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FORESIGHT

Ashvin Parekh Managing Partner, APAS

Volume No. 03 March 2015

Table of Contents

Guest’s Column

Ashu Suyash – Indian Mutual

Fund Industry at the edge of

some Fundamental Shifts

Economy

PMI update – Mar

Core sector update – Feb

IIP update – Jan

Inflation update – Feb

Banking Sector

Debt Equity Conversion

Norms

Priority sector Lending

Norms

NBFC Prudential Norms

Restriction on Corporate

Loans

Flexibility to provide Cover

for Bad Loans

NBFCs require approve for

Takeovers, Deals

Insurance

Insurance bill passed in

Rajya Sabha

Infrastructure

Indian Telecom Spectrum

Auction

Email Infrastructure

Capital Market

Easier Listing Norms for

Startups Snapshot

Economic Data Snapshot

Contact Us: 022-6789 1000

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Season’s greetings, We have Ms. Ashu Suyash - CEO of L&T Investment Management Limited, discussing the five key trends in the asset management business which will transform the asset management space. Opening up of a Pension sector to AMC, mainstreaming of alternative instruments, growth of institutional business to manage accounts, transformation of fee model and domination of smart devices. We thank Ms. Suyash for providing lucid insight to the newsletter readers. The economy shows signs of gradual growth with industrial production growing by 2.6%. Capital goods sector notably grew at 12.8% on an annualized basis. The Manufacturing PMI grew to 52.1 from 51.2 last month. The core sector however declined to 1.4% from 1.8% mainly due to crude oil and gas. Inflation grew marginally. CPI grew to 5.37% from 5.11% in the previous month. WPI however declined by 2.06% mainly due to fuel costs. SEBI came out with relaxed norms for the banking companies for conversion of debt into equity in the loan accounts. RBI proposes to revisit the priority sector lending norms based on recommendations made by an internal working group of RBI. The regulator also revised the norms for NBFCs whose ratings are downgraded. Such NBFCs will be required to stop accepting and renewing deposits. After a long wait of 7 years, both the houses of parliament approved the new insurance bill. The amended act will introduce core reforms in the areas of health insurance and reinsurance branches. More significantly the regulator now has more powers to regulate the industry. The foreign investment limits have also been enhanced to 49%. We welcome your inputs and thoughts and encourage you to share them with us.

Ashvin Parekh

By Ashu Suyash- CEO of L&T Investment

Management Limited.

A well-known life coach Tony Robbins once

remarked –“Change is inevitable. Progress is

optional.” With less than Rs.1.0 trillion in 1995,

the Indian asset management industry has

come a long way growing to over INR 11 trillion

in Assets under Management as at end

December, 2015. This rapid growth is the

outcome of several changes such as the entry of

global players and Indian Private Bank

sponsored Asset Management Companies

(AMCs), product innovation and sales push, a

favourable environment backed by strong

economic expansion, the support of an

ecosystem of service providers and a robust

regulatory regime. While not widely

acknowledged, this industry has played a critical

role in India’s overall economic development by

mobilizing capital from those who wish to invest

to those who seek investments aiding capital

formation and adding breadth and depth to its

capital markets. In the wake of regulatory and

policy change, the economy at crossroads and

less than desired investor awareness of the

benefit of mutual funds, the industry stands at

the edge of some fundamental shifts that could

help shape its future in the coming years.

Five such fundamental shifts are opening up of

the pension’s space to AMCs, mainstreaming of

alternatives, growth of Institutional business

through managed accounts, transformation of

fee models, and the domination of smart

devices for Information, advice and execution.

While the manifestation of the full impact of

these shifts is a multi-year process, 2015 surely

marks its beginning.

In this year’s union budget for example, the government increased the limit of deduction on account of contribution to a pension fund and the New Pension Scheme (NPS) from INR 100,000 to INR 150,000 and introduced an additional income tax deduction of Rs. 50000 under section 80CCD for contribution to the New Pension Scheme (NPS) to boost the retirement savings. With these provisions and the support the industry already has from Securities Exchange Board of India (SEBI), AMCs may now be able to launch Pension Funds to get a foothold in the pensions market. Retirement oriented investment products have been the main growth driver for asset management industry in most countries. In the U.S. for example, over 38% (around US $ 6.5 trillion) of Industry AUMs are contributed by Individual Retirement Accounts (IRAs) and defined contribution plans like 401k. In fact, the introduction of 401k played the role of a catalyst in building awareness about mutual funds and helped the industry get to scale. Today, one in every two households is a mutual fund investor in the U.S. In comparison, less than 4% of household money is invested in mutual funds in India. Another key development has been in the area of alternate investment funds (AIF) and Real Estate Investment Trusts (REITs). Securities and Exchange Board of India (SEBI) had issued AIF regulations in 2012 and many private equity and hedge funds have been registered with SEBI since then. While it had also notified norms for REITs, certain tax roadblocks had prevented interested players from launching such products. Changes in taxation announced in this year’s budget have addressed some of the concerns and it is perhaps a matter of time before we see launch of REITs in India. REITs are very popular globally due to their ability to offer periodic cash flows and they could attract lot of

