53

2012

IDRBT Banking

Best Bank in 'IT for Operational Effectiveness'

Technology Excellence

category

Awards 2011-12
Asia Money 2012

Best Domestic Bank in India

India's Top 500

Best Bank in India

Companies -Dun &

Bradstreet Corporate
Awards
Finance Asia

- Best Managed Company

- Best CEO - Mr. Aditya Puri

UTI Mutual Fund CNBC TV

- Best Performing Bank - Private

18 Financial Advisor
Awards 2011
Asian Banker

- Best Retail Bank in India

International Excellence

- Best Bancassurance

in Retail Financial

- Best Risk Management

Services Awards 2012

5th Loyalty Summit award Customer and Brand Loyalty
Skoch foundation 2012

SHG/JLG linkage programme

ICAI Awards 2011

Excellence in Financial Reporting

2011

Financial Express Best

- Best in Strength and Soundness

Bank Survey 2010-11

- 2nd Best in the Private Sector

54

CNBC TV18's Best Bank &

- Best Bank

Financial Institution

- Mr. Aditya Puri, Outstanding Finance

Awards

Professional

Dun & Bradstreet Banking Best Private Sector Bank - SME Financing
Awards 2011
ISACA 2011 award for IT

Best practices in IT Governance and IT

Governance

Security

IBA Productivity

New Channel Adopter (Private Sector)

Excellence Awards 2011

DSCI (Data Security

Security in Bank

Council of India)
Excellence Awards 2011
Euromoney Awards for

Best Bank in India

Excellence 2011
FINANCE ASIA Country

- BEST BANK

Awards 2011: India

- BEST CASH MANAGEMENT BANK

- BEST TRADE FINANCE BANK

Asian Banker

Strongest Bank in Asia Pacific

BloombergUTV's Financial

Best Bank

Leadership Awards 2011

IBA Banking Technology

Winner -

Awards 2010

1) Technology Bank of the Year

2) Best Online Bank
3) Best Customer Initiative
4) Best Use of Business Intelligence
5) Best Risk Management System
Runners Up -

55

Best Financial Inclusion

IDC FIIA Awards 2011

Excellence in Customer Experience

2010

Outlook Money 2010

Best Bank

Awards
Businessworld Best Bank

Best Bank (Large)

Awards 2010
Teacher's Achievement

Mr. Aditya Puri

Awards 2010 (Business)

The Banker and PWM 2010

Best Private Bank in India

Global Private Banking

Awards
Economic Times Awards for

Business Leader of the Year - Mr. Aditya Puri

Corporate Excellence 2010

Forbes Asia

Fab 50 Companies - 5th year in a row

NDTV Business Leadership

Best Private Sector Bank

Awards 2010
The Banker Magazine

World's Top 1000 Banks

MIS Asia IT Excellence

BEST BOTTOM-LINE I.T. Category

Award 2010
Dun & Bradstreet Banking
Awards 2010

Overall Best Bank

56

 Best Private Sector Bank

Best Private Sector Bank in SME
Financing
Institutional Investor

HDFC Bank MD, Mr. Aditya Puri among "Asian

Magazine Poll

Captains of Finance 2010"

IDRBT Technology 2009

Winner - 1) IT Infrastructure 2) Use of IT

Awards

within the Bank

Runners-up - IT Governance (Large Banks)

ACI Excellence Awards

Highly Commended - Asia Pacific HDFC Bank

2010
FE-EVI Green Business

Best performer in the Banking category

Leadership Award
Celent's 2010 Banking

Model Bank Award

Innovation Award
Avaya Global Connect 2010 Customer Responsiveness Award - Banking &
Financial Services category
Forbes Top 2000 Companies Our Bank at 632nd position and among 130
Global High Performers
Financial Express - Ernst &
Young Survey 2009-10

Best New Private Sector Bank

Best in Growth
Best in strength

Asian Banker Excellence

Awards 2010

Best Retail Bank in India

57

 Excellence in Automobile Lending

Best M&A Integration
Technology Implementation
The Asset Triple A Awards

Best Cash Management Bank in India

Euromoney Private Banking 1) Best Local Bank in India (second year in a

and Wealth Management

row) 2) Best Private Banking Services

Poll 2010

overall (moved up from No. 2 last year)

Financial Insights

Innovation in Branch Operations - Server

Innovation Awards 2010

Consolidation Project

Global Finance Award

Best Trade Finance Provider in India for 2010

2 Banking Technology

1) Best Risk Management Initiative and 2)

Awards 2009

Best Use of Business Intelligence.

