2017

Volume 12

THIS MONTH

Season’s greetings!

In this issue, Mr. Leo Puri, Managing Director, UTI AMC Ltd., has presented his thoughts on

Mutual Funds in Indian Market. We thank Mr. Puri for his contribution to the APAS Monthly

publication.

This month, the APAS column presents its views on Indian Economy – Inflation and other drivers.

The economic indicators showed mixed performance. Manufacturing PMI rose from 50.3 in

October to 52.6 in November. India’s annual infrastructure output in November grew by 6.8%.

India's Index of Industrial Production (IIP) stood at 2.2% in October. PMI services showed no

change in November while, composite PMI fell from 51.3 in October to 50.3 in November. CPI

inflation was increased to 4.88% in November from 3.58% in October 2017. India’s wholesale

inflation rose to an eight-month high of 3.93%. in November from 3.59% in October.

The Reserve Bank of India (RBI) released Financial Stability Report (FSR) – December 2017.

Also, RBI gave its clarification on Banks under Prompt Corrective Action Plan.

The insurance regulator has issued guidelines clearing the way for setting up of IFSC (International

Financial Services Centre) Insurance Offices (IIOs). International Monetary Fund (IMF) and

World Bank (WB) released a report – India: Financial Sector Assessment Program 2017 (FSAP)

APAS

MONTHLY

on the Financial System Stability Assessment (FSSA) and Financial Sector Assessment (FSA)

respectively.

The National Highways Authority of India (NHAI) has created a National Highways Investment

Promotion Cell (NHIPC). Cabinet approved the revised model concession agreement for PPP

Projects in Major Ports.

Limits for FPI Investment in Government Securities has been amended. The SEBI Board

conducted a board meeting in the last week of December and took some important decisions, which

has been discussed in the newsletter.

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

GUEST COLUMN

Mr. Leo Puri

MD, UTI AMC Ltd.

Mutual Fund: Riding a tailwind

APAS COLUMN

India Economy – Inflation and other drivers

ECONOMY

➢ Index of Industrial Production – October

➢ Inflation update – November

➢ PMI update – November

➢ Core Sector update – November

BANKING

➢ Financial Stability Report (FSR) – December 2017

➢ The Reserve Bank of India (RBI) – Clarification on Banks

under Prompt Corrective Action Plan

INSURANCE

➢ Registration and operations of International Financial

Service Centre Insurance Offices (IIO) Guidelines, 2017

➢ International Monetary Fund (IMF) and World Bank

(WB) released Financial System Assessment (FSSA) and

Financial Sector Assessment (FSA)

INFRASTRUCTURE

➢ National Highways Authority of India (NHAI) created

National Highways Investment Promotion Cell (NHIPC)

➢ Cabinet approved the revised model concession

agreement for PPP Projects in Major Ports

CAPITAL MARKETS

➢ Investment by Foreign Portfolio Investors (FPI) in Government Securities Medium Term Framework – Review ➢ SEBI Board Meeting

CAPITAL MARKET SNAPSAHOT

ECONOMIC DATA SNAPSHOT

In an era of increasing regulatory scrutiny and cost rationalization because of faster adoption of

technology in the BFSI space, it is essential to continuously improve efficiency across every segment of

the asset management business, to remain relevant. Along with these developments observed across the

globe, in the Indian scenario, two recent developments - Demonetization and shift to Goods & Services

Tax (GST) regime, can potentially change the face of the Indian mutual fund industry. And some early signs

are already there.

Consider this: AMFI data show that since November 2016, when demonetization was announced, till

November this year, monthly inflows through the SIP route had jumped nearly 52% to Rs 5,893 crore from

Rs 3,884 crore. Also between April and November this year, the total inflow into the fund industry through

SIP channel alone was up nearly 49% to Rs 40,780 crore.

One of the reasons for this high double-digit growth is the increased financialization of investments among

Indian savers and investors. While it’s been more than a year since demonetization was launched, rough

edges to the GST rules are still being smoothened out by the government. My understanding is that once

GST is firmly in place and most of the businesses which earlier operated in the informal sector with low or

no income tax to the government now coming within GST, the process of financialization of investments

would further accelerate. In this changed environment, I see tremendous opportunities for all the serious

players in the industry to tap long term investors and help them create wealth.

Another government initiative that will bring in more funds into the hands of fund managers is the Ease

of Doing Business. This is sure to help commit more funds into the country from domestic as well as foreign

investors.

On the other hand, the government’s increased thrust towards divestment of strong PSUs would increase

the supply of securities into the market. The primary market has been active this year led by the financial

sector – NBFCs, new banks, Insurance and now asset management. This trend is likely to expand to other

sectors next year. This in turn would help keep in check valuations from going much above the long-term

average.

Mutual Fund: riding a

tailwind

Mr. Leo Puri, MD, UTI AMC Ltd.

This benign environment rests on assumptions that the favourable tailwinds of the recent past which

include the moderate crude oil prices, stable inflation and rate of interest and strong domestic liquidity

flow, would continue to help the economy and the market.