Guest Column

Indian investors who are looking for regular income. Exchange Traded Funds (ETFs) have been gaining popularity globally and have seen huge flows in the recent years. While there have been quite a few ETFs launched in India, they haven’t so far gained the scale they deserve. But such products are likely to get more popular over the next few years especially once the institutional investor participation increases. The Government too has used the ETF route for disinvestment of some of its stake in select public sector enterprises and we could see more such products coming up in the future. These developments are the start of mainstreaming of alternatives. The Government has also announced the modification of its Permanent Establishment norm to encourage fund managers to relocate to India as well as appoint local AMCs to manage India dedicated money on their behalf. SEBI too has recently issued guidelines making it easier for AMCs to leverage their Fund Managers for offshore mandates. This gives Indian AMCs an opportunity to seek a managed

account mandates from international players and investors that satisfy the amended norms. Fee models and distributor commissions have come under regulatory scrutiny world over. This is aimed at introducing regulation that aligns interests of AMCs and distributors with end investors. The implementation of the Retail Distribution Review in the UK is one such example. India has seen sharper moves with the doing away of entry loads in 2009. Further, effective April 1 this year, the Industry trade body has issued guidelines that moderate upfront and total distributor commissions paid by AMCs. The global asset management industry was taken by surprise when Yu’e Bao Money Market Fund raised nearly $100 billion in less than a year from Alipay’s (Alibaba’s subsidiary) online customers. While online investing is in its early days in India, it is clear that the trend is towards more not less. These shifts along with the SEBI’s focus on improving the governance standards will certainly drive the industry to newer heights. But like in any other industry, there will be a few challenges along the way. How players across different segments of the industry respond will determine their future.

PMI update – March

Manufacturing PMI

Up from 51.2 in February to 52.1 in March, the

headline HSBC India Purchasing Managers’

Index highlighted a further improvement in the

health of India’s manufacturing economy.

The latest increase in production was broad

based by sector with growth signalled by

consumer, intermediate and investment goods

companies.

March saw a return of inflationary pressures

across India’s manufacturing economy. After

falling in the prior month, purchase costs rose

at a marked rate that was the most pronounced

since August 2014.

According to panelists, chemicals, metals,

plastics, energy and paper had all risen in price.

Output charge inflation quickened to the

strongest in four months, as firms attempted to

sustain profit margins by raising their tariffs.

The rate of accumulation in stocks of purchases

was modest, but quicker than in the previous

month.

Manufacturing employment stabilized in March,

having fallen in February. Staffing levels have

barely changed over the past 14 months.

Exactly 100% of survey participants reported

unchanged workforce numbers since the prior

month.

Core Sector Update – Feb

Growth in eight core industries slowed to 1.4%

in February due to output decline in five sectors

including crude oil and natural gas. Besides

these two, the other three sectors which posted

negative growth are refinery products, fertilizer

and steel. The combined Index of Eight Core

Industries stands at 161.5 in February, 2015.

The growth was 1.8% in January 2015. The

output had expanded by 6.1% in February

2014.The core sector contributes 38% to the

overall industrial production, a parameter that

the Reserve Bank takes into account while

framing its monetary policy. Production of

crude oil and natural gas contracted by 1.9%

and 8.1% respectively, according to the data

released by the Commerce and Industry

Ministry. However, coal, cement and electricity

output grew by 11.6%, 2.7% and 5.2%

respectively.

Economy

Index of Industrial Production (IIP) update – Jan

Sources: APAS Business Research Team

Industrial production grew 2.6% in January mainly on account of improvement in manufacturing activity and better offtake of capital goods. The growth in factory output, as measured by the Index of Industrial Production (IIP), was 1.1% in January 2014. Meanwhile, the December IIP has been revised upwards to 3.23% from the provisional estimates of 1.7% released last month. Mobile phones were the top contributor to the contraction, with output falling by 58% during

the month, essentially due to the shutdown of Nokia's Chennai plant. Mining output fell 2.8%, while electricity generation rose a modest 2.7%. The first 10 months of the current fiscal year saw industrial growth of 2.5%, against 0.1% in the corresponding period of 2013-14. The production of capital goods, a barometer of demand, grew by 12.8% in January as against a contraction of 3.9% in same month of last year. Manufacturing output, which constitutes over 75% to the index, grew by 3.3% in January compared to a meagre growth of 0.3 per cent in the same month a year ago. For April-January period, the sector saw an output growth of 1.7% , compared to a contraction of 0.3% in the year-ago period.