SPJIMR Marketing Impact

2nd Prize

Awards (SMIA) 2010

Business Today Best

Listed in top 10 Best Employers in the

Employer Survey

country

58

59

HDFC BANK PMS PRODUCT

An HDFC Bank service ensures that our clients can pursue an individualized
plan to achieve their investment goals. Our product suite is a one-stop
solution for your entire portfolio needs across equity, fixed income, mutual
funds, structured products, estate planning, etc. customized to your riskreturn profile. Our product suite includes:
1. Direct equity
Our in-house equity research desk provides recommendations based on
strong company fundamental analyses. This is supported by a network of
analysts with expertise in key sectors across industries. Our equity desk
tracks various sectors and uses a mix of top down and bottom-up approach
to identify stocks. Exposure to these is recommended on the basis of your
risk profile - be it conservative, aggressive or moderate.
The direct equity product offering include:

Model Portfolio (Aggressive & Conservative)

Stock Flash
Regular company/result updates
Regular company updates
Thematic Notes: These notes are largely sent to discuss important
events/themes that are impacting the markets and desk views on the

same
Market Impact: These are notes on quarterly analysis of the companies

of the model portfolios

Sector report/ Sector Update: These are notes on a specific sector,
explaining the basic business model and subsequent updates on the

current scenario in the sector

2. Mutual funds
We offer a complete range of Equity, Debt and Ultra-Short term Income funds
to meet individual risk-return objectives. The selection of mutual funds is
60

based on a range of parameters built on Qualitative due-diligence and

Quantitative tools like FAMA Ratio, Performance Consistency Ratio, standard
deviation, volatility, rolling returns, expense ratio, Credit Rating and more.
The funds are distributed to clients across AMCs and are built on the
principles of conservative approach and focused advice. MAAG (mutual fund
analysis tool) is used to analyze the holdings across Equity and Balanced
mutual Funds as the tool provides a snapshot to assess the asset allocation,
market capitalization, sectoral holdings and company holdings.
3. Fixed income product
We offer fixed income products like Government bonds, Tax Free Bonds, fixed
maturity plans, income funds; Bank Deposit, etc. in line with the client's riskreturn profile. Capital Gains Bonds like NABARD, NHAI, and REC and, RBI
Bonds are also provided to clients.
4. Private equity funds
In terms of asset class, private equity focuses on generating superior returns
whilst improving portfolio diversification. However, these funds are illiquid
and recommended for aggressive investors. Our in house research team
carefully evaluates and selects private equity funds that will help you
achieve your long-term investment goals. We suggest a large range of funds
managed by some of the leading and trusted names in the industry.

PORTFOLIO CHARACTERISTICS
EXPOSURE LIMIT UNDER NORMAL CIRCUMSTANCES

To a single stock
1.5 to 15%
To a sector/industry
30%
Portfolio will consist of four uncorrelated sectors
Rigorous company analysis guided by fundamentals of the stock
61

Growth available at reasonable valuation

Discounted asset value as compared to enterprise value

MINIMUM FUNDS AND FEES PAYABLE

MINIMUM FUNDS RS. 25 LACS
PORTFOLIO MANAGEMENT FEES
-2.75% P.A OF DAILY AVERAGE ASSETS UNDER MANAGEMENT
OR

-1.75% P.A. OF DAILY AVERAGE ASSET UNDER MANAGEMENT PLUS

-20% OF GAINS IN EXCESS OF 10% P.A.

EXIT FEES
UPTO 12 MONTHS- 3%
MORE THAN 12 MONTHS UPTO 24 MONTHS- 2%
MORE THAN 24 MONTHS-NIL

FEES AND CHARGES

Profit sharing / performance related fees are usually charged by portfolio
managers upon exceeding a hurdle rate or benchmark as specified in the
agreement. However there is no uniformity in practice on how the profit /
performance of the portfolio computed. It is advised that, henceforth, profit /
performance shall be computed on the basis of high water mark principle
over the life of the investment, for charging of performance / profit sharing
fee.
High Water Mark Principle:
High Water Mark shall be the highest value that the portfolio/account has
reached. Value of the portfolio for computation of high watermark shall be
62

taken to be the value on the date when performance fees are charged. For
the purpose of charging performance fee, the frequency shall not be less
than quarterly. The portfolio manager shall charge performance based fee
only on increase in portfolio value in excess of the previously achieved high
water mark.
Illustration: Consider that frequency of charging of performance fees is
annual.
A

