2019

Volume 11

THIS MONTH

Season’s greetings!

In this issue, Mr. Sundeep Sikka, ED & CEO, Nippon India Mutual Fund, has presented his thoughts

on ‘Trends in Mutual Fund Industry: Shape of Things to Come’. We thank Mr. Sundeep Sikka for his

contribution to the APAS Monthly.

This month, the APAS column presents its views on ‘Artificial Intelligence in Financial Services’.

The economic indicators showed mixed performance. Manufacturing PMI fell to a 2-year low of 50.6

in October from 51.4 in September. India’s annual infrastructure output in October contracted by

5.8%. India's Index of Industrial Production (IIP) contracted to a 7-year low of -4.3% in September.

PMI services rose to 49.2 in October from 48.7 in September, while composite PMI fell to 49.6 in

October from 49.8 in September. CPI inflation rose to a 16-month high of 4.62% in October from

3.99% in September. WPI inflation eased to a 40-month low of 0.16% in October from 0.33% in

September.

The Gross Domestic Product (GDP) growth rate for the second quarter (July-September) of fiscal year

2019-20 slowed to a 6.5-year low of 4.5%.

The Reserve Bank of India (RBI) released the Fifth Bi-monthly Monetary Policy Statement, 2019-20

and kept the policy repo rate unchanged at 5.15%. The RBI issued guidelines on compensation of

whole-time directors/ chief executive officers/ material risk takers and control function staff. RBI

released liquidity risk management framework for NBFCs and Core Investment Companies (CICs).

APAS

MONTHLY

RBI released foreign exchange management (mode of payment and reporting of non-debt instruments)

regulations, 2019. RBI released the report of the working group to review the regulatory and

supervisory framework for CICs. RBI announced the framework on currency swap arrangement for

SAARC countries for the period 2019 to 2022. RBI allowed RRBs to issue additional instruments for

augmenting regulatory capital.

The Insurance Regulatory and Development Authority of India (IRDAI) revised guidelines on

registration and operations of International Financial Service Centre Insurance Offices (IIOs).

The Insolvency and Bankruptcy Board of India (IBBI) amended the regulations on insolvency

resolution process for corporate persons. IBBI also notified regulations for insolvency resolution and

bankruptcy proceedings of personal guarantors to corporate debtors. The Ministry of Corporate Affairs

(MCA) notified rules for insolvency and liquidation proceedings of financial service providers and

application to adjudicating authority.

The Securities and Exchange Board of India (SEBI) conducted its board meeting. SEBI introduced

further norms with regard to collection and reporting of margins by trading member (TM) and clearing

member (CM) in cash segment. SEBI released operational guidelines for foreign portfolio investors

(FPIs), designated depository participants (DDPs) and eligible foreign investors (EFIs). SEBI decided

cut-off time for determining minimum threshold of margins to be collected from clients. SEBI issued

norms for debt ETFs/ index funds. SEBI released guidelines on Handling of Clients’ Securities by

TMs/CMs. SEBI released guidelines for preferential issue of units and institutional placement of units

by a listed Real Estate Investment Trust (REIT). SEBI issued norms for enhanced governance of credit

rating agencies (CRAs).

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

ECONOMY

➢ Index of Industrial Production – September

➢ Inflation update – October

➢ PMI update – October

➢ Core Sector – October

➢ GDP Q2 – FY 19-20

APAS COLUMN

Artificial Intelligence in Financial Services

GUEST COLUMN

Sundeep Sikka ED & CEO Nippon India Mutual Fund Trends in Mutual Fund Industry: Shape of Things to Come

INSURANCE ➢ Registration and Operations of International Financial

Service Centre Insurance Offices (IIOs) Guidelines, 2017

– Amendments

INFRASTRUCTURE & OTHER

GOVT. INITIATIVES

➢ IBBI amends Insolvency Resolution Process for

Corporate Persons Regulations, 2016

➢ IBBI notifies Regulations for Insolvency Resolution

and Bankruptcy Proceedings of Personal Guarantors

to Corporate Debtors

➢ MCA notifies Insolvency and Liquidation Proceedings

of Financial Service Providers and Application to

Adjudicating Authority Rules

CAPITAL MARKETS

➢ Position Limits in Interest Rate Derivatives (IRD)

➢ Securities and Exchange Board of India (Foreign

Portfolio Investors) Regulations, 2019

➢ Risk management framework for liquid and overnight

funds and norms governing investment in short term

deposits

BANKING

➢ RBI Fifth Bi-monthly Monetary Policy Statement, 2019-20

➢ Guidelines on Compensation of Whole Time Directors/ Chief

Executive Officers/ Material Risk Takers and Control

Function Staff

➢ Liquidity Risk Management Framework for NBFCs and CICs

➢ Foreign Exchange Management (Mode of Payment and

Reporting of Non-Debt Instruments) Regulations, 2019

➢ Report of Working Group to Review Regulatory and

Supervisory Framework for CICs

➢ Framework on Currency Swap Arrangement for SAARC

countries for the period 2019-22

➢ Issue of additional instruments for augmenting regulatory

capital for RRBs

CAPITAL MARKETS SNAPSHOT

➢ CNX Nifty, BSE Sensex, India VIX, $/₹, GIND 10Y

ECONOMIC DATA SNAPSHOT

➢ Global GDP, CPI, Current account balance, budget

balance, Interest rates

CAPITAL MARKETS

➢ SEBI Board Meeting

➢ Collection and Reporting of Margins by Trading Member

(TM)/ Clearing Member (CM) in Cash Segment

➢ Operational Guidelines for FPIs, designated depository

participants and eligible foreign investors

➢ Cut-off Time for Determining Minimum Threshold of

Margins to be Collected from Clients

➢ Norms for Debt ETFs/ Index Funds

➢ Handling of Clients’ Securities by TMs/CMs

➢ Guidelines for Preferential Issue of Units and

Institutional Placement of Units by a listed REIT

➢ Enhanced Governance Norms for CRAs

The Indian MF Industry has been one of the fastest growing financial services sectors in India. The Industry

has posted growth across all aspects and become one of the leading investment avenues for the Indian

population. In last 3 years, AUM has grown from Rs 14.6 lakh Cr to Rs ~26 lakh Cr and monthly SIP Book

multiplied more than 2.5 times from Rs 3,400 Cr to Rs 8,250 Cr. Industry caters to more than 8.5 Cr investor

folios, up from 5 Cr 3 years ago. Growth has kept pace even over the longer term with Indian MF Industry

posting CAGR of 13% in last 10 years.

At this point, there are a few key themes emerging from this rapid growth. Digital is a clear theme across

industries and will continue to grow its influence in the MF Industry as well. Digital is likely to be seen as a

paradigm shift for the Industry as a whole with effects on distribution, advisory, payment, communication,

customer service, and maybe even fund management in the form of aid from AI systems. India has successfully

crossed the PC stage of development and moved directly to a widespread usage of smartphones. India is the

second largest smartphone holder in the country with 37 Cr smartphones. This is a platform with tremendous

capabilities both as a storefront for Financial Services and as a means of payment. Mobile apps have quickly

started making their presence felt. Fintech marketplaces like Paytm Money, ET Money, Groww, Kuvera, etc.

are steadily contributing to MF flows especially in SIP.

The second pillar of growth will continue to be Distribution and Advisory services. As far as Indian financial

decisions are concerned, there is a human touch required for the investors at least for the next few years. In

the Indian context, with financial awareness still developing, Mutual funds have not yet been fully absorbed

by the public consciousness. In this regard, distributors form a crucial link between AMCs and investors, by

raising awareness and onboarding investors that are new to the Industry. Currently there are more than

100,000 registered distributors and they are likely to grow in coming years. Distribution strength across the

country will be the key driver for growth for the next 5 years at least.

