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2018
Volume 1
THIS MONTH
Season’s greetings!
In this issue, Mr. Arijit Basu, MD & CEO, SBI Life Insurance Company Limited, has presented
his thoughts on the Indian Capital Market and their recent experience in IPO. We thank Mr. Basu
for his contribution to the APAS Monthly publication.
This month, the APAS column presents its views on Price Discovery in Insurance Companies.
The Budget for the year 2018 held a subtle stand on all the sections of the economy. The key
highlights included introduction of the world’s largest Health Protection Scheme covering over 10
crore poor and vulnerable families, launched with a family limit up to INR 5 lakhs for secondary
and tertiary treatment, re-introduction of LTCG tax, reduction in tax rate for companies having net
turnover below INR 250 crore to 25%, etc., which have been covered in detail.
Economic survey 2018 highlighted a few important aspects, which included economic growth
expected to be around 7-7.5 per cent for FY'19, CPI inflation averaged at 3.3 per cent during April-
December, demonetization helping in increasing share of financial savings and many more
observations have been covered.
The economic indicators showed mixed performance. Manufacturing PMI grew at the fastest pace
in 5 years and rose from 52.6 in November to 54.7 in December. India’s annual infrastructure
output in December slowed to a 5-month low of 4%. India's Index of Industrial Production (IIP)
rose to a 17-month high of 8.4% in November. PMI services rose to 50.9 in December from 48.5
APAS
MONTHLY
in November, while composite PMI rose to 53 in December from 50.3 in November. CPI
inflation rose to a 17-month high of 5.21% in December from 4.88% in November. WPI inflation
fell to a 3-month low of 3.58% in December from 3.93% in November.
The Reserve Bank of India (RBI) released the sixth Bi-monthly Monetary Policy Statement, 2017-
18 on 7th February and kept the repo rate unchanged at 6%. The RBI also issued Master Direction
on Foreign Investment in India. The RBI also issued a circular on refinancing of external
commercial borrowings.
The Insurance Regulatory and Development Authority of India (IRDAI) issued clarification on
MISP guidelines. The IRDAI also issued a notification on obligatory cession.
The National Investment and Infrastructure Fund (NIIF) made its first investment.
The FDI policy has been further liberalized in key sectors.
The Securities and Exchange Board of India (SEBI) released a circular on benchmarking of
scheme’s performance to total return index.
We hope that this APAS Monthly is insightful. We welcome your inputs and thoughts and
encourage you to share them with us.
Ashvin parekh
On the cover
APAS COLUMN
Price Discovery in Insurance Companies
BUDGET 2018
Highlights of Budget 2018
GUEST COLUMN
Mr. Arijit Basu
MD & CEO, SBI Life Insurance Company Limited
Indian Capital Market and our recent experience in IPO
Economic
Survey
2018
Economic Survey 2018
Highlights of Economic Survey 2018
BANKING
➢ Sixth RBI Bi-monthly Monetary Policy
Statement, 2017-18
➢ RBI issued Master Direction on foreign
investment in India
➢ Refinancing of External Commercial
Borrowings
ECONOMY
➢ Index of Industrial Production – November
➢ Inflation update – December
➢ PMI update – December
➢ Core Sector – December
INSURANCE ➢ Clarification on MISP Guidelines
➢ Notification on Obligatory Cession
INFRASTRUCTURE ➢ National Investment and Infrastructure
Fund (NIIF) made its first investment
➢ FDI policy liberalized in key sectors
CAPITAL MARKETS
➢ Benchmarking of Scheme’s Performance to Total Return Index
CAPITAL MARKET SNAPSHOT
October 3, 2017 was a golden day for SBI Life Insurance Company Ltd. (SBIL). This is the day which most
of us in SBIL were looking forward to for a long time. Finally, the company which was formed on March
29, 2001 by two giants – State Bank of India and BNP Paribas Cardif - was getting listed as a public listed
company on National Stock Exchange (NSE) & Bombay Stock Exchange (BSE).
Many of us in SBIL were very excited to see the clock strike 10 a.m. and find our shares trading in the
bourses. We also realized that the listing brought upon us a great responsibility to meet expectations of
new stakeholders in our venture, the investors, both institutional and retail.
Indian capital market is one of the oldest capital markets of Asia. While in mature markets IPOs have been
in existence since long, the IPO market in India has been developing since the transformation of the Indian
economy after the economic reforms of the 1990s. IPO has become one of the most preferred methods
of raising funds for various companies. The IPO market in India after a spell of lull is again showing signs
of robustness as a large number of companies are issuing or planning to hit the markets. In 1992, Securities
& Exchange Board of India (SEBI) was established to regulate the capital market (prior to which we had
CCI to look after this activity) and to provide a well governed environment for the Indian capital market.
SEBI was given the authority of monitoring and regulating the activities of the companies, bankers, lead
managers to the issue, stockbrokers and other mediators to the stock market.
The corporate governance practices of major companies have received wide- spread attention in recent
years, particularly the monitoring and control of publicly held corporations. These concerns have grown
markedly during the last few years in the wake of certain unsavoury practices noticed globally. Failings in
corporate governance can have an adverse impact on expansion plans, including treasury operations, as
companies with poor corporate governance will find it harder to access external funds. Also, such firms
may find that financing costs increase, credit ratings are down-graded and investor confidence weakens.
Modern corporations have to balance many competing considerations, reflecting material obligations to
customers, shareholders, employees, suppliers, creditors and others, as well as wider social
responsibilities to the communities in which they operate. However, the need to reflect the owners’ – or
shareholders’ – desires has typically been the focus for debate regarding corporate governance reform.
The protection of investors from risks arising from the separation of ownership and control has been the
central focus of corporate governance recommendations throughout the world. The mechanisms of
corporate governance are seen as integral tenets in the operation of modern corporations; “good”
corporate governance is viewed as essential in terms of safeguarding company assets and maintaining
Indian Capital Market and
our Recent Experience in IPO
Mr. Arijit Basu, MD & CEO, SBI Life Insurance Company Limited
and enhancing investor confidence, thus providing greater access to funds and reducing the potential risks
associated with fraud.