clients

initial

contribution

is

Rs.10,00,000,

which

then

rises

to

Rs.12,00,000 in its first year; a performance fee/ profit sharing would be

payable on the Rs.2,00,000 return. In the next year the portfolio value drops
to Rs.11, 00,000 hence no performance fee would be payable. If in the third
year the Portfolio rises to Rs.13,00,000, a performance fee/profit sharing
would be payable only on the Rs1,00,000 profit which is portfolio value in
excess of the previously achieved high water mark of Rs.12,00,000, rather
than on the full return during that year from Rs.11,00,000 to Rs.13,00,000.
All fees and charges shall be levied on the actual amount of clients assets
under management.
High Water Mark shall be applicable for discretionary and non-discretionary
services and not for advisory services. In case of interim contributions/
withdrawals by clients, performance fees may be charged after appropriately
adjusting

the

high

water

mark

on

proportionate

basis.

To

ensure

transparency and adequate disclosure regarding fees and charges, the client
agreement shall contain a separate Annexure which shall list all fees and
charges payable to the portfolio manager. The Annexure shall contain details
of levy of all applicable charges on a sample portfolio of Rs.10 lacs over a
period of one year. The fees and charges shall be shown for 3 scenarios viz.
when the portfolio value increases by 20%, decreases by 20%.

63

FEES AND CHARGES

This computation is for illustrative purpose only. Portfolio Managers may
suitably modify
This to reflect their fees and charges.
The assumptions for the illustration are as follows:
a. Size of sample portfolio: Rs. 10 lacs over
b. Period: 1 year
c. Hurdle Rate: 10% of amount invested
d. Brokerage/ DP charges/ transaction charges: Weighted Average of such
charges (as a
Percentage of assets under management) levied in the past year/ in case of
new portfolio
Managers indicative charges as a percentage of assets under management
(e.g. 2%)
e. Upfront fee (e.g. 2%)
f. Management fee (e.g. 2%)
g. Performance fee (e.g. 20% of profits over hurdle rate)
h. The frequency of calculating all fees is annual.
A)

64

B)

65

SWOT ANALYSIS OF HDFC BANK

STRENGTH

Support of various promoters

High level of services
Knowledge of Indian market
Right strategy for the right products.
Superior customer service vs. competitors
Great Brand Image
Products have required accreditations.
High degree of customer satisfaction.
Good place to work
Lower response time with efficient and effective service.
Dedicated workforce aiming at making a long-term career in the
66

field.

WEAKNESSES

Some gaps in range for certain sectors.

Problems of sales staff.
Processes and systems, etc.
Not been fully able to position it correctly

Opportunities

Profit margins will be good.

Could extend to overseas broadly.
New specialist applications.
Could seek better customer deals
Fast-track career development opportunities on an industry-wide

basis.
An applied research centre to create opportunities for developing

techniques to provide value-added services.

Growing Indian banking sector
People are becoming more service oriented
global market opportunity

Threats
Legislation could impact.
Great risk involved
Very high competition prevailing in the industry.
Vulnerable to reactive attack by major competitors
Lack of infrastructure in rural areas could constrain investment.
High volume/low cost market is intensely competitive.

SEBI (PORTFOLIO MANAGERS)

REGULATIONS
67

Portfolio Managers are registered and regulated under the SEBI

(Portfolio Managers) Regulations.

Portfolio managers accepting funds or securities less than `5lakh from

clients and opening client accounts.

It is clarified that the first single lump-sum investment amount
received as funds or securities from clients should not be less than 5

Lakh.
It shall disclose the performance of portfolios grouped by investment
category for the past three years

68

DISCLOSURES BY SEBI
1) What is the difference between a discretionary portfolio manager
and a non- discretionary portfolio manager?
The discretionary portfolio manager individually and independently
manages the funds of each client in accordance with the needs of the client.
The

non-discretionary

portfolio

manager

manages

the

funds

in

accordance with the directions of the client.

2) What is the procedure of obtaining registration as a portfolio

manager from SEBI?
For registration as a portfolio manager, an applicant is required to pay a nonrefundable application fee of Rs.1,00,000/- by way of demand draft drawn in
favor of Securities and Exchange Board of India, payable at Mumbai.
The application in Form A along with additional information (Form A and
additional information available on SEBI Website.

3) What is the capital adequacy requirement of a portfolio manager?

The portfolio manager is required to have a minimum net worth of Rs. 2
crore.