With MF Industry maturing further, and MF awareness growing across the country, we will see the emergence

of a new category of investors. MF schemes like Liquid funds and broad-based Equity funds will become

ubiquitous regardless of income levels. This new wave of investments will start coming from fresh investors.

As per AMFI, 24% of Equity AUM comes from locations beyond the Top 30. Although this is not an impressive

ratio yet, it points towards a vast untapped potential in smaller cities and towns across India. As financial

awareness and income levels rise, new investors across the country will pour in. This new wave of investors

will also need a different approach from the Industry. Addition of regional languages in communication,

Trends in Mutual Fund

Industry: Shape of Things to

Come Sundeep Sikka ED & CEO Nippon India Mutual Fund

simpler onboarding process, quicker turnaround on NAV assignment, etc. will be important to take MFs to

India at large.

The growth potential in Indian MF Industry is quite significant. However, tapping this potential in Asset

Management space needs more than growth drivers. There is an inherent responsibility of all stakeholders

that forms the backbone of this Industry. Recent credit events have affected the MF Industry and brought to

light improvement areas for all involved. In the long run, all AMCs have the responsibility to continue

strengthening their risk management processes and put the investors’ interest at the forefront. The continued

trust of the investor in the MF Industry is the most important metric of success and driver for growth.

I am confident of the long-term potential of the Industry. Indian growth story is intact and further financial

deepening is likely to boost growth in the Asset Management space. Strong investor participation is likely,

however the long term sustained growth of the Industry will be determined by keeping investors’ needs at

the forefront.

*Views are personal. Neither APAS nor any of its employees endorse any view, products or services mentioned in the article.

One of leading South-east Asian bank has started servicing its customers by way of artificial intelligence (AI)-

powered chatbots to assist customers for personalized banking services, 24*7 customer care facilities, etc.

Meanwhile, one other large bank in Southeast Asia is using an AI-powered virtual assistant to enhance the

experience at its mobile-only bank. A South-Africa based bank has recently launched first of its kind ‘behavioral

bank’. This bank is a completely digital bank, which can be joined by anyone with a smart phone. The bank

offers dynamic interest rates, with linkage of interest rates to client’s financial behavior enabling them to earn

more interest on savings and to pay less interest on credit as they improve their financial behavior. These are

examples of how the financial services industry is rapidly adopting to the AI and machine learning based

applications. Such applications are finding their space in areas of credit decisions, risk management, fraud

detection, quantitative trading, personalized banking, etc.

The applicability of AI in financial industry can know no leaps and bounds. But to understand this, what is AI

at the first place? Artificial intelligence is intelligence possessed by machines by way of programs which keep

learning continuously. Embedding AI into traditional operations, enhances the ‘learnings’ of the processes,

converting them into experiential processes rather than just repetitive processes. This helps in recording past

experiences and avoiding repeating same mistakes, thereby reducing the costs as well as risks for the

companies and increasing productivity.

Few private sector general insurance firms have started leveraging AI to manage their claims, underwriting

and fraud detection. Security brokers are adopting to AI to build quantitative trading models and also

operations such as risk management and fraud detection. Similarly, banks have started to deploy AI for credit

scoring, customer servicing and marketing. This has led to a significant rise of AI-based start-ups which are

collaborating not only with financial services firms but also several other industries like peer-to-peer, logistics,

e-commerce, FMCG, etc. With the scale growing at a fast pace, such AI reinforcements and tailor-made

solutions in the business could lead to huge savings for these companies in the near future.

The growing availability of data will lead to greater optimization of the AI solutions deployed, further leading

to operational efficiency of the solution. For sectors such as healthcare (which is highly linked to health and

life insurance), greater availability of data can help in optimizing solutions. For economies like India and China,

the formalization of healthcare has just begun. Therefore, this increase in database could assist healthcare

companies, health insurers, third-party administrators and reinsurers.

Artificial Intelligence in

Financial Services

Other areas in finance like investment banking specifically transaction advisory have adopted to technology

at moderate pace. Due to niche nature of the assignments, the AI-implementation in transaction advisory has

been limited to research and analytics. Activities like merger and acquisitions, negotiations, IPO processes,

legal due-diligence, valuations, advisory, investor activism, etc. are difficult to be carried out with AI alone.

Above all, one can’t automate good advice, sound judgement and experience.

The AI market is growing tremendously. This includes start-ups, in-house solutions and consulting firms. To

understand the AI market, we see that in South-east Asian economies specifically China, the AI and ML-based

fintech start-ups are garnering maximum attention among major investors like Tencent, Ant financials, etc.

Not only are these funds investing aggressively in such start-ups, they are also actively deploying them into

partnering with local full-fledged banks, payment wallets, insurance companies, etc. According to public

sources, the global AI-based fintech industry is expected to grow at a CAGR of 31.5% from USD 5.53 billion in

2018 to USD 26.92 billion in 2024. With minimum entry barriers, flexibility and agility, AI-based companies

also offer a desired destination for entrepreneurship. AI industry includes natural language processing (NLP),

robotic process automation (RPA) and machine learning.

AI could face certain set of challenges in India, including regulatory compliance, reduction in jobs as well as

unavailability of talent. To explain this, we know that the financial services are highly regulated; therefore,

fresh regulations could invite further comments on aspects of privacy, cyber security and data localization.

RBI has started examining and issuing guiding directions on blockchain, AI and cryptocurrency, to stay updated

on such areas. Another challenge that the AI industry poses is lack of trained professionals. With the AI

industry just taking off, the existing workforce is not familiar with latest tools and application. The creation

and training of AI-focusing workforce will take some amount of time. Further, right now, AI faces difficulties

like the implementation time and cost of AI-focusing programs, integration challenges and lack of

understanding of the state-of-art systems, opportunity costs, privacy-related concerns, lack of transparency,

etc.

The AI has started creating a strong presence in the financial services industry already. Factors like availability

of trained manpower, regulatory compliance, etc. will play a key role in shaping AI’s engagement with financial

services. For AI to have a meaningful impact in financial services, it must align with the core business purpose

and, specifically, deliver shareholder value. Effective implementation of AI would involve evolving practical

and cost-optimum solutions to current problems faced by the industry

-APAS

IIP (Index of Industrial Production) – September

Index of Industrial Production (IIP) or factory output for the month of September 2019 contracted to a 7-year

low of -4.3%, compared to -1.4% in August 2019 and 4.6% in September 2018.

The General Index for the month of September 2019 stands at 123.3, which is 4.3% lower as compared to that

in September 2018.

The growth declined mainly due to poor performance of manufacturing, mining and power generation sectors.

The cumulative growth for the period April-September 2019-20 over the corresponding period of last year

was 1.3%, down from 5.2%.

As per Use-based classification, the growth rates in September 2019 over September 2018 are (-) 5.1% in

primary goods, (-) 20.7% in capital goods, 7% in intermediate goods and (-) 6.4% in infrastructure/construction

goods.

Consumer durables and non-durables have recorded growth rates of (-) 9.9% and (-) 0.4% respectively.

The manufacturing sector, which constitutes 77.63% of the index, contracted by 3.9% in September,

compared to 4.8% growth last year.

Electricity generation contracted by 2.6% in September, compared to 8.2% last year.

Mining sector output growth contracted by 8.5% in September, compared to 0.1% last year.

In terms of industries, 17 out of 23 industry groups in the manufacturing sector have contracted in September

2019 from September 2018.