The main focus of various reports on corporate governance has been on the role of non-executive
directors, the appointment of audit and remuneration committees, the disclosure of information about
reward and bonus systems for directors and senior employees and the reporting structure for auditors. A
further aspect of these reports has been the establishment of an internal control system that includes the
whole spectrum of controls, financial and otherwise, to ensure adherence to management policies, the
safeguarding of assets and the completeness and accuracy of the records. The systems of control must
include procedures for reporting immediately, to appropriate levels of management, any significant
control failings or weaknesses that are identified, together with details of any corrective action
undertaken. This requirement has ensured that systems of control are now embedded in the operations
of most companies and form part of their culture.
This year (2018 -19), I personally see a lot of companies hitting the stock market with their issues. It will
be good to have more and more new age companies getting listed. More transparency, more openness
and finally good returns to the investors will improve the overall markets.
The insurance sector in India was reopened to the private sector more than two decades ago. Still, in
FY2016, the insurance penetration in India was 3.4%, far below the global average of 6.2%. The below-
average penetration of insurance, represents huge scope and opportunity for insurance firms. With
possible listing of the insurance companies, a view on valuation of insurance companies becomes a subject
of importance and interest. This article throws light on valuation of life and general insurance companies
and the factors that drive the value. The valuation of insurance companies is a very complex process and
it is difficult to arrive at an appropriate price. It is, therefore, not surprising that perceptions of value can
often differ widely between buyer and seller particularly in emerging markets like India, where there is a
great degree of uncertainty.
Life insurance, by its very nature, primarily sells long-term contracts with annual premiums and
expectation that a portion of those will get renewed year-on-year. Additionally, it considers life mortality
assumptions to create adequate reserves for future pay-outs because of death, maturity or surrender of
policies. These characteristics need to be captured in valuation approach appropriately. Also, the
regulations on distribution channels impact valuations.
Most of the capital issued by insurance companies gets burn out on agent commission and operational
expenditure (which is quite less after first year). Prime strength of an insurance company lies in its
distribution network and valuing such strength is quite difficult, given it needs to be evaluated on a
prospective basis.
Currently, there are certain valuation methodologies which are being used in the industry.
Appraisal value method
The value generation is hugely dependent on market share and new business growth rates which in turn,
is affected by product innovation and distribution capabilities. This may be highly biased towards
Price Discovery in
Insurance
Companies
operators with bancassurance tie-ups and banks as promoters, and hence would generate significantly
higher valuation.
For life insurance companies, overall split up of the valuation is based on two parameters, which combine
into appraisal value: Embedded value and Structural value.
Embedded value is the sum of net asset value (NAV) of the business that is value of the policies issued till
date and value-in-force business (VIF) that is present value of future cash flows from existing policies. NAV
is calculated subsequent to providing for policyholders’ liabilities. Policyholders’ liabilities are held in a
conservative manner as per regulations. VIF recognizes that this extra margin in the liabilities will be
released in future as policyholders’ claims are settled.
Structural value is usually derived by the value of one year’s new business (VONB) or new business
achieved profit (NBAP) multiplied by a capitalization factor (NBAP multiple) or projecting several years’
cash flows of all new business and computation of its present value. A high growth rate/increasing market
share trend may justify application of a higher NBAP multiple.
The three important elements for the computation of VONB or even computation of present value of cash
flows of all new business or value of the entire business as per discounted cash flow method include
financial forecast, choice of discount rate and terminal value computation beyond the forecast period.
An influential factor here is, the initial cost of customer acquisition which of course would be large in the
initial years of establishment and impact the embedded value of the company. As the company matures
and the in-force book (policies already sold and active) expands, the expectations of policy renewals and
increase in business contribute to net-positive cash flow. This appraisal value is mostly influenced by
structural value in the emerging countries, on expectations of increase in new businesses.
Relative valuation method
Relative valuation of companies would largely depend upon their current position, past and future
financial performance, product or distribution mix, growth strategy and parentage. This kind of valuation
methodology is based on peer-to-peer comparison of benchmarks, financial ratios and hence arriving at
valuation parameters.
Given the long gestation period (for life insurance specifically), the multiple based approach draws a hazy
picture of the industry multiples, as it may undermine the intrinsic value created by the company, the
growth rate and softer aspects developed over-time.
Ratios
Important ratios that need to be considered for evaluation of life insurance companies are business
growth, mortality ratio, expense ratio and persistency ratio. The efficiency of the company can be judged
on the basis of the selective selling it does, to maintain an optimum portfolio, which in turn can be judged
by the mortality ratio. Expense ratio is important because it helps evaluate the chunk occupied by
expenses into the NBAP (New business achieved profits) margins.
Following table compares three recently listed life insurance companies based on some ratios (at the time
of IPO):
Name of the Company Expense Ratio Persistency ratio P/EV P/E P/BV
HDFC Life 12.3 80% 4.1 65 15
ICICI Prudential 10.5 85% 3.2 29 9
SBI Life 7.8 77% 3.6 55 11.5
As ICICI Prudential was the first life insurance company to get listed, the anonymity in discovering the
intrinsic value could be clearly seen by its tepid listing. SBI Life also saw mild response, however, HDFC
Life garnered good response from the investors.
In case of general insurance, the current valuations present a clear picture of the growth of the sector.
Contrary to life insurance, general insurance is an annual business and the sector remains fairly distributed
with the private insurers being quite aggressive. However, despite the increase in awareness levels and
Government push, the penetration has been relatively low. The valuations in such scenario are based on
scope of new business achievable. This can be judged based on the strength of distribution network,
relevant tie-ups, other partnerships, etc. Other important aspects are claims ratio, quality of business
written, combined ratio, etc.