Inflation update – Feb Consumer Price Index (CPI):

Sources: APAS Business Research Team

The February consumer price index (CPI) rose to 5.37% mainly due to a spike in food inflation (6.7%).

For pan, tobacco & intoxicants category, the rate of price rise was 9.24% in February. For eggs, inflation dipped further to 1.06% during the month over a negative price rise of 0.24% in the previous month. Likewise, for category under transport and communication, inflation fell to 2.16%. February also saw hike in petrol and diesel prices which is reflected in transport inflation.

India's core consumer price index (CPI) was

estimated to have risen around 4.1% in

February from a year earlier, accelerating from

an advance of around 3.9% in January.

Inflation, as measured by the wholesale price index (WPI), fell to a steep -2.06%, marking the fourth straight month of deflating prices. The February contraction was led by a month-on-month decline in all three broad groups that make up the index. Primary articles were down 1.9%, fuel & power fell 4.43%, while manufactured products were down 0.26%. Primary articles comprise primarily of food articles; fuel & power group is made up from coal, oil and electricity; manufactured products comprise of food products, textiles, chemicals, basic metals among others. The strong fall in wholesale inflation was

unlikely to stir the Reserve Bank of India into

cutting interest rates more aggressively experts

Wholesale Price Index (WPI):

Sources: APAS Business Research Team

said. This was witnessed in bond yields -- yields

fall if expectations of a rate cut increase --

which remained relatively unchanged as the

data came out.

SEBI Relaxes Debt Equity Conversion Norms for Banks

In a major fillip to banks struggling with bad

loans, the Securities and Exchange Board of

India (SEBI) on 22nd March, 2015, relaxed

norms for conversion of the lenders' debt into

equity in companies that are in distress and

unable to repay funds and was also approved by

Capital market regulator SEBI’s board on the

same day.

Under the relaxed norms, the banks would be

allowed to convert their debt into equity in a

listed borrower entity that is in distress without

applicability of the markets regulator's pricing

formula in such conversions.

Banks are facing a serious problem of non-

performing loans. There is urgent need for

conversion of debt into equity, but the existing

SEBI regulations with regard to pricing come in

their way.

SEBI had said under the updated norms pricing

would be based on "fair value" with some

safeguards and conversion into equity can only

happen when the lenders have acquired at least

51% stake in the concerned company.

RBI Internal Working Group Report on Revisiting Priority Sector Lending Norms The Reserve Bank of India (RBI) released a "Report" of the internal working group to revisit the Existing Priority Sector Lending Guidelines. The working group has focused on channeling credit to segments that get crowded out in the absence of specific targets. Foreign banks will however be given time to comply with the revised norms, the RBI added, without specifying on a time period. The key recommendations of the Report included – A sub-target of 8% of Adjusted Net Bank Credit (ANBC) for small and marginal farmers is recommended, which is to be achieved in a phased manner. In addition to micro and small enterprises, medium enterprises are included within the ambit of priority sector lending to ensure that the micro enterprises are not crowded out, a

sub-target of 7.5% for micro enterprises has been recommended. Loans to sanitation, health care and drinking water facilities and renewable energy will come under the priority sector ambit, as will incremental loans made to exports, with certain ceilings. The Working Group recommends introduction of priority sector lending certificates (PSLCs) which will enable banks to meet their PSL requirements even while leveraging their comparative advantage in lending. RBI has indicated that it would revisit the guidelines after examining the recommendations.

Banking sector

NBFCs' Prudential Norms Revised, Ratings Made Mandatory The Reserve Bank of India has revised regulations for non-banking finance lenders by directing them to get themselves rated by March 2016, and those failing to achieve investment grade ratings should not accept fresh deposits or renew older ones. "Those asset finance companies (AFCs) that do not get a minimum investment grade rating by the end of March 2016, shall not renew existing deposits or accept fresh deposits thereafter," it said in the "Revised regulatory framework" for NBFCs notified late on Friday (i.e. 27th March, 2015).