The industry group ‘Manufacture of motor vehicles, trailers and semi-trailers’ has declined most by 24.8%,

followed by 23.6% in ‘Manufacture of furniture’ and 22% in ‘Manufacture of fabricated metal products, except

machinery and equipment’.

ECONOMY

On the other hand, the industry group ‘Manufacture of wood and products of wood and cork, except furniture;

manufacture of articles of straw and plaiting materials’ has shown the highest growth of 15.5%, followed by

9.2% in ‘Manufacture of basic metals’.

Source: APAS BRT, www.mospi.gov.in

CPI (Consumer Price Index) – October

India's consumer price index (CPI) or retail inflation rose to a 16-month high of 4.62% in October 2019,

compared to 3.99% in September 2019 and 3.38% in October 2018.

The corresponding provisional inflation rates for rural and urban areas are 4.29% and 5.11% respectively.

The Consumer food price index (CFPI) spiked to 7.89% in October from 5.11% in September.

Among the CPI components, inflation for food and beverages jumped to 6.93% in October 2019 from 4.7% in

September 2019.

Within the food items, the inflation rose for vegetables to 26.1%, fruits to 4.08%, milk and products to 3.1,

pulses and products to 11.72%, cereals and products to 2.16%, oils and fats to 1.98%, sugar and confectionery

to 1.33%, prepared meals, snacks, sweets, etc. to 2.21%, spices to 3.86% and eggs to 6.26%. On the other

hand, the inflation eased for non-alcoholic beverages to 2.58% and meat and fish to 9.75% in October 2019.

The inflation for housing eased marginally to 4.58%, while that for miscellaneous items also fell to 3.45% in

October.

3.43.1

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Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19

IIP (% YoY)

Base rate 2011-12

Within the miscellaneous items, the inflation declined for health to 5.58%, transport and communication to

(-) 0.47%, personal care and effects to 5.5% and household goods and services to 2.4%, while it also eased for

education to 6.08% and recreation and amusement to 5.04% in October 2019.

The inflation for clothing and footwear rose to 1.65%, while that for fuel and light moved up to (-) 2.02% in

October.

Source: APAS BRT, www.mospi.gov.in

WPI (Wholesale Price Index) – October

India's wholesale price index (WPI) inflation eased to a 40-month low of 0.16% in October 2019, as compared

to 0.33% in September 2019 and 5.54% in October 2018.

The rate of inflation based on WPI Food Index increased to 7.65% in October 2019 from 5.98% in September

2019.

The index for primary articles rose by 2.1% from the previous month.

Under primary articles, ‘Food articles’ group rose by 3.2% due to higher prices of fruits & vegetables (11%),

egg and pork (4% each), urad, tea and wheat (2% each) and rajma, condiments & spices, fish-marine, poultry

chicken, gram and moong (1% each). However, the prices declined for bajra (6%), ragi (3%) and maize and

barley (1% each).

The ‘Non-Food Articles’ group declined by 0.3% due to lower prices of castor seed (15%), raw rubber (9%),

guar seed (5%), raw cotton (4%), skins (raw) and soyabean (3% each), hides (raw) (2%) and groundnut seed

and coir fibre (1% each). However, the prices moved up for floriculture (14%), raw silk (9%), niger seed (5%),

3.05 3.18 3.15 3.21

3.99

4.62

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0.50

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1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19

CPI

Base rate 2011-12

safflower (kardi seed) (4%), gingelly seed (sesamum) (3%), raw jute (2%) and sunflower and rape & mustard

seed (1% each).

‘Minerals’ group declined by 3.2% due to lower prices of copper concentrate (5%), limestone (3%) and iron

ore, manganese ore and chromite (1% each). However, the price moved up for lead concentrate (1%).

‘Crude petroleum and natural gas’ group declined by 0.7% due to lower price of natural gas (8%). However,

the price moved up for crude petroleum (3%).

The index for fuel and power rose by 1.9% from the previous month.

Under fuel and power, ‘Mineral oils’ group rose by 2.8% due to higher prices of furnace oil (9%), bitumen and

naphtha (6% each), ATF and kerosene (3% each), petrol and HSD (2% each) and LPG (1%).

‘Electricity’ group rose by 1.6% due to higher price of electricity (2%).

The index for manufactured products remained unchanged from the previous month.

Source: APAS BRT, www.eaindustry.nic.in

Manufacturing PMI – October The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) grew at its slowest pace in 2 years in

October, as new orders and output rose at a slower pace.

The Manufacturing PMI fell to a 2-year low of 50.6 in October 2019 from 51.4 in September 2019. It stayed

above the 50 level, that separates expansion from contraction, for the 27th consecutive month.

Business confidence sank to its lowest level in over two and a half years.

2.45

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1.08 1.08

0.330.16

0.00

0.50

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2.50

3.00

May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19

WPI

Base rate 2011-12

The cooling of manufacturing sector conditions in India continued in October, with both factory orders and

production rising at the weakest rates in 2 years.

Subsequently, job creation softened to a 6-month low, while companies were reluctant to hold excess stock

and lowered input buying in response.

The PMI data for October showed a continuation of manufacturing sector weakness in India, with sales growth

softening to the slowest in 2 years.

Weakening demand had a domino effect in the manufacturing industry, knocking down rates of increase in

production, employment and business sentiment.

With quantities of purchases contracting for the third month in a row, input costs fell for the first time in over

4 years during October.

Source: www.tradingeconomics.com

Services PMI – October

The Indian services sector activity contracted for the second successive month in October, due to muted

demand.

The Nikkei India Services Purchasing Managers’ Index (PMI) Business Activity Index rose to 49.2 in October

2019 from 48.7 in September 2019. The index remained below the neutral mark of 50, which separates

expansion from contraction, for the second consecutive month.

A sub-index tracking demand showed new business barely grew last month.

It is somewhat worrying to see the Indian service sector stuck in contraction, as firms react to muted demand

by lowering business activity.

Perhaps, even more concerning was the downward revision to future expectations, given the possible

detrimental impact of subdued business confidence on investment and jobs.

Optimism about the coming year faded to its lowest since December 2016 and firms increased headcount at

the joint weakest pace in over 2 years.

Weak demand also forced firms to absorb much of a jump in input costs, which increased at the quickest pace

in a year, squeezing profit margins.

The seasonally adjusted Nikkei India Composite PMI Output Index fell to 49.6 in October from 49.8 in

September, signalling a marginal rate of reduction overall.

Source: www.tradingeconomics.com

Core Sector Data – October

Eight infrastructure sectors contracted by 5.8% in October 2019, their lowest level in over a decade, indicating

the severity of economic slowdown in India.

The eight core sectors – coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity

– had contracted by 5.1% in September 2019 and grown by 4.8% in October 2018.

The combined index of eight core industries stood at 127 in October 2019.

Six of eight core sectors saw a contraction in output in October.

While coal output declined 17.6%, crude oil output declined 5.1%.

Natural gas and steel saw contraction in output of 5.7% and 1.6% respectively.

While cement output contracted 7.7%, electricity generation declined 12.4%.

Growth in output of refinery products slowed down to 0.4% in October, as against 1.3% last year.

The only other sector that posted growth in October was fertilisers, where production rose by 11.8%.

Cumulatively, the growth in the eight core sectors during April-October 2019-20 slowed to 0.2%, as against

5.4% in the same period last financial year.