Overall, various factors such as financial forecast for an entity based on industry growth rate, possible
market share, specific business strategy, Distribution capabilities and Embedded Value are critical inputs
for estimation of value of any insurance company. These factors are not only considered on standalone
company basis, but also compared for the competitive peers, to obtain a complete analysis. Since these
assumptions are inherently subjective, sensitivity checks on these assumptions need to be conducted to
derive possible valuation range. Value would also depend upon several other factors such as the leverage
for negotiation of the transacting parties, their strategic objectives and potential buyers’ expectations on
realization of any synergies, etc.
Still, anonymity of the sector has kept both the types of investors, retail and institutional, guessing about
appropriate valuation of companies.
-APAS
Key highlights of the Budget 2018 were as follows:
➢ Budget guided by mission to strengthen agriculture, rural development, health, education,
employment, MSME and infrastructure sectors
➢ World’s largest Health Protection Scheme covering over 10 crore poor and vulnerable families
launched with a family limit up to INR 5 lakh for secondary and tertiary treatment.
➢ Fiscal Deficit pegged at 3.5 %, projected at 3.3 % for 2018-19.
➢ INR 5.97 lakh crore allocation for infrastructure
➢ Disinvestment crossed target of INR 72,500 crore to reach INR 1,00,000 crore
➢ Comprehensive Gold Policy on the anvil to develop yellow metal as an asset class
➢ 100 percent deduction proposed to companies registered as Farmer Producer Companies with an
annual turnover up to INR 100 crores on profit derived from such activities, for five years from 2018-
19.
➢ Deduction of 30 percent on emoluments paid to new employees Under Section 80-JJAA to be relaxed
to 150 days for footwear and leather industry, to create more employment.
➢ No adjustment in respect of transactions in immovable property where Circle Rate value does not
exceed 5 percent of consideration.
➢ Proposal to extend reduced rate of 25 percent currently available for companies with turnover of less
than INR 50 crore (in Financial Year 2015-16), to companies reporting turnover up to INR 250 crores
in Financial Year 2016-17, to benefit micro, small and medium enterprises.
➢ Standard Deduction of INR 40,000 in place of present exemption for transport allowance and
reimbursement of miscellaneous medical expenses. 2.5 crore salaried employees and pensioners to
benefit.
➢ Relief to Senior Citizens proposed:
o Exemption of interest income on deposits with banks and post offices to be increased from
INR 10,000 to INR 50,000.
o TDS not required to be deducted under section 194A. Benefit also available for interest from
all fixed deposit schemes and recurring deposit schemes.
Budget 2018
Highlights of Budget 2018
o Hike in deduction limit for health insurance premium and/ or medical expenditure from INR
30,000 to INR 50,000 under section 80D.
o Increase in deduction limit for medical expenditure for certain critical illness from INR 60,000
(in case of senior citizens) and from INR 80,000 (in case of very senior citizens) to INR 1 lakh
for all senior citizens, under section 80DDB.
➢ More concessions for International Financial Services Centre (IFSC), to promote trade in stock
exchanges located in IFSC.
➢ To control cash economy, payments exceeding INR 10,000 in cash made by trusts and institutions to
be disallowed and would be subject to tax.
➢ Tax on Long Term Capital Gains exceeding INR 1 lakh at the rate of 10 percent, without allowing any
indexation benefit. However, all gains up to 31st January 2018 will be grandfathered.
➢ Proposal to introduce tax on distributed income by equity oriented mutual funds at the rate of 10
percent.
➢ Proposal to increase cess on personal income tax and corporation tax to 4 percent from present 3
percent.
➢ Proposal to roll out E-assessment across the country to almost eliminate person to person contact
leading to greater efficiency and transparency in direct tax collection.
➢ Proposed changes in customs duty to promote creation of more jobs in the country and also to
incentivize domestic value addition and Make in India in sectors such as food processing, electronics,
auto components, footwear and furniture.
The Ministry of Finance announced the outcomes of Economic Survey 2018. The findings of the survey
are as follows:
The Economic Survey 2018 has estimated that the Indian economy will grow by 7-7.5% in 2018-19,
thereby re-instating India as the world’s fastest-growing major economy.
The major highlights were as follows:
➢ Economic growth pegged at 7-7.5 per cent for FY'19.
➢ The growth to be higher at 6.75 per cent in FY'18 than advance estimates of 6.5 per cent.
➢ CPI inflation averaged 3.3 per cent during April-December, the lowest in the past six years.
➢ Fifty per cent increase in the number of indirect taxpayers due to Goods and Services Tax (GST).
➢ During the first eight months of 2017-18, tax collections are reasonably on track; and the robust
progress in disinvestment compensates to a great extent for the sluggish pace in non-tax revenue.
➢ Fiscal deficit overshot target by 12 per cent till November. Likely to normalize as the year
progresses.
➢ Weighted average collection rate (incidence) of GST is about 15.6 per cent. As such, the single tax
rate that would preserve revenue neutrality is between 15 to 16 per cent.
➢ Tax departments have gone in for contesting several tax disputes but also with a low success rate,
which is below 30 per cent.
➢ Largest firms account for much smaller exports than in other comparable countries. Top one per
cent of Indian firms account only for 38 per cent of exports unlike in other countries where they
account for substantially greater share – (72, 68, 67 and 55 per cent in Brazil, Germany, Mexico, and
USA, respectively).
➢ Five States -- Maharashtra, Gujarat, Karnataka, Tamil Nadu, and Telangana account for 70 per cent
of India's exports.
➢ Demonetization helped in increasing share of financial savings.
➢ Formal sector in the economy is substantially greater than currently believed. Formality defined in
terms of social security provision yields an estimate of formal sector payroll of about 31 per cent of
the non-agricultural work force; formality defined in terms of being part of the GST net suggests a
formal sector payroll share of 53 per cent.