Till March 2016, unrated companies or those with a sub-investment grade, have been allowed to only renew existing deposits on maturity, but barred from accepting fresh deposits. In an event of not getting minimum investment grade, all existing deposits should runoff to maturity and NBFCs should report to the concerned RBI's Regional Offices within 15 days. The RBI has also tweaked rules in respect of net-owned funds, and pegged the mandatory requirement at Rs 2 crore for all NBFCs and has given time till April 2017 to comply.

RBI Moves to Restrict Bank Exposure to Corporate Loans The Reserve Bank of India (RBI) has proposed to lower the ceiling on how much a bank can lend to a single corporate group, in a move to curb risks in the banking sector at a time when bad loans are on the rise. Under the proposal, banks would only be allowed to lend up to 25% of their core capital, down from the earlier ceiling of up to 55%, starting January 1, 2019. The apex bank also said late on Friday (i.e. 27th march, 2015) that it would consider setting a minimum percentage of capital requirements that companies must raise from corporate bond

and commercial paper markets, saying the corporate sector had become too dependent on banks for their financial needs. The RBI requested feedback on its proposals by April 30. The RBI regularly issues discussion papers on proposals, which are not final measures. It had said earlier that it planned to review the lending cap to companies to gradually align it with a 25% ceiling set by global standard-setter Basel Committee on Banking Supervision.

RBI Allows Lenders More Flexibility to Provide Cover for Bad Loans.

Countercyclical provisioning buffer is created in

good times. It can be utilized during economic

downturns when banks are often required to

make unusually high bad loan provisions.

Until now banks were allowed to draw only up

to one-third of this pool. Over the past one

year, banks had been lobbying with the central

banks to allow them to draw a higher amount

from the buffer as the stress on their loan book

has increased significantly.

It has now been decided, as a counter cyclical

measure, to allow banks to utilize up to 50% of

countercyclical provisioning buffer/floating

provisions held by them as at the end of

December 31, 2014, for making specific

provisions for non-performing assets, as per the

policy approved by their Board of Directors.

RBI tightens grip on Non-Banking Finance Companies, approval needed for Takeovers, Deals

The Reserve Bank of India (RBI) has proposed to

regulate non-banking finance companies

(NBFCs) more closely by way of managing things

such as changes in directorship. The banking

regulator reiterated that NBFCs would need

prior written permission from it for any

takeover or acquisition of control, which may or

may not result in change of management; or

any change in the shareholding of an NBFC

which would result in acquisition or transfer of

shareholding of 26% or more.

The central bank released the "Draft

Directions" on Monday (i.e 30th March, 2015),

seeking public comments by April 15.

If a company has only two or three directors

(private companies may have just two), change

of any one of them is a change of more than

30% directors. That any such change will require

prior approval of the Reserve Bank of India

makes matter tough for NBFCs. According to

the proposals, NBFCs should issue public notice

at least 30 days before effecting the sale, or

transfer, of ownership through sale of shares, or

transfer of control whether with or without any

sale of shares.

Insurance Bill Passed in Rajya Sabha with Support from Congress, Other Opposition Parties Parliament on 12th March, 2015, approved the NDA government's first major economic reform measure as the long-pending bill providing for raising foreign investment cap from 26% to 49% in insurance was passed by Rajya Sabha after main Opposition Congress and some other parties came on board. The bill was passed by Lok Sabha on 4th March, 2015. While raising the overseas investment cap, the

insurance bill carries a rider that management

control would be in Indian hands. The higher

foreign investment ceiling will be a composite

cap and could include both foreign direct

investment (FDI) and portfolio investment.

Besides facilitating a higher cap, the insurance

Act provides more powers to the insurance

regulator—the Insurance Regulatory and

Development Authority of India—like deciding

on commissions and imposing higher penalties

on companies for any irregularities. The New

Act talks about reforms in Health Insurance

sector and opening up of Re-insurance

branches.

Insurance sector

Indian Telecom Spectrum Auction

India’s largest telecom auction got over last weekend (i.e. 27th March, 2015) Eight telcos contended hard for 19 days for spectrum being auctioned by the government. The eight participating telcos will be forking out nearly Rs 1.10 lakh crore to the government; Bharti, Vodafone and Idea retained their 900 MHz spectrum holding. Amongst the telecom

companies in the fray, all except Uninor won some bids. The total price the operators paid for the spectrum is around 35% higher than the government’s pre-set minimum prices and higher than in any previous Indian spectrum auction, according to DoT results released after the auction.

Government approves Rs 98.2 crore for creating email infrastructure

The government has approved Rs 98.2 crore for

building email infrastructure under which IDs

will be created for 50 lakh users as the use of

private email services by its personnel has been

restricted.