Source: APAS BRT, www.eaindustry.nic.in

GDP – Quarter 2 – FY 2019-20

The country’s Gross Domestic Product (GDP) growth rate for the second quarter (July-September) of fiscal

year 2019-20 slowed to a 6.5-year low of 4.5%, led by dwindling consumer demand, slowing private

investment and global slowdown.

The GDP growth rate in Q2 2018-19 was 7.1% and in Q1 2019-20 was 5%.

The gross value added (GVA) growth rate for the said quarter grew at 4.3%, as compared to 4.9% in the

previous quarter.

Lower growth this quarter was primarily due to lower output in the mining and construction sectors.

Manufacturing sector growth also slumped, compared to Q1.

What appears to have helped boost growth in this quarter is expenditure by the government. Government

final consumption expenditure (GFCE) grew by 15.6% in Q2, compared to 10.9% last year.

Private final consumption expenditure (PFCE) declined to 5%, compared to 9.7% last year.

4.8

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Month

Core sector Trend - Monthwise

Nominal growth in the second quarter, which includes the impact of price changes, stood at 6.1%, versus 8%

in Q1.

Manufacturing growth contracted, while both private consumption and investment stayed weak. Some

support from government spending was expected, given combined central and state expenditure grew 22.5%

in Q2, versus 1.3% in Q1. Thus, GVA excluding ‘Public Administration, Defence and Other Services’ is much

lower at 3.2%, essentially reflecting the high government contribution to the headline number.

Growth in investment (gross fixed capital formation), at a mere 1%, was the slowest since the December 2014

quarter. The investment rate in Q2 stood at 27.6%, the lowest in 11 quarters.

Agriculture grew at 2.1%, refusing to go up much despite monsoon recovery in September. But nominal

growth in the farm sector stayed above 7%.

Even as the services sector propped up the growth number, its growth at 6.7% was the lowest since March

2014, excluding construction.

Construction, too, failed to pick up pace, growing just 3.3% in Q2.

Source: APAS BRT, www.mospi.gov.in

5.76.3

7.27.7

8.27.1

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Q1 17-18 Q2 17-18 Q3 17-18 Q4 17-18 Q1 18-19 Q2 18-19 Q3 18-19 Q4 18-19 Q1 19-20 Q2 19-20

GD

P %

Quarter

GDP Trend

Fifth Bi-monthly Monetary Policy Statement, 2019-20 Resolution of the Monetary Policy

Committee (MPC) Reserve Bank of India

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy

Committee (MPC) decided to:

• keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 5.15 per cent.

Consequently, the reverse repo rate under the LAF remains unchanged at 4.90 per cent, and the marginal

standing facility (MSF) rate and the Bank Rate at 5.40 per cent.

• The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth,

while ensuring that inflation remains within the target.

These decisions are 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. The main

considerations underlying the decision are set out in the statement below:

Assessment

Global Economy

Since the MPC’s meeting in October 2019, global economic activity has remained subdued, though some signs

of resilience are becoming visible. Among the advanced economies (AEs), GDP growth in the US picked up in

Q3 on strong private investment and personal consumption expenditure. More recent data, however, indicate

that factory activity contracted for the fourth consecutive month in November, while retail sales and industrial

production declined in October. In the Euro area, GDP growth remained stable in Q3 relative to the previous

quarter on improved household consumption and government spending, although manufacturing activity

continued to struggle with lingering geo-political uncertainties. With weak global demand pulling down

exports, the Japanese economy lost momentum in Q3. Economic activity in the UK accelerated in Q3, primarily

driven by the services sector and construction activity.

Among emerging market economies (EMEs), GDP growth in China decelerated further in Q3, reflecting weak

industrial production and declining exports amidst trade tensions with the US. While retail sales edged lower

in October, fiscal and monetary stimuli are expected to temper the slowdown.

BANKING

Crude oil prices have moved in a narrow range in both directions since the last meeting of the MPC, reflecting

changing sentiments relating to progress in US-China trade talks. Gold prices traded sideways before falling in

early November as a revival of risk appetite eased safe haven demand. Inflation remained benign in major AEs

and EMEs in Q3, except in China where it firmed up to its highest level in eight years.

Global financial markets were buoyed in October by risk-on sentiment stemming from renewed optimism on

a trade truce between the US and China and possibility of a Brexit deal. Stock markets in EMEs too registered

gains in October before some selling pressure took hold in the second half of November on renewed fears of

US-China trade talks stalling on the Hong Kong stand-off.

Domestic Economy

On the domestic front, gross domestic product (GDP) growth moderated to 4.5 per cent year-on-year (y-o-y)

in Q2:2019-20, extending a sequential deceleration to the sixth consecutive quarter. Real GDP growth was

weighed down by a sharp slowdown in gross fixed capital formation (GFCF), cushioned by a jump in

government final consumption expenditure (GFCE). Excluding GFCE, GDP growth would have been at 3.1 per

cent. Growth in real private final consumption expenditure (PFCE) recovered from an 18- quarter trough. The

drag from net exports eased on account of a sharper contraction in imports than in exports.

After the introduction of the external benchmark system, most banks have linked their lending rates to the

policy repo rate of the Reserve Bank. The median term deposit rate has declined by 47 bps during February-

November 2019. The weighted average term deposit rate declined by 9 bps in October as against a decline of

just 7 bps in eight months during February-September. This augurs well for transmission to lending rates,

going forward.

Outlook

In the fourth bi-monthly resolution of October 2019, CPI inflation was projected at 3.4 per cent for Q2:2019-

20, 3.5-3.7 per cent for H2:2019-20 and 3.6 per cent for Q1:2020-21 with risks evenly balanced. The actual

inflation outcome for Q2 evolved broadly in line with projections – averaging 3.5 per cent. The inflation prints

for October, however, was much higher than expected.

The MPC notes that economic activity has weakened further, and the output gap remains negative. However,

several measures already initiated by the Government and the monetary easing undertaken by the Reserve

Bank since February 2019 are gradually expected to further feed into the real economy. Data on corporate

finance and on projects sanctioned by banks and financial institutions suggest some early signs of recovery in

investment activity, though its sustainability needs to be watched closely. The need at this juncture is to

address impediments, which are holding back investments. The introduction of external benchmarks is

expected to strengthen monetary transmission. In this context, there is also a need for greater flexibility in

the adjustment in interest rates on small saving schemes. In the judgement of the MPC, inflation is rising in

the near-term, but it is likely to moderate below target by Q2:2020-21. It is, therefore, prudent to carefully

monitor incoming data to gain clarity on the inflation outlook. Similarly, the forthcoming union budget will

provide better insight into further measures to be undertaken by the Government and their impact on growth.

Guidelines on Compensation of Whole Time Directors/ Chief Executive Officers/ Material Risk

Takers and Control Function staff

The compensation practices, especially of large financial institutions, were one of the important factors which

contributed to the global financial crisis in 2008. Employees were often rewarded for increasing short-term

profit without adequate recognition of the risks and long-term consequences that their activities posed to the

organizations. These perverse incentives amplified excessive risk taking that severely threatened the global

financial system. The compensation issue has, therefore, been at the center stage of regulatory reforms.

In the wake of financial crisis, in order to address the issues in a coordinated manner across jurisdictions, the

Financial Stability Forum (later the Financial Stability Board i.e. FSB) brought out a set of Principles (FSF

Principles for Sound Compensation Practices, dated April 02, 2009) and Implementation Standards (FSB

Principles for Sound Compensation Practices - Implementation Standards, dated September 25, 2009) on

sound compensation practices. The Principles are intended to reduce incentives towards excessive risk taking

that may arise from the structure of compensation schemes. The Principles call for effective governance of

compensation, alignment of compensation with prudent risk taking, effective supervisory oversight and

stakeholder engagement. The Principles have been endorsed by the G-20 countries and the Basel Committee

on Banking Supervision (BCBS). The Implementation Standards are specific norms, prioritizing the areas that

should be addressed by firms and supervisors to achieve effective global implementation of the Principles.