Economic Survey 2018
Highlights of Economic Survey 2018 Economic
Survey
IIP (Index of Industrial Production) – November
Index of Industrial Production (IIP) or factory output for the month of November 2017 rose to a 17-month
high of 8.4%, compared to 2.2% in the month of October 2017 and 4.1% in September 2017. This was
mainly due to surge in manufacturing sector production.
The General Index for the month of November 2017 stands at 125.6, which is 8.4% higher as compared to
the level in the month of November 2016. The cumulative growth for the period April-November 2017
over the corresponding period of the previous year stands at 3.2%.
As per Use-based classification, the growth rates in November 2017 over November 2016 are 3.2% in
Primary goods, 9.4% in Capital goods, 5.5% in Intermediate goods and 13.5% in Infrastructure/
Construction Goods. The Consumer durables and Consumer non-durables have recorded growths of 2.5%
and 23.1% respectively.
The Indices of Industrial Production for the mining, manufacturing and electricity sectors for the month
of November 2017 stand at 107.4, 127.5 and 140.1 respectively, with the corresponding growth rates of
1.1%, 10.2% and 3.9% as compared to November 2016.
As many as 15 out of 23 industry groups in the manufacturing sector showed positive growth in November
2017 as compared to November 2016.
Under manufacturing, the industry group ‘Manufacture of pharmaceuticals, medicinal chemical and
botanical products’ has shown the highest positive growth of 39.5%, followed by 29.1% in ‘Manufacture
of computer, electronic and optical products’ and 22.6% in ‘Manufacture of other transport equipment’.
On the other hand, the industry group ‘Other manufacturing’ has shown the highest negative growth of
(-) 15.9%, followed by (-) 13.1% in ‘Manufacture of wearing apparel’ and (-) 11.2% in ‘Manufacture of
electrical equipment’.
ECONOMY
Source: APAS BRT, www.mospi.gov.in
1.2
4.3
3.8
2.2
8.4
Jul-17 Aug-17 Sep-17 Oct-17 Nov-17
IIP (% YoY)
Base rate 2011-12
CPI (Consumer Price Index) – December
India's consumer price index (CPI) or retail inflation rose to a 17-month high of 5.21% in the month of
December 2017 – higher than 4.88% in November 2017 and 3.41% in December 2016.
The annual CPI in rural and urban areas rose by 5.27% and 5.09% respectively.
The Consumer food price index (CFPI) stood at 4.96% compared to 4.35% in November 2017 and 1.37% in
December 2016.
Major indicators of CPI were all positive with food & beverages at 4.85%, pan, tobacco & intoxicants at
7.76%, clothing & footwear at 4.8%, housing at 8.25%, fuel & light at 7.9% and miscellaneous at 3.79%.
Vegetable prices grew 29.13% in December as compared to 22.48% in November.
Source: APAS BRT, www.mospi.gov.in
3.36 3.283.58
4.885.21
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
CPI
Base rate 2011-12
WPI (Wholesale Price Index) – December
India's wholesale price index (WPI) inflation fell to a 3-month low of 3.58% in December 2017, gradually
lower than 3.93% in November and higher than 2.1% in December 2016.
The rate of inflation in the WPI Food Index also eased to 2.91% in December from 4.1% in November. The
index of primary articles declined by 2.9% from the previous month.
Under primary articles, ‘Food Articles’ group declined by 4.3% due to lower prices of fruits and vegetables
(14%), peas/chawali (6%), gram and egg (5% each), rajma and poultry chicken (4% each), coffee and fish-
inland (3% each), urad and tea (2% each) and maize and masur (1% each).
On the other hand, ‘Non-Food Articles’ group rose by 1.8% due to higher prices of floriculture (19%), copra
(coconut) (8%), raw silk, gingelly seed and guar seed (7% each), raw cotton (6%), raw wool and raw rubber
(4% each), hides (raw) and soyabean (3% each), cotton seed, rape & mustard seed and castor seed (2% each)
and raw jute, skins (raw), sunflower and coir fibre (1% each).
‘Minerals’ group also declined by 5.4% due to lower prices of copper concentrate (14%), lead concentrate
and zinc concentrate (7% each). ‘Crude Petroleum & Natural Gas’ group rose by 4.8% due to higher price of
crude petroleum (7%). However, the price of natural gas declined by 1%. Fuel and power index rose by 1.6%.
The index for ‘Coal’ group rose by 0.6% due to higher price of lignite (18%).
Manufacturing group, which has the highest weightage in WPI, grew by 0.1%.
Under manufacturing group, food products declined by 0.4%, tobacco products tumbled by 2.1%, textiles
were down by 0.4% and plastic products plunged by 0.1%. However, sectors like beverages, wearing apparel,
paper products, chemical products, pharma products and non-metallic products rose by 0.2%, 1%, 0.3%,
0.5%, 1.2% and 0.2% respectively.
Source: APAS BRT, www.mospi.gov.in
3.24
2.6
3.593.93
3.58
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
WPI
Base rate 2011-12
Manufacturing PMI – December
The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) grew at the fastest rate in 5 years in
December.
The Manufacturing PMI rose to 54.7 in December from 52.6 in November, marking its fifth straight month
above the 50 level that separates expansion from contraction.
This has come in the backdrop of a pickup in merchandise exports and output of 8 infrastructure sectors in
November and has stoked expectations of a sustained revival in the Indian economy.
Merchandise exports grew at a 6-year high of 30.5% in November, while the index for core sectors expanded
at its fastest pace in 13 months at 6.8%.
India’s manufacturing sector witnessed higher payroll figures in December, while the rate of job creation
rose to its highest since August 2012.
The new orders sub-index, a proxy for domestic demand, also rose to 56.8 in December, the highest since
October 2016.
Stronger demand allowed firms to raise prices at the fastest pace in 10 months to make up for rising input
costs.
Source: www.tradingeconomics.com
Services PMI – December
India’s services sector bounced back into the growth zone in December after a contraction in November.
The Nikkei India Services Purchasing Managers’ Index (PMI) Business Activity Index rose to 50.9 in December
from 48.5 in November, signaling a renewed increase in activity.