In the coming months, given these tailwinds which are favouring the economy, the pace of reforms should

continue. These in turn should prompt private capital expenditure in anticipation of higher demand. Once

people start spending more, leading to higher consumption, the economy should show stronger growth.

Compared to the April-June quarter, when the GDP growth at 5.7% was a multi-quarter low, the

corresponding number for the July-September was 6.3%. As the GST system stabilizes and the favourable

economic fundamentals assist the economy, the upward GDP growth trajectory should continue.

I would also like to point out here the impact of the current innovations and developments in the mobile

and fintech space. Backed by a billion-plus mobile connection and the recent fall in service charges, the

country is fast emerging to a mobile-first market. The huge opportunity that the telecom sector is

throwing up to the service providers and other stakeholders, the number of fintech companies that are

coming into the space, along with the quality of services they are offering is very encouraging. My belief

is that all these factors, namely wide mobile coverage, low rates and varied nature of services by the

stakeholders, will help in retailising financial products. This trend will also be helped by the government

push for banking for all through the Jan Dhan accounts.

In the interim, there could be some short-term corrections that would lead to market volatility, but my

belief is that such swings should not be a major cause for concern for fund managers and also investors

who are focused on the long-term wealth creation through the mutual fund route. There would also be

phases of euphoria in the market. In those times the main job for fund managers would be to help

investors differentiate between sound information and irrelevant noises.

Indian economy is going under a major transformation due to various reforms such as Goods and Services

Tax (GST) undertaken by the government. Recently published data shows that GDP growth recovered to

6.3% in the July-September quarter from a three-year low of 5.7% in the preceding quarter. Also, the

growth of real gross value added (GVA) accelerated sequentially in Q2 of 2017-18, after five consecutive

quarters of deceleration. This was powered by a sharp acceleration in all the three sub-sectors of industry.

GVA growth in the manufacturing sector – the key component of industry – accelerated sharply on

improved demand and re-stocking post GST implementation. While the construction sector remained

sluggish, especially due to slowing demand of finished steel and cement, the biggest concern was

agriculture, which continued to be under stress with growth slowing in the second quarter to 1.7%,

compared with the 4.1% clocked in the year-ago period.

While the economy is being recovered, the obstacle in the upward trajectory of an economy has started

showing up. Retail inflation zoomed to 15-month high of 4.88% in November mainly due to rise in food

and crude oil prices which touched a two-and-a-half-year high in early November on account of the

Organisation of the Petroleum Exporting Countries’ (OPEC) efforts to rebalance the market. For a net oil

importer like India, a sustained rise in crude oil price would have adverse macroeconomic implications.

Higher oil prices are tantamount to a negative terms-of-trade shock that weakens growth, pushes up

inflation and deteriorates the twin deficits (current account deficit and fiscal deficit). India’s fiscal deficit

at the end of October hit 96.1% of the budget estimate for 2017- 18, mainly due to lower revenue

realization and rise in expenditure. In absolute terms, the fiscal deficit — the difference between

expenditure and revenue — was INR 5.25 trillion during April-October of 2017-18, according to data of

the Controller General of Accounts (CGA). During the same period of 2016-17, the deficit stood at 79.3%

of the target.

Adding to this, the Indirect taxes collection by the government may fall short of the target during the

current financial year due to disruption caused by the GST rollout. November goods and services tax (GST)

collection stood at INR 80,808 crore, lowest since the new tax regime was introduced in July. The GST

Indian Economy:

Inflation and other

drivers

collections in October, the figure stood at INR 83,346 crore, in September at INR 92,150 crore, in August

INR 90,669 crore and in July INR 94,063 crore. The sharp decline in the November numbers are also due

to the cut in rate on over 200 items that became effective from mid-November. Due to inconsistencies in

revenue trends the government would hesitate to make further experiments on the rate structure and

process in the near future considering that it can further complicate matters. The government, which is

set to unveil its last full budget in February 2018, will find it extremely difficult to make its tax projections

due to inconsistency. If revenue collections fall way short, the government will have a tough situation to

deal with and also not to breach the fiscal deficit target (3.2 percent this fiscal year). This deficit will in

turn once again impact inflation.

Going forward, the inflation path will be influenced by several other factors. First, moderation in inflation

excluding food and fuel observed in Q1 of 2017-18 has, by and large, reversed. There is a risk that the

growing trend may continue in the near-term. Second, the impact of House Rent Allowances (HRA) by the

Central Government is expected to peak in December. The staggered impact of HRA increases by various

state governments may push up housing inflation further in 2018, with attendant second order effects.

Third, the recent rise in international crude oil prices may sustain, especially due to the OPEC’s decision

to maintain production cuts through next year. In such a scenario, any adverse supply shock due to geo-

political developments could push up prices even further. Despite recent increase in prices of vegetables,

some seasonal moderation is expected in near months as winter arrivals kick in. Prices of pulses have

continued to show a downward bias. The GST Council in its last meeting has brought several retail goods

and services to lower tax brackets, which should translate into lower retail prices, going forward. To sum

up, inflation is estimated in the range 4.3-4.7 per cent in Q3 and Q4 of this year.