Considering the stipulations in these documents, Reserve Bank had issued the ‘Guidelines on compensation

vide Circular applicable to Whole Time Directors / Chief Executive Officers / Risk Takers and Control Function

Staff, etc.’. for implementation by private sector and foreign banks from the financial year 2012-13.

The final Guidelines are given in the Annex.

Private sector banks, foreign banks operating under the Wholly Owned Subsidiary mode (WOS), and foreign

banks operating in India under the branch mode are required to obtain regulatory approval for grant of

remuneration (i.e. compensation) to WTDs/ CEOs in terms of Section 35B of the Banking Regulation Act, 1949

(B.R. Act, 1949). The approval process will involve, inter alia, an assessment of whether the bank’s

compensation policies and practices are in accordance with the Guidelines set out in the Annex, and the BCBS

Methodologies detailed in Appendix.

Liquidity Risk Management Framework for Non-Banking Financial Companies and Core Investment

Companies

In order to strengthen and raise the standard of the Asset Liability Management (ALM) framework applicable

to NBFCs, RBI has decided to revise the extant guidelines on liquidity risk management for NBFCs. All non-

deposit taking NBFCs with asset size of ₹ 100 crore and above, systemically important Core Investment

Companies and all deposit taking NBFCs irrespective of their asset size, shall adhere to the set of liquidity risk

management guidelines given below. However, these guidelines will not apply to Type 1 NBFC-NDs1, Non-

Operating Financial Holding Companies and Standalone Primary Dealers. It will be the responsibility of the

Board of each NBFC to ensure that the guidelines are adhered to. The internal controls required to be put in

place by NBFCs as per these guidelines shall be subject to supervisory review. Further, as a matter of prudence,

all other NBFCs are also encouraged to adopt these guidelines on liquidity risk management on voluntary

basis.

While some of the current regulatory prescriptions applicable to NBFCs on ALM framework have been recast

below, a few additional features including disclosure standards have also been introduced. The detailed

guidelines are given in Annex and the important changes are as under:

i) Granular Maturity Buckets and Tolerance Limits

ii) Liquidity risk monitoring tools

iii) Adoption of “stock” approach to liquidity

iv) Extension of liquidity risk management principles

Introduction of Liquidity Coverage Ratio (LCR)

Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments)

Regulations, 2019

The Reserve Bank made the following regulations relating to mode of payment and reporting requirements

for investment in India by a person resident outside India.

The detailed regulations are as: Foreign Exchange Management (Mode of Payment and Reporting of Non-

Debt Instruments) Regulations, 2019. It consists of following sub-heads:

1. Mode of Payment and Remittance of sale proceeds

2. Issue of Convertible Notes by an Indian start-up company

3. Reporting Requirements

a. Form Foreign Currency-Gross Provisional Return (FC-GPR)

b. Annual Return on Foreign Liabilities and Assets (FLA)

c. Form Foreign Currency-Transfer of Shares (FC-TRS)

d. Form Employees' Stock Option (ESOP)

e. Form Depository Receipt Return (DRR)

f. Form LLP (I)

g. Form LLP (II)

h. LEC(FII)

i. LEC(NRI)

j. Form InVI

k. Downstream Investment

l. Form Convertible Notes (CN)

4. Delays in reporting

RBI releases the Report of the Working Group to Review the Regulatory and Supervisory

Framework for Core Investment Companies

The Reserve Bank of India had constituted a Working Group (WG) to Review Regulatory and Supervisory

Framework for Core Investment Companies (CICs), on July 03, 2019, with Shri Tapan Ray, former Secretary,

Ministry of Corporate Affairs, Government of India as the Chairperson.

The WG has submitted its report to the Governor. The key recommendations of the WG are as follows:

i. Capital contribution by a CIC in a step-down CIC, over and above 10% of its owned funds, should be deducted from its Adjusted Networth, as applicable to other NBFCs. Further, step-down CICs may not be permitted to invest in any other CIC, while allowing them to invest freely in other group companies;

ii. The number of layers of CICs in a group should be restricted to two. As such, any CIC within a group shall not make investment through more than a total of two layers of CICs, including itself

iii. Every Group having a CIC should have a Group Risk Management Committee (GRMC)

iv. Constitution of the Board level committees viz., Audit Committee and Nomination and Remuneration Committee should be mandated

v. Offsite returns may be designed by the Reserve Bank and may be prescribed for the CICs on the lines of other NBFCs. Annual submission of Statutory Auditors Certificates may also be mandated; and

vi. Onsite inspection of CICs may be conducted periodically

RBI announces the Framework on Currency Swap Arrangement for SAARC countries for the period

2019 to 2022

To further financial stability and economic cooperation within the SAARC region, the Reserve Bank of India, with the concurrence of the Government of India, has decided to put in place a revised Framework on Currency Swap Arrangement for SAARC countries 2019-2022. The Framework is valid from November 14, 2019 to November 13, 2022. Based on the terms and conditions of the Framework, the RBI would enter into bilateral swap agreements with SAARC central banks, who want to avail swap facility. It may be recalled that the SAARC Currency Swap Facility came into operation on November 15, 2012 with an intention to provide a backstop line of funding for short term foreign exchange liquidity requirements or balance of payment crises till longer term arrangements are made.

Under the Framework for 2019-22, RBI will continue to offer swap arrangement within the overall corpus of USD 2 billion. The drawals can be made in US Dollar, Euro or Indian Rupee. The framework provides certain concessions for swap drawals in Indian Rupee.

The Currency Swap Facility will be available to all SAARC member countries, subject to their signing the bilateral swap agreements.

Issue of additional instruments for augmenting regulatory capital for RRBs

RBI had issued capital adequacy norms for Regional Rural Banks (RRBs) via this circular to compute capital to

risk weighted assets (CRAR) and disclose it in 'Notes on Accounts' to their Balance Sheets. Further, it has also

revised the ‘risk weights for calculation of CRAR’ were revised. Further, RRBs have also been advised to achieve

and maintain a minimum CRAR of 9 per cent on an ongoing basis with effect from March 31, 2014.

With a view to providing RRBs additional options for augmenting regulatory capital funds, so as to maintain

the minimum prescribed CRAR, besides meeting the increasing business requirements, it has been decided to

allow RRBs to issue Perpetual Debt Instruments (PDIs) eligible for inclusion as Tier 1 capital.

The terms and conditions for issue of Perpetual Debt Instruments (PDIs) are given in the Annex.

Insurance Regulatory and Development Authority of India (Registration and Operations of

International Financial Service Centre Insurance Offices (IIO)) Guidelines, 2017 – Amendments

IRDAI has revised its earlier guidelines of Insurance Regulatory Development authority (IRDAI) Registration and Operations of International Financial Service Centre Insurance Offices (IIO) Guidelines, 2017 for regulating the process of registration and operations of insurers and reinsurers in International Financial Service Centre, SEZ. Pursuant to amendment of Insurance Act 1938 by the Finance Act (No.2) of 2019, a new sub section (3) is inserted in section 6 of the Insurance Act as under: “No insurer, being a foreign company engaged in re-insurance business through a branch established in an International Financial Services Centre referred to in sub section (1) of section 18 of the Special Economic Zones Act, 2005, shall be registered unless it has net owned funds of not less than rupees one thousand crore.” Thereby, Clause 8 (b) of the IRDAI (IIO) Guidelines, 2017 shall be substituted, namely: ‘Net Owned Fund (NOF): i. The Applicant, which is a foreign company engaged in re-insurance business and proposes to establish a branch in an International Financial Services Centre, shall also have net owned funds (NOF) as specified in sub section (3) of section 6 of the Insurance Act, 1938 at the time of application for registration. ii. Such NOF shall be maintained by the applicant at all times during the subsistence and validity of its registration. Provided that the applicant shall inform the Authority about change in shareholding pattern or ownership of applicant company, if any, within thirty days of effecting such change.’