The Nikkei India Composite PMI Output Index, which includes both services and manufacturing, rose to 53
from 50.3 in November, the highest since October 2016.
Stable new orders and improved output helped services bounce back in December, but the Goods and
Services Tax (GST) hindered many firms from securing new business.
Hiring in services firms rose at the fastest pace since September and remained above average, underpinned
by an overall improvement in the outlook of future business conditions.
Business sentiment was broadly similar to November’s 4-month high and an expected improvement in
demand conditions was cited as the key factor behind business confidence.
Cost inflationary pressures also eased from November, translating into service providers raising output
prices at the slowest pace since mid-2017 in December.
Source: www.tradingeconomics.com
Core Sector Data – December
Growth of the eight core sectors slowed to a 5-month low of 4% in December 2017 due to negative
performance of segments like coal and crude oil. The output growth recorded in December is the lowest
since July 2017, when these core sectors had witnessed 2.9% expansion.
In November, the figure stood at 6.8%, which was revised to 7.4%.
These eight industries – coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and
electricity – had witnessed a growth of 5.6% in December 2016.
The output of coal and crude oil sectors contracted 0.1% and 2.1% respectively during December 2017.
Growth in steel and electricity generation slowed to 2.6% and 3.3% respectively in December as against
15.9% and 6.4% in December 2016.
Refinery products, natural gas, fertilizer and cement recorded healthy growth in December. Cement
production remained the biggest growth driver, rising 19.6% in December.
Cumulatively, the growth in the eight core sectors during April-December this fiscal slowed to 4% as
against 5.3% in the same period last fiscal.
Source: APAS BRT, www.eaindustry.nic.in
5.6
3.4
1.0
5.0
2.5
3.6
0.4
2.4
4.9 5.24.7
6.8
4.0
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Co
re s
ect
or
dat
a %
Month
Core sector Trend - Monthwise
Sixth RBI Bi-monthly Monetary Policy Statement, 2017-18
On the basis of an assessment of the current and evolving macroeconomic situation at its meeting on the
8th of February, 2016, the Monetary Policy Committee (MPC) released the Sixth Bi-monthly Monetary
Policy Statement 2017-18 and kept the policy repo rate under the liquidity adjustment facility (LAF)
unchanged at 6.00 percent.
Consequently, the reverse repo rate under the LAF remains at 5.75 per cent, and the marginal standing
facility (MSF) rate and the Bank Rate at 6.25 per cent. The decision of the MPC is consistent with the
neutral stance of monetary policy in consonance with the objective of achieving the medium-term target
for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting
growth.
GVA growth for 2017-18 is projected at 6.6 per cent. GVA growth for 2018-19 is projected at 7.2 per cent
overall – in the range of 7.3-7.4 per cent in H1 and 7.1-7.2 per cent in H2 – with risks evenly balanced. The
inflation outlook beyond the current year is likely to be shaped by several factors. First, international crude
oil prices have firmed up sharply since August 2017, driven by both demand and supply side factors.
Second, non-oil industrial raw material prices have also witnessed a global uptick. Firms polled in the
Reserve Bank’s IOS expect input prices to harden in Q4. In a scenario of improving economic activity, rising
input costs are likely to be passed on to consumers. Third, the inflation outlook will depend on the
monsoon, which is assumed to be normal. Taking these factors into consideration, CPI inflation for 2018-
19 is estimated in the range of 5.1-5.6 per cent in H1, including diminishing statistical HRA impact of
central government employees, and 4.5-4.6 per cent in H2, with risks tilted to the upside. The projected
moderation in inflation in the second half is on account of strong favorable base effects, including
unwinding of the 7th CPC’s HRA impact, and a softer food inflation forecast, given the assumption of
normal monsoon and effective supply management by the Government.
BANKING
RBI issued master direction on Foreign Investment in India
The Reserve Bank of India, in consultation with the Government of India, has revised the regulations on
foreign investment in India and has repealed and replaced the Foreign Exchange Management (transfer
or issue of security by a person resident outside India) Regulations, 2000 (Notification No. FEMA 20) and
Foreign Exchange Management (Investment in a firm or a proprietary concern in India) Regulations, 2000
(Notification No. FEMA 24) both dated May 3, 2000 with the Foreign Exchange Management (Transfer or
issue of security by a person resident outside India) Regulations, 2017 dated November 7, 2017
(Notification No. FEMA 20 ( R )).
It may be recalled that the Reserve Bank had informed that the rationalization exercise is being
undertaken vide press release on “RBI rationalizes FEMA Regulations” dated February 4, 2016. The
rationalized regulations have been framed keeping in view the objective of promoting ease of doing
business, both from the regulatory as well as supervisory perspective.
Consequent to the rationalization, the Master Direction on ‘Foreign Investment in India’ consolidating all
the instructions relevant to foreign investment in India has been issued on 4th January, 2018.
Below are some of the key changes and clarifications in the Master Direction.
• Venture capital funds (VCFs): RBI has specifically carved out VCFs from the definition of
‘investment vehicle’. Accordingly, investments by VCFs with foreign investment will be subject to
downstream investment requirements.
• Foreign portfolio investors (FPIs):
o FPI ceiling: Investments made by FPIs through offshore funds, global depository receipts
and euro convertible bonds would not be counted to calculate the ceiling on FPI holdings
and only investment in capital instruments acquired through primary and secondary
markets would be included.
o Short-selling by FPIs: Short selling by FPIs is permissible only if a 2% headroom is available
for foreign investment and/or aggregate FPI investment limits. The designated custodian
bank has to report all short selling transactions and lending and borrowing of equity
shares by FPIs to RBI on a daily basis.
o Investment by FPIs in non-convertible debentures (NCDs): Consistent with the approach
adopted by SEBI, the Master Direction provides that FPIs can invest in primary issuance
of ‘to be listed’ NCDs/ bonds only if listing is committed within 15 days of such investment
and in unlisted NCDs or bonds only if such instruments have a minimum residual maturity
of 3 years and end use restrictions on investments in real estate business, capital market
and purchase of land.