The Government had, on February 18, notified

the email policy which said email service

provided by NIC should be used for all official

communications.

The new policy also bars officials from using the

forward option in e-mails to non-government e-

mail services. This policy is applicable to all

employees of central government and

employees of those state or union territories

governments that use the e-mail services of

provided by central government.

As per new policy, government officials will be

allocated two e-mail ids -- one based on

designation and the other on name.

Infrastructure

SEBI relaxes post-listing lock-in as a measure to provide easier listing for startups

SEBI relaxes post-listing lock-in as a measure to

provide easier listing for startups raise funds

through initial public offerings (IPOs), as

reported by a section of media. The capital

market regulator has recommended opening up

the institutional trading platform for these

companies to list. It has relaxed post-listing

lock-in for major shareholders of these firms

and eased disclosure requirements that IPO-

bound companies have to make in their issue

prospectus on how they plan to use the money

from the offering.

At present, rules require promoters to offer a

minimum 20% of post issue capital as lock-in for

a period of three years. The lock-in provision

ensures promoters' skin in the game for a

period of at least three years. This is also to

ensure that interest of retail investors is

protected. But, most startup companies have

lower founding members' holding (often less

than 20%) and a large holding of institutional

investors.

SEBI had introduced the institutional trading

platform (ITP) in mid-2013 to allow small and

medium enterprises to list without having to

make an initial public offer.

The listing on the institutional platform would

be for a period of one year post which the

company would have the option to migrate to

the main board subject to compliance with

eligibility requirements of the stock exchange.

SEBI said the new platform for raising money

would be initially made applicable to companies

which are in the area of software product

development, e-commerce and new-age

companies having an innovative business

model.

Capital Markets

Sources: National Stock Exchange

Sources: Bombay Stock Exchange

The BSE sensex slumped around 700 points, on

26th March,2015, pushing the benchmark to its

lowest close in two months.

Over the next few quarters the positives could

be on the Infrastructure space, automobiles and

in oil refineries and marketing companies.

There is an impact of the global market

correction on the Indian markets in March.

India has been amongst the best performing

markets for over 18 months, in terms of local

currency and US Dollar. This was based on long

term growth potential. The sentiment has been

quite bullish given the government’s actions to

kick-start growth.

Sources: National Stock Exchange

Indian rupee has fluctuated through the month

of March and traded in a narrow range

betweent 61 and 63 a dollar.

Sources: APAS Business Research Team

Sources: APAS Business Research Team

Capital Market Snapshot

Countries GDP CPI Current Account

Balance Budget Balance

Interest Rates

Latest 2015* 2016* Latest 2015* % of GDP, 2015* % of GDP,

2015* (10YGov),

Latest

Brazil -0.2 Q4 Nil 1.5 7.7 Feb 7.2 -4.1 -4.9 13.1

Russia -0.3 Q4 -3.8 0.4 16.7Feb 13.4 4.6 -2.3 12.0

India 7.5 Q4 7.0 7.1 5.4 Feb 6.0 -1.6 -4.1 7.74

China 7.3 Q4 7.2 6.8 1.4 Feb 1.5 2.1 -2.9 3.48^

S Africa 1.3 Q4 2.4 3.3 3.9 Feb 5.2 -4.9 -3.7 7.81

USA 2.4 Q4 3.2 2.9 Nil Feb 0.3 -2.2 -2.5 1.96

Canada 2.6 Q4 2.1 2.3 1.0 Feb 1.1 -2.5 -1.7 1.36

Mexico 2.6 Q4 2.8 3.5 3.0 Feb 3.7 -1.8 -3.4 5.85

Euro Area 0.9 Q4 1.3 1.6 -0.1 Mar Nil 2.4 -2.2 0.18

Germany 1.5 Q4 1.6 1.8 0.3 Mar 0.2 7.1 0.7 0.18

Britain 3.0 Q4 2.6 2.4 Nil Feb 0.5 -4.3 -4.4 1.61

Australia 2.5Q4 2.6 3.1 1.7 Q4 1.7 -2.8 -2.3 2.32

Indonesia 5.0 Q4 5.1 5.6 6.4 Mar 5.2 -2.9 -1.9 7.48

Malaysia 5.8 Q4 5.5 5.6 0.1 Feb 3.1 3.4 -4.7 3.89

Singapore 2.1 Q4 3.1 3.2 -0.3 Feb 0.4 22.6 -0.3 2.27

S Korea 2.7 Q4 3.7 3.8 0.4 Mar 1.5 5.7 0.5 2.16

Economic Data Snapshot

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