INSURANCE

IBBI amends the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for

Corporate Persons) Regulations, 2016

The Insolvency and Bankruptcy Board of India (IBBI) notified the Insolvency and Bankruptcy Board of India

(Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2019 on

28th November 2019. Some of the amendments made by these Regulations are consequential to the

Insolvency and Bankruptcy Code (Amendment) Act, 2019, which came into force on 5th August 2019.

The Insolvency and Bankruptcy Code, 2016 (Code) envisages corporate insolvency resolution process (CIRP)

for reorganization and insolvency resolution of corporate debtors. An insolvency professional conducts the

CIRP and manages its operations during the CIRP. Keeping in view the responsibilities of the IPs and the

importance of CIRP, the Code casts an obligation on the IBBI and the IPA to monitor performance of IPs, and

to collect, maintain and disseminate information and records relating to insolvency process of corporate

debtors. It also casts an obligation on IPs to forward/submit certain information and records relating to CIRP

to the IPA and IBBI.

In the interest of transparency and accountability in conduct of CIRPs and conduct of the IPs, and to facilitate

the IBBI, the IPAs and the IPs to discharge of their statutory obligations, the Amendment Regulations require

the IPs to file a set of Forms, covering the life cycle of a CIRP, online on an electronic platform hosted on the

website of the IBBI at https://www.ibbi.gov.in. An IP shall be liable to action permissible under the Code,

including refusal to issue or renew Authorization for Assignment, for failure to file a Form or for inaccurate or

delayed filing.

The Amendment Regulations come into force from 28th November 2019. They are available

at www.mca.gov.in and www.ibbi.gov.in.

INFRASTRUCTURE &

OTHER GOVT.

INITIATIVES

IBBI notifies Regulations for Insolvency Resolution and Bankruptcy Proceedings of Personal

Guarantors to Corporate Debtors

Following the notification by the Central Government on 15th November, relating to proceedings of Personal Debtors to Corporate Debtors, the Insolvency and Bankruptcy Board of India (IBBI) notified Regulations for Insolvency Resolution and Bankruptcy Proceedings of Personal Guarantors to Corporate Debtors.

The following Regulations for Insolvency Resolution and Bankruptcy Proceedings of Personal Guarantors to Corporate Debtors were notified:

I. The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019, specifying the details of the insolvency resolution process for personal guarantors to CDs, inter-alia, including: a. eligibility to act as a resolution professional for an insolvency resolution process; b. manner of receipt and verification of claims of creditors; c. manner of preparation of list of creditors, holding the meetings of the creditors and voting in the

meeting; d. contents of the repayment plan; and e. procedure of filing of application for issuance of discharge order, etc.

II. The Insolvency and Bankruptcy Board of India (Bankruptcy Process for Personal Guarantors to

Corporate Debtors) Regulations, 2019 specifying the details of the bankruptcy process for personal guarantors to CDs, inter-alia, including: f. eligibility to act as a bankruptcy trustee for the bankruptcy process; g. manner of preparation of reports and timeline for submission by the bankruptcy trustee; h. manner of collating claims and formation of committee of creditors, holding meetings of the

committee and voting in the meeting; and i. manner of realization of assets of the bankrupt and its distribution, etc.

These Rules provide for the process and forms of making applications for initiating insolvency resolution and bankruptcy proceedings against personal guarantors to CDs, withdrawal of such applications, forms for public notice for inviting claims from the creditors, etc.

The IBC envisages reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all stakeholders. The provisions of the IBC relating to corporate processes (insolvency resolution, fast track resolution, liquidation and voluntary liquidation) have since been operationalized.

MCA notifies Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial

Service Providers and Application to Adjudicating Authority) Rules, 2019 (Rules)

The Ministry of Corporate Affairs (MCA) has notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (Rules) to provide a generic framework for insolvency and liquidation proceedings of systemically important Financial Service Providers (FSPs) other than banks. The Rules shall apply to such FSPs or categories of FSPs, as will be notified by the Central Government under section 227 from time to time in consultation with appropriate regulators, for the purpose of their insolvency and liquidation proceedings.

The Rules provide that the provisions of the Code relating to the Corporate Insolvency Resolution Process (CIRP), Liquidation Process and Voluntary Liquidation Process for a corporate debtor shall, mutatis mutandis, apply to a process for an FSP, subject to modifications, as under:

a. The CIRP of an FSP shall be initiated only on an application by the appropriate regulator. b. On admission of the application, the Adjudicating Authority shall appoint the individual, who has been

proposed by the appropriate regulator in the application for initiation of CIRP, as the Administrator. c. While conducting a proceeding of an FSP, the Administrator shall have the same duties, functions,

obligations, responsibilities, rights, and powers of an insolvency professional, interim resolution professional, resolution professional or liquidator, as the case may be. He shall be appointed or replaced by the Adjudicating Authority on an application made by the appropriate regulator in this behalf.

d. The appropriate regulator may constitute an Advisory Committee of three or more experts to advise the Administrator in the operations of the FSP during the CIRP.

e. An interim moratorium shall commence on and from the date of filing of the application for initiation of CIRP by the appropriate regulator till its admission or rejection by the Adjudicating Authority.

f. The provisions of interim-moratorium or moratorium shall not apply to any third-party assets or properties in custody or possession of the FSP, including any funds, securities and other assets required to be held in trust for the benefit of third parties.

g. The Administrator shall take control and custody of third-party assets or properties in custody or possession of the FSP and deal with them in the manner, to be notified by the Central Government under section 227.

h. The license or registration which authorises the FSP to engage in the business of providing financial services shall not be suspended or cancelled during the interim-moratorium and the CIRP.

i. Upon approval of the resolution plan by the Committee of Creditors, the Administrator shall seek ‘no objection’ from the appropriate regulator to the effect that it has no objection to the persons, who would be in control or management of FSP after approval of the resolution plan. The appropriate regulator shall issue ‘no objection’ on the basis of the ‘fit and proper’ criteria applicable to the business of the FSP without prejudice to the provision of Section 29A of the Code.

j. The FSP shall obtain prior permission of the appropriate regulator for initiating voluntary liquidation proceedings.

k. The Adjudicating Authority shall provide the appropriate regulator an opportunity of being heard before passing an order for liquidation or dissolution of the FSP.

SEBI Board Meeting

The SEBI Board in its Board Meeting took the following decisions:

I. Issuance of SEBI (Portfolio Managers) Regulations, 2019

SEBI had constituted a Working Group to review the SEBI (Portfolio Managers) Regulations, 1993 to suggest

steps to be taken to safeguard the interest of investors and development of the investment product.

The salient features of the proposed SEBI (Portfolio Managers) Regulations, 2019 are:

i. To enhance the eligibility criteria and to define the role of Principal Officer clearly. The enhanced

eligibility criteria to be applicable to any employee with decision making authority relating to

management of the clients’ portfolios.

ii. A Portfolio Manager to mandatorily employ minimum one person with defined eligibility criteria

in addition to Principal Officer and Compliance Officer.

iii. Net-worth requirement of Portfolio Managers to be enhanced from INR 2 Crores to INR 5 Crores.