• Funds for downstream investment by Indian entity: Foreign owned and controlled Indian entities
(FOCCs) are prohibited from using funds borrowed in domestic markets for making downstream
investments. Subscriptions by non-residents (NRs) to NCDs of an Indian company will not be
considered as funds borrowed in domestic markets. Accordingly, funds raised by FOCCs by issuing
NCDs to FPIs can be used for making downstream investments. Ability of NRs other than FPIs to
subscribe to NCDs of an Indian company for making downstream investments continues to be
curtailed by the external commercial borrowing regulations of the RBI.
• Issue of partly paid shares: Partly paid shares are required to be fully called up within 12 months
from its issuance. The Master Direction relaxes this requirement if the issue size is greater than
INR 5 billion. In such a scenario, listed companies are required to comply with the requirements
of SEBI ICDR Regulations and appoint a monitoring agency. The relaxation is also available to
unlisted companies, subject to such company appointing a monitoring agency on the same lines
as required in case of listed companies. Further, it has been clarified that partly paid shares cannot
be issued in lieu of funds payable to a non-resident (NR) by an Indian company.
• Amendment to tenure of convertible instruments: The tenure of compulsorily convertible
debentures and preference shares can be amended in accordance with the Companies Act, 2013.
• Mandatory divestments by FPIs, NRIs and OCIs: FPIs, NRIs and overseas citizens of India (OCIs)
that breach their prescribed ceiling are required to mandatorily divest their holding within 5
trading days after settlement.
Refinancing of External Commercial Borrowings
In terms of the extant provisions in paragraphs 2.15 and 2.16 (xiii) of Master Direction No. 5 dated January
1, 2016 on ‘External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by
Authorised Dealers and Persons other than Authorised Dealers’, as amended from time to time, Indian
corporates are permitted to refinance their existing External Commercial Borrowings (ECBs) at a lower all-
in-cost. The overseas branches/subsidiaries of Indian banks are however, not permitted to extend such
refinance.
In order to provide a level playing field, it has been decided, in consultation with the Government of India,
to permit the overseas branches/subsidiaries of Indian banks to refinance ECBs of highly rated (AAA)
corporates as well as Navratna and Maharatna PSUs, provided the outstanding maturity of the original
borrowing is not reduced and all-in-cost of fresh ECB is lower than the existing ECB. Partial refinance of
existing ECBs will also be permitted, subject to same conditions.
As per the circular, all other aspects of the ECB policy remain unchanged.
Clarification on MISP Guidelines
The Insurance Regulatory and Development Authority of India (IRDAI) issued a circular on clarification on
Motor Insurance Service Provider (MISP) Guidelines.
It may be recalled that IRDAI had issued
a. Guidelines on Motor Insurance Service Provider vide Circular No. IRDA/ INT/ GDL/ MISP/ 202/
08/ 2017 dt. 31st August 2017
b. Circular on MISP – IRDA/INT/CIR/MISP/246/11/2017 dt.01st Nov 17
The clarifications are on two aspects.
1. Creation of panel of insurers by MISP
The Authority is in receipt of representations from insurance companies that they are not included in
the panel of Insurance brokers/ MISPs as it is not compulsory for Insurance broker/ MISP to empanel all
insurance companies for selling motor insurance policies through MISP even if they are willing to enter
into Service Level Agreements (SLAs).
The guidelines 5 (f) of Guidelines on MISP issued on 31.08.17 and point no. 4 of IRDA circular
dt.01.11.2017, state that an insurance intermediary, based on objective and transparent criteria, can
enter into service level agreement with general insurers for selling motor insurance policies. The
Authority is of the view that with the commission / remuneration levels for the insurance intermediaries
and MISP being stipulated, the creation of a panel of insurers is restrictive, which can lead to
undesirable market practices. Therefore, to remove misgivings in the minds of the stakeholders, it is
clarified that neither the insurance broker, nor the MISP, can create such a panel of insurers for selling
motor insurance policies. However, the insurance companies should enter into service level agreements
with insurance brokers/ MISPs based on transparent and objective criteria.
2. Roles and responsibilities of MISP vis-à-vis Original Equipment Manufacturers (OEMs)
INSURANCE
It is reported that the Original Equipment Manufacturers (OEMs) are exercising undue influence, both
on the insurance intermediary and the automobile dealer, who have become MISP without having
corresponding accountability for their actions.
In order to ensure that MISP guidelines work in the interest of the customers, it is advised that no MISP
or insurance intermediary can enter into an agreement with the OEM which has an influence or bearing
on the sale of motor insurance policies.
Notification on Obligatory Cession
The IRDAI, after consultation with the Advisory Committee and with the previous approval of the Central
Government, issued a notification on obligatory cession.
This notification shall be applicable to Indian reinsurers and other applicable insurers as per the
provisions of Section 101A of Insurance Act, 1938.
The percentage cession of the sum insured on each general insurance policy to be reinsured with the
Indian reinsurers shall be 5% in respect of insurance attaching during the financial year beginning from
1st April 2017 to 31st March 2018. Apportionment of obligatory cession for the FY 2017-18 will be at 5%
and 0% between General Insurance Corporation of India and ITI Reinsurance Ltd. respectively.
Terms and conditions
a. Sum insured limits for cession:
i. The following sum insured limits for obligatory cession shall be applicable from 1st April 2017
to 30th September 2017.
Class Limit of cession in sum insured
Fire, IAR large risks INR 750 crore (MD + LOP) per risk
Marine cargo/DSU insurance INR 50 crore per policy/bottom/sending
Marine hull INR 50 crore per vessel
War & SRCC INR 50 crore per vessel
All liability products excluding financial liability INR 25 crore per policy including USA and INR 50 crore per policy excluding USA
Financial, credit and guarantee lines, mortgage insurance, special contingency policies, etc.