4) Is there any registration fee to be paid by the portfolio

managers?
Yes. Every portfolio manager is required to pay Rs. 10 lakhs as registration
fees at the time of grant of certificate of registration by SEBI.

69

5) How long does the certificate of registration remain valid?

The certificate of registration remains valid for three years. The portfolio
manager has to apply for renewal of its registration certificate to SEBI, 3
months before the expiry of the validity of the certificate, if it wishes to
continue as a registered portfolio manager.

6) How much is the renewal fee to be paid by the portfolio manager?

The portfolio manager is required to pay Rs. 5 lakh as renewal fees to SEBI.

7) Is there any contract between the portfolio manager and its

client?
Yes. The portfolio manager, before taking up an assignment of management
of funds or portfolio of securities on behalf of the client, enters into an
agreement in writing with the client, clearly defining the inter se relationship
and setting out their mutual rights, liabilities and obligations relating to the
management of funds or portfolio of securities, containing the details as
specified in Schedule IV of the SEBI (Portfolio Managers) Regulations, 1993.

8) What kind of reports can the client expect from the portfolio
manager?
The portfolio manager shall furnish periodically a report to the client, as
agreed in the contract, but not exceeding a period of six months and as and
when required by the client and such report shall contain the following
details, namely:-

70

(a) the composition and the value of the portfolio, description of security,
number of securities, value of each security held in the portfolio, cash
balance and aggregate value of the portfolio as on the date of report;
(b) Transactions undertaken during the period of report including date of
transaction and details of purchases and sales;
(c) Beneficial interest received during that period in respect of interest,
dividend, bonus shares, rights shares and debentures;
(d) Expenses incurred in managing the portfolio of the client;
(e) Details of risk foreseen by the portfolio manager and the risk relating to
the securities recommended by the portfolio manager for investment or
disinvestment.

This report may also be available on the website with restricted access to
each client. The portfolio manager shall, in terms of the agreement with the
client, also furnish to the client documents and information relating only to
the management of a portfolio. The client has right to obtain details of his
portfolio from the portfolio managers.
9) Are investors required to open demat accounts for PMS services?
Yes. For investment in listed securities, an investor is required to open a
demat account in his/her own name.
10) Does SEBI approve any of the services offered by portfolio
managers?
No. SEBI does not approve any of the services offered by the Portfolio
Manager. An investor has to invest in the services based on the terms and
conditions laid out in the disclosure document and the agreement between
the portfolio manager and the investor.

71

11) Does SEBI approve the disclosure document of the portfolio

manager?
The Disclosure Document is neither approved nor disapproved by SEBI. SEBI
does not certify the accuracy or adequacy of the contents of the Disclosure
Document.
12) What are the rules governing services of a Portfolio Manager?
The services of a Portfolio Manager are governed by the agreement between
the portfolio manager and the investor. The agreement should cover the
minimum details as specified in the SEBI Portfolio Manager Regulations.
However, additional requirements can be specified by the Portfolio Manager
in the agreement with the client. Hence, an investor is advised to read the
agreement carefully before signing it.
13) Is premature withdrawal of Funds/securities by an investor
allowed?
The funds or securities can be withdrawn or taken back by the client before
the maturity of the contract. However, the terms of the premature
withdrawal would be as per the agreement between the client and the
portfolio manager.
14) Can a Portfolio Manager impose a lock-in on the investor?
Portfolio managers cannot impose a lock-in on the investment of their
clients. However, a portfolio manager can charge exit fees from the client for
early exit, as laid down in the agreement.
15) Can a Portfolio Manager offer indicative or guaranteed returns?
Portfolio manager cannot offer/ promise indicative or guaranteed returns to
clients.
.
16) On what basis is the performance of the portfolio manager
calculated?

72

The performance of a discretionary portfolio manager is calculated using

weighted average method taking each individual category of investments for
the immediately preceding three years and in such cases performance
indicator is also disclosed.

17) Where can an investor look out for information on portfolio

managers?
Investors can log on to the website of SEBI www.sebi.gov.in for information
on SEBI regulations and circulars pertaining to portfolio managers. Addresses
of the registered portfolio managers are also available on the website.

18) How can the investors redress their complaints?

Investors would find in the Disclosure Document the name, address and
telephone number of the investor relation officer of the portfolio manager
who attends to the investor queries and complaints. The grievance redressal
and dispute mechanism is also mentioned in the Disclosure Document.
Investors can approach SEBI for redressal of their complaints. On receipt of
complaints, SEBI takes up the matter with the concerned portfolio manager
and follows up with them.

73