Existing Portfolio Managers to meet the enhanced requirement within 36 months.

iv. Minimum investment by clients of Portfolio Managers to be increased from INR 25 lakhs to INR

50 lakhs. Existing investments of clients may continue as such till end date of the PMS Agreement

or as specified by the Board.

v. Discretionary Portfolio Managers to invest only in listed securities, money market instruments,

units of Mutual Funds and such other securities/ instruments as specified by SEBI from time to

time.

vi. Non-discretionary/ Advisory Portfolio Managers to invest not more than 25% of their AUM in

unlisted securities.

vii. To make the appointment of custodian mandatory for all the Portfolio Managers except for those

providing only advisory services to clients. 8. To restrict off market transfers from/to clients’

accounts with certain exceptions to facilitate operational convenience.

CAPITAL MARKETS

II. Review of Rights Issue process

The SEBI Board has approved the proposals with respect to Rights Issue process and consequential

amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR

Regulations”) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR

Regulations”) with an objective to significantly reduce the timeline for the completion of the Rights

Issue, as well as introduce the dematerialization and trading of rights entitlements (REs).

The key proposals approved by the Board are as follows:

i. Reduction in the timeline for completion of the Rights Issue from the current ~T+55 days to

~T+31 days.

ii. Introduction of dematerialized REs and trading of REs on stock exchange platform.

iii. Shareholders holding shares in physical form will be required to provide details of demat

account for credit of REs.

iv. ASBA facility made mandatory for all investors applying to Rights Issue.

III. Extension of Business responsibility reporting to top one thousand listed entities by market

capitalization.

The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”)

require that the top five hundred listed entities based on market capitalization, as on March 31 of

every financial year shall include Business Responsibility Reporting (BRR) as part of their annual

reports. The Board upon deliberations, approved a proposal to extend the applicability of Business

Responsibility Reporting (BRR) to top one thousand listed entities.

IV. Disclosure by listed entities of defaults on payment of interest / repayment of principal amount on

loans from banks / financial institutions

In order to address the gaps in availability of information with respect to defaults, the Board has,

inter-alia, decided that in case of any default in repayment of principal or interest on loans from banks

or financial institutions which continues beyond 30 days from the pre-agreed payment date, listed

entities shall, promptly, but not later than 24 hours from the 30th day, disclose the fact of such

default.

Collection and reporting of margins by Trading Member (TM) /Clearing Member (CM) in Cash

Segment

In order to regulate margins by trading member/ clearing members, SEBI has earlier implemented norms

regarding the same. SEBI has introduced further norms with regard to collection and reporting of margins by

TM and CM in Cash segment.

In cash segment, the VaR margin is collected by Clearing Corporation (CC) upfront from trading

member/clearing member by adjusting against the available liquid assets of TM/CM at the time of trade.

However, the quantum, form and mode of collection of the margin from the client is left to the discretion of

TM/CM. In order to align and streamline the risk management framework of both cash and derivatives

segments, with respect to collection of margins from the clients and reporting of short collection/non-

collection of margins, following guidelines are issued under following sub-heads:

I. Collection of margins from the clients by TM/CM in cash segment

II. Penalty structure for short-collection/non-collection of margins and false/incorrect reporting of

margin collection from the clients by TMs/CMs:

Operational guidelines for foreign portfolio investors, designated depository participants and

eligible foreign investors

These consolidated operational guidelines (“Operational Guidelines”) for foreign portfolio investors (FPIs) and

Designated Depository Participants (DDPs) are issued to facilitate implementation of SEBI (Foreign Portfolio

Investors) Regulations, 2019 (“the Regulations”).

The existing Circulars, FAQs, operating guidelines, other guidance issued by SEBI (Annexure-A) shall stand

withdrawn with the issue of these Operating Guidelines. With respect to the directions or other guidance

issued by SEBI, as specifically applicable to FPIs, shall continue to remain in force. The detailed regulations

have divided into following sub-sections:

I. Foreign Portfolio Investors (FPI) registration related activities

II. Know your clients requirements for FPIs

III. Investment conditions/restrictions on FPIs registered with SEBI under FPI regulations, 2019

IV. Issuance of offshore derivatives instruments by FPI under SEBI (Foreign Portfolio Investors)

Regulation, 2019

V. Guidelines for participation/functioning of eligible foreign investors (EFIs) in International Finance

service centers (IFSCs)

Cut-off Time for Determining Minimum Threshold of Margins to be Collected from Clients

SEBI via its earlier circulars has prescribed mechanism for levying penalties on short-collection/non-collection

of Margins.

SEBI has received feedback from the market participants that members currently report margins collected

from their clients to clearing corporations (CCs) vis-à-vis the End of Day (EOD) Risk Parameters File (RPF)

generated by the CC. In case of commodity derivative products that are traded beyond 5:00 PM, members

face difficulty in collecting Initial Margin (IM)/Extreme Loss Margin from their respective clients. This is

because final margin requirements are crystallized at EOD, which is beyond banking hours.

In the light of the above, SEBI has decided following for commodity derivative contracts, having trading hours

beyond 5:00 PM:

a. For the purpose of determining minimum threshold of margins to be collected by members from their

clients, cut off time shall be kept as 5:00 PM.

b. Risk Parameter File (RPF) to be generated at cut-off time shall be applied on clients’ EOD portfolio for

the purpose of determining minimum threshold of margin to be collected from clients by members.

c. Similarly, for the purpose of determining minimum threshold of Extreme Loss Margin (ELM) to be

collected from clients, EOD client portfolio shall be valued at the half an hour weighted average trade

price arrived at cut-off time stipulated above.

d. For commodity derivative contracts having trading till 5:00 PM, margin collection from clients shall be

on EOD basis

Norms for Debt Exchange Traded Funds (ETFs)/Index Funds

SEBI has issued following norms for Debt ETFs/Index Funds to be adopted by all AMCs:

(a) The constituents of the index shall be aggregated at issuer level.

(b) The index shall have a minimum of 8 issuers.

(c) No single issuer shall have more than 15% weight in the index.

(d) The rating of the constituents of the index shall be investment grade.

(e) The constituents of the index shall have a defined credit rating and defined maturity as specified

in the index methodology.

I. Replication of the Index by Debt ETFs/Index Funds

II. In an event where the credit rating of an issuance falls below the investment grade or rating mandated

in the index methodology, rebalancing by Debt ETFs/Index Funds shall be done within a period of 5 working

days.

III. Accordingly, any Debt ETF/Index Fund that seeks to replicate a particular Index shall ensure that

such index complies with the aforesaid norms.

IV. Compliance Procedure

V. Applicability

Handling of Clients’ Securities by Trading Members/Clearing Members

In order to protect clients’ funds and securities, The Securities Contracts (Regulation) Act, 1956 and

Securities and Exchange Board of India (Stock-Brokers) Regulations, 1992 specifies that the stock broker

shall segregate securities or moneys of the client or clients or shall not use the securities or moneys of a

client or clients for self or for any other client.

The details of the circular are as given here.

Guidelines for preferential issue of units and institutional placement of units by a listed Real Estate

Investment Trust (REIT)

This circular detail the guidelines in respect of a preferential issue of units and institutional placement of

units by a listed REIT.