INR 50 crore per policy
Machinery breakdown, boiler explosion and related loss of profit INR 100 crore per risk
Contractor’s all risks, erection all risks, advance loss of profit, DSU insurance
INR 500 crore per risk (MD + LOP)
Oil & energy INR 50 crore per risk
Others No limit
ii. No sum insured limit shall be applicable for the cessions made during the period from 1st
October 2017 to 31st March 2018.
iii. In view of the above, the Indian reinsurers may require the ceding insurer to give immediate
notice of underwriting information of any cession exceeding an amount specified by the
former. The ceding insurer shall inform to the Indian reinsurers at all times whenever the
cession exceeds such specified limits.
b. Commission: Percentage of commission on obligatory cession for different classes of business
shall be as follows:
i. Minimum 5% for motor TP and oil & energy insurance
ii. Minimum 10% for group health insurance
iii. Average terms for aviation insurance
iv. Minimum 15% for all other classes of insurance business
Commission over and above can be as mutually agreed between Indian reinsurers and the ceding
insurer.
c. Profit commission: The Indian reinsurers shall share the profit commission, on 50%:50% basis,
with the ceding insurer based on the performance and surplus of the total obligatory portfolio of
the ceding insurer, after factoring the following:
i. Incurred loss % (to be worked at the end of 3 financial years)
ii. Management expenses at 2%
iii. Profit at 5%
iv. Commission at 15%
v. Loss ratio at 50% to 78%
No profit commission is payable if the loss ratio exceeds 78%. Profit commission shall not exceed 14%.
National Investment and Infrastructure Fund (NIIF) made its First Investment
The National Investment and Infrastructure Fund (NIIF) made its first investment, partnering with DP
World to create an investment platform for ports, terminals, transportation and logistics businesses in
India, the finance ministry said in a statement on Monday. DP World is a Dubai-based company which
operates multiple related businesses – from marine and inland terminals, maritime services, logistics and
ancillary services to technology-driven trade solutions.
According to the press release, the platform will invest in opportunities in the ports sector, and beyond
sea ports into areas such as river ports and transportation, freight corridors, port-led special economic
zones, inland container terminals, and logistics infrastructure including cold storage.
“The platform would invest up to $3 billion of equity to acquire assets and develop projects in the sector,”
DP World said in a separate statement. It said the partnership follows the memorandum of understanding
(MoU) signed in May 2017 and the visit to India of Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince
of Abu Dhabi, and DP World Group Chairman and CEO Sultan Ahmed bin Sulayem in February 2016.
This would be NIIF’s first investment and would set a good example of how NIIF could work with
international capital and expertise to invest at scale to build critical infrastructure in India.
NIIF was registered with the Securities and Exchange Board of India as a Category II Alternate Investment
Fund on December 28, 2015. The fund has been set up as a fund of funds structure with an aim to generate
risk adjusted returns for its investors alongside promoting infrastructure development.
INFRASTRUCTURE
FDI policy further liberalized in key sectors
The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, has given its approval to a number
of amendments in the FDI policy. These are intended to liberalise and simplify the FDI policy so as to
provide ease of doing business in the country. In turn, it will lead to larger FDI inflows contributing to
growth of investment, income and employment.
Government has put in place an investor friendly policy on FDI, under which FDI up to 100%, is permitted
on the automatic route in most sectors/ activities. In the recent past, the Government has brought FDI
policy reforms in a number of sectors
Measures undertaken by the Government have resulted in increased FDI inflows in to the country. During
the year 2014-15, total FDI inflows received were USD 45.15 billion as against USD 36.05 billion in 2013-
14. During 2015-16, the country received total FDI of USD 55.46 billion and in the financial year 2016-17,
total FDI of USD 60.08 billion has been received, which is an all-time high.
It has been felt that the country has potential to attract far more foreign investment, which can be
achieved by further liberalizing and simplifying the FDI regime. Accordingly, the Government has decided
to introduce a number of amendments in the FDI Policy.
The amendments, as per the press release, are as below.
1. Single Brand Retail Trading (SBRT): Extant FDI policy on SBRT allows 49% FDI under automatic
route and FDI beyond 49% and up to 100% through government approval route. It has now been
decided to permit 100% FDI under automatic route for SBRT.
2. Civil aviation: As per the extant policy, foreign airlines are allowed to invest, under government
approval route, in the capital of Indian airline companies, up to 49% of their paid-up capital.
However, this provision was presently not applicable to Air India. It has now been decided to do
away with this restriction and allow foreign airlines to invest up to 49% under approval route in
Air India.
3. Real estate broking services: It has been decided to clarify that real estate broking service does
not amount to real estate business and is therefore, eligible for 100% FDI under automatic route.
4. Power exchanges: Extant policy provides for 49% FDI under automatic route in power exchanges.
However, FII/FPI purchases were restricted to secondary market only. It has now been decided to
allow FIIs/FPIs to invest in power exchanges through primary market as well.
5. Issue of shares against non-cash considerations: As per the extant FDI policy, issue of equity
shares against non-cash considerations like pre-incorporation expenses, import of machinery etc.
is permitted under government approval route. It has now been decided that it shall be permitted
under automatic route in case of sectors under automatic route.
6. Pharmaceuticals: FDI policy on pharmaceuticals sector provides that the definition of medical
devices as contained in the FDI policy would be subject to amendment in the Drugs and Cosmetics
Act. As the definition contained in the policy is complete in itself, it has been decided to drop the
reference to Drugs and Cosmetics Act from FDI policy. Further, it has also been decided to amend
the definition of medical devices contained in the FDI policy.
Benchmarking of scheme’s performance to total return index
SEBI released a circular on benchmarking of scheme’s performance to total return index.
Mutual funds are required to disclose the names of benchmark indices with which the AMC and trustees
would compare the performance of the scheme in scheme related documents.
At present, most of the mutual fund schemes (other than debt schemes) are benchmarked to the Price
Return variant of an Index (PRI). PRI only captures capital gains of the index constituents. On the other
hand, Total Return variant of an Index (TRI) takes into account all dividends/ interest payments that are
generated from the basket of constituents that make up the index in addition to the capital gains. Hence,
TRI is more appropriate as a benchmark to compare the performance of mutual fund schemes.
With an objective to enable the investors to compare the performance of a scheme vis-à-vis an
appropriate benchmark, it has been decided that
a. Selection of a benchmark for the scheme of a mutual fund shall be in alignment with the
investment objective, asset allocation pattern and investment strategy of the scheme.
b. The performance of the schemes of a mutual fund shall be benchmarked to the Total Return
variant of the Index chosen as a benchmark as stated in para (a) above.
c. Mutual funds shall use a composite CAGR figure of the performance of the PRI benchmark (till the
date from which TRI is available) and the TRI (subsequently) to compare the performance of their
scheme in case TRI is not available for that particular period.
This circular is applicable to all schemes of mutual funds with effect from February 1, 2018.
CAPITAL MARKETS
CAPITAL MARKETS SNAPSHOT
Source: National Stock Exchange Source: Bombay Stock Exchange
Sources: APAS Business Research Team Sources: APAS Business Research Team
Sources: APAS Business Research Team
The Bombay Stock Exchange (BSE) Sensex rose almost
28 percent in 2017 and the rally has continued in the
new year. The valuation of the index is seen at over
26 times their underlying average EPS. Due to
demonetization, a general fear of holding cash has
emerged in the market, leading to increased
formalization of savings. According to RBI data, in
2016-17, household savings jumped to a historical
high of INR 1,825 billion. Also, bank deposits almost
reached INR 11,000 billion in 2016-17. Apart from
that, FIIs net purchase amounted to INR 9568 crores
and DIIs net purchase amounted to INR 398.73 crores
for the month of January 2018.
1-J
an-1
8
3-J
an-1
8
5-J
an-1
8
7-J
an-1
8
9-J
an-1
8
11
-Jan
-18
13
-Jan
-18
15
-Jan
-18
17
-Jan
-18
19
-Jan
-18
21
-Jan
-18
23
-Jan
-18
25
-Jan
-18
27
-Jan
-18
29
-Jan
-18
31
-Jan
-18
CNX Nifty (Jan-2018)
1-J
an-1
8
3-J
an-1
8
5-J
an-1
8
7-J
an-1
8
9-J
an-1
8
11
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-18
13
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15
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-18
17
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19
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21
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23
-Jan
-18
25
-Jan
-18
27
-Jan
-18
29
-Jan
-18
31
-Jan
-18
BSE Sensex (Jan-2018)
10.0010.8011.6012.4013.2014.0014.8015.6016.4017.2018.0018.80
Indian VIX (Jan-2018)
7.10
7.20
7.30
7.40
7.50
7.60
1-J
an-1
8
3-J
an-1
8
5-J
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8
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11
-Jan
-18
13
-Jan
-18
15
-Jan
-18
17
-Jan
-18
19
-Jan
-18
21
-Jan
-18
23
-Jan
-18
25
-Jan
-18
27
-Jan
-18
29
-Jan
-18
31
-Jan
-18
GIND10Y(Jan-2018)
63.00
63.20
63.40
63.60
63.80
64.00
64.20
1-J
an-1
8
3-J
an-1
8
5-J
an-1
8
7-J
an-1
8
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an-1
8
11
-Jan
-18
13
-Jan
-18
15
-Jan
-18
17
-Jan
-18
19
-Jan
-18
21
-Jan
-18
23
-Jan
-18
25
-Jan
-18
27
-Jan
-18
29
-Jan
-18
31
-Jan
-18
$/₹ (Jan-2018)
ECONOMIC DATA SNAPSHOT
* The Economist poll or Economist Intelligence Unit estimate/forecast;
^ 5-year yield
Quarter represents a three-month period of a financial year beginning 1st April
Countries GDP CPI
Current
Account
Balance
Budget
Balance
Interest
Rates
Latest 2017* 2018* Latest 2017*
% of GDP,
2017*
% of GDP,
2017*
(10YGov),
Latest
Brazil 1.4 Q3 0.6 2.6 2.9 Dec 3.4 -0.7 -8.0 8.63
Russia 1.8 Q3 1.8 2.1 2.5 Dec 3.7 2.5 -1.5 8.13
India 6.3 Q3 6.6 7.3 5.2 Dec 3.5 -1.5 -3.3 7.43
China 6.8 Q4 6.8 6.5 1.8 Dec 1.6 1.2 -4.3 3.85*
S Africa 0.8 Q3 0.8 1.4 4.7 Dec 5.4 -2.5 -3.9 8.47
USA 2.5 Q4 2.3 2.6 2.1 Dec 2.1 -2.4 -3.5 2.70
Canada 3.0 Q3 3.1 2.2 1.9 Dec 1.5 -3.0 -1.7 2.29
Mexico 1.8 Q4 2.0 2.1 6.8 Dec 6.0 -1.7 -1.9 7.62
Euro Area 2.7 Q4 2.3 2.3 1.3 Jan 1.5 3.2 -1.2 0.7
Germany 2.8 Q3 2.5 2.5 1.6 Jan 1.7 7.9 0.6 0.7
Britain 1.5 Q4 1.6 1.4 3.0 Dec 2.7 -4.5 -2.9 1.51
Australia 2.8 Q3 2.3 2.8 1.9 Q4 2.0 -1.7 -1.5 2.82
Indonesia 5.1 Q3 5.1 5.3 3.3 Jan 3.8 -1.6 -2.8 6.19
Malaysia 6.2 Q3 5.8 5.3 3.5 Dec 3.9 2.6 -2.9 3.94
Singapore 3.1 Q4 3.5 2.6 -3.9 Dec 0.6 18.5 -1.0 2.20
S Korea 3.0 Q4 3.1 3.0 1.0 Jan 2.0 5.5 0.9 2.77
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