Guidelines:

“Institutional Placement” shall mean a preferential issue of units by a listed REIT only to Institutional

Investors, as defined under REIT Regulations or circulars issued thereunder. The guidelines are divided in

two parts:

I. Conditions for issuance

II. Manner of issuance of units

The issue of units shall comply with the conditions and manner of allotment for preferential issue units and

institutional placement as provided in Annexure – I and Annexure – II & III, respectively (Available in the

attached regulations)

Enhanced Governance Norms for Credit Rating Agencies (CRAs)

1. In order to further enhance governance and accountability of Credit Rating Agencies (CRAs), SEBI has issued

the following directions:

i. MD/CEO of a CRA shall not be a member of rating committees of the CRA.

ii. Rating committees of a CRA shall report to a Chief Ratings Officer (CRO).

iii. One third of the board of a CRA shall comprise of independent directors, if the board is chaired by a

non-executive director. In case the board of the CRA is chaired by an executive director, half of the

board shall comprise of independent directors.

iv. The board of a CRA shall constitute the following committees:

a. (i) Ratings Sub-Committee

b. (ii) Nomination and Remuneration Committee

V. The Chief Ratings Officer (CRO) shall directly report to the Ratings Sub-Committee of the board of the

CRA.

VI. The Nomination and Remuneration Committee shall be chaired by an independent director.

2. During the rating process, CRAs shall record minutes of the meeting with issuer management and

incorporate it in the rating committee note.

3. CRAs shall meet the audit committee of the rated entity, at least once in a year, to discuss issues including

related party transactions, internal financial control and other material disclosures made by the management,

which have a bearing on rating of the listed NCDs.

CAPITAL MARKETS SNAPSHOT

Source: National Stock Exchange

Sources: APAS Business Research Team

Source: National Stock Exchange

Source: Bombay Stock Exchange

Source: Bombay Stock Exchange

Sources: APAS Business Research Team

Buying interest in the healthcare, power and metal counters

buoyed the benchmarks further. S&P BSE Healthcare (topmost

sectoral gainer), S&P BSE Power and S&P BSE Metal advanced

3%, 1% and 0.8%, respectively. The Organization for Economic

Co-operation and Development scaled back India’s economic

growth forecast to 5.8% for 2019 but said growth will pick up

to 6.2% and 6.4% in 2020 and 2021, respectively. Ambiguity

surrounding the US-China trade deal continued to affect

equities across the globe. As a result, the demand for the safe-

haven US treasuries remained on the positive side. Crude

prices advanced following a lower than-expected rise in US oil

supplies and reports that the Organization of Petroleum-

Exporting Countries and its allies may extend production cuts.

11600

11700

11800

11900

12000

12100

12200

1-N

ov-

19

3-N

ov-

19

5-N

ov-

19

7-N

ov-

19

9-N

ov-

19

11

-No

v-1

9

13

-No

v-1

9

15

-No

v-1

9

17

-No

v-1

9

19

-No

v-1

9

21

-No

v-1

9

23

-No

v-1

9

25

-No

v-1

9

27

-No

v-1

9

29

-No

v-1

9

CNX Nifty (Nov-2019)

39600398004000040200404004060040800410004120041400

01

-No

v-1

9

03

-No

v-1

9

05

-No

v-1

9

07

-No

v-1

9

09

-No

v-1

9

11

-No

v-1

9

13

-No

v-1

9

15

-No

v-1

9

17

-No

v-1

9

19

-No

v-1

9

21

-No

v-1

9

23

-No

v-1

9

25

-No

v-1

9

27

-No

v-1

9

29

-No

v-1

9

BSE Sensex (Nov - 2019)

12.513

13.514

14.515

15.516

16.517

01

-No

v-1

9

03

-No

v-1

9

05

-No

v-1

9

07

-No

v-1

9

09

-No

v-1

9

11

-No

v-1

9

13

-No

v-1

9

15

-No

v-1

9

17

-No

v-1

9

19

-No

v-1

9

21

-No

v-1

9

23

-No

v-1

9

25

-No

v-1

9

27

-No

v-1

9

29

-No

v-1

9Indian VIX ( Nov-2019)

70.00

70.50

71.00

71.50

72.00

72.50

No

v 0

1, 2

01

9

No

v 0

4, 2

01

9

No

v 0

5, 2

01

9

No

v 0

6, 2

01

9

No

v 0

7, 2

01

9

No

v 0

8, 2

01

9

No

v 1

1, 2

01

9

No

v 1

2, 2

01

9

No

v 1

3, 2

01

9

No

v 1

4, 2

01

9

No

v 1

5, 2

01

9

No

v 1

8, 2

01

9

No

v 1

9, 2

01

9

No

v 2

0, 2

01

9

No

v 2

1, 2

01

9

No

v 2

2, 2

01

9

No

v 2

5, 2

01

9

No

v 2

6, 2

01

9

No

v 2

7, 2

01

9

No

v 2

8, 2

01

9

No

v 2

9, 2

01

9

$/₹ (Nov - 2019)

6.35

6.40

6.45

6.50

6.55

6.60

No

v 0

1, 2

01

9

No

v 0

4, 2

01

9

No

v 0

5, 2

01

9

No

v 0

6, 2

01

9

No

v 0

7, 2

01

9

No

v 0

8, 2

01

9

No

v 1

1, 2

01

9

No

v 1

3, 2

01

9

No

v 1

4, 2

01

9

No

v 1

5, 2

01

9

No

v 1

8, 2

01

9

No

v 1

9, 2

01

9

No

v 2

0, 2

01

9

No

v 2

1, 2

01

9

No

v 2

2, 2

01

9

No

v 2

5, 2

01

9

No

v 2

6, 2

01

9

No

v 2

7, 2

01

9

No

v 2

8, 2

01

9

No

v 2

9, 2

01

9

GIND10Y (Nov- 2019)

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 2019* 2020* Latest 2019*

% of GDP,

2019*

% of GDP,

2019* (10YGov), Latest

Brazil 1.2 Q3 0.8 2.1 3.3 Nov 3.6 -1.9 -5.8 4.68

Russia 1.7 Q3 1.1 1.6 3.6 Nov 4.5 6.2 2.3 6.55

India 4.5 Q3 4.9 6.3 4.6 Oct 3.4 -1.8 -3.9 6.66

China 6.0 Q3 6.1 5.9 3.8 Oct 2.7 1.5 -4.3 2.99^

S Africa 0.1 Q3 0.6 1.4 3.7 Oct 4.2 -3.9 -5.9 8.41

USA 2.1 Q3 2.2 1.6 1.8 Oct 1.8 -2.4 -4.8 1.76

Canada 1.7 Q3 1.6 1.7 1.9 Oct 1.9 -2.3 -0.9 1.58

Mexico -0.3 Q3 0.1 1.1 3.0 Nov 3.6 -1.1 -2.7 6.99

Euro Area 1.2 Q3 1.2 1.2 1.0 Nov 1.2 3.1 -1.1 0.0

Germany 0.5 Q3 0.5 0.9 1.1 Nov 1.3 6.6 0.5 0.0

Britain 1.0 Q3 1.3 1.3 1.5 Oct 1.9 -4.3 -2.0 0.84

Australia 1.7 Q3 1.6 2.0 1.7 Q3 1.6 0.1 0.1 1.13

Indonesia 5.0 Q3 5.1 5.1 3.0 Nov 3.1 -2.2 -2.0 7.10

Malaysia 4.4 Q3 4.5 4.4 1.1 Oct 0.8 3.1 -3.5 3.44

Singapore 0.5 Q3 0.5 1.0 0.4 Oct 0.6 14.3 -0.3 1.76

S Korea 2.0 Q3 1.8 2.2 0.2 Nov 0.4 3.0 0.6 1.68

Sources: The Economist

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