Overall, the economy will get affected as rise in inflation due to higher prices could lower real disposable

incomes of households and therefore hurt consumer discretionary demand. It would also lower the

corporate profit margins due to rising input costs and accordingly impacts investment, among

others. Additionally, the RBI is not expected to slash interest rates to stimulate growth. Higher interest

rates would mean a corresponding rise in the currency as they attract more inflows of foreign capital that

are seeking to exploit higher returns. To deal with this situation, the RBI and the government will have to

maintain a fine balance between inflation, interest rates and foreign exchange.

-APAS

IIP (Index of Industrial Production) – October

Index of Industrial Production (IIP) or factory output for the month of October 2017 stood at 2.2%

compared to 4.1% in the month of September 2017 and 4.50% in August 2017.

The General Index for the month of October 2017 stands at 123.0, which is 2.2% higher as compared to

the level in the month of October 2016. The cumulative growth for the period April-October 2017 over

the corresponding period of the previous year stands at 2.5%. The Indices of Industrial Production for the

mining, manufacturing and electricity sectors for the month of October 2017 stand at 101.2, 124.3 and

149.8 respectively, with the corresponding growth rates of 0.2%, 2.5% and 3.2% as compared to October

2016.

As per Use-based classification, the growth rates in October 2017 over October 2016 are 2.5% in Primary

goods, 6.8% in Capital goods, 0.2% in Intermediate goods and 5.2% in Infrastructure/ Construction

Goods. The Consumer durables and Consumer non-durables have recorded growth of (-) 6.9% and 7.7%

respectively.

The industry group ‘Manufacture of pharmaceuticals, medicinal chemical and botanical products’ has

shown the highest positive growth of 23% followed by 12.8% in ‘Manufacture of motor vehicles, trailers

and semi-trailers’ and 9.7% in ‘Manufacture of computer, electronic and optical products’.

On the other hand, the industry group ‘Other manufacturing’ has shown the highest negative growth of

(-) 36.4% followed by (-) 20.9% in ‘Manufacture of tobacco products’ and (-) 16.1% in ‘Manufacture of

rubber and plastic products’.

ECONOMY

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

-0.1

1.2

4.3

3.8

2.2

Jun-17 Jul-17 Aug-17 Sep-17 Oct-17

IIP (% YoY)

Base rate 2011-12

CPI (Consumer Price Index) – November

India's consumer price index (CPI) or retail inflation came in at 4.88% in the month of November 2017 -

higher from 3.58% in October 2017 and 3.63% in the similar month of previous year.

This month the Consumer food price index (CFPI) stood at 4.42% compared to 1.90% of October 2017 and

2.03% of November 2016.

Major indicators of CPI were all positive with food & beverages at 4.41%, pan, tobacco & intoxicants at

7.75%, clothing & footwear at 4.96`%, housing at 7.36%, fuel & light at 7.92% and miscellaneous at 3.63%.

Inflation rate for eggs shot to 7.95% in November against 0.69% in the previous month, while vegetable

prices increased to 22.48% in November from 7.47% last month. The inflation rate for pulses, however,

stayed in the negative territory at (-) 23.53% in November as against (-) 23.13% in October.

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

2.36

3.36 3.283.58

4.88

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Jul-17 Aug-17 Sep-17 Oct-17 Nov-17

CPI

Base rate 2011-12

WPI (Wholesale Price Index) – November

India's annual wholesale price inflation rose to an eight-month high at 3.93% in November up from 3.59%

in October.

The index for ‘Food Articles’ group rose by 1.8% from the previous month due to higher price of betel leaves

(12%), egg (11%), fruits & vegetables (7%) and fish-marine, beef & buffalo meat, pork, condiments & spices

and wheat (1% each).

However, the price of ragi and gram (7% each), maize and jowar (4% each), urad and rajma (3% each), arhar,

peas/chawali, masur, bajra and moong (2% each) and poultry chicken and barley (1% each) declined.

The index for ‘Non-Food Articles’ group declined by 1.9% from the previous month due to lower price of

tanning materials (35%), fodder (10%), raw rubber, raw silk and raw jute (4% each), skins (raw), castor seed

and soyabean (3% each), mesta and coir fibre (2% each) and safflower (kardi seed), guar seed and hides

(raw) (1% each). However, the price of copra (coconut) (3%), raw wool, floriculture, cotton seed and gingelly

seed (2% each) and rape & mustard seed and raw cotton (1% each) moved up.

The index for ‘Minerals’ group rose by 7% from the previous month due to higher price of iron ore (14%),

copper concentrate (12%), lead concentrate (4%), zinc concentrate (3%), manganese ore (2%) and

phosphorite (1%). However, the price of sillimanite (12%) and bauxite (3%) declined.

The index for ‘Crude Petroleum & Natural Gas’ group rose by 6.7% due to higher price of crude petroleum

(10%).

The index for ‘Coal’ group rose by 0.1% due to higher price of lignite (1%). The index for ‘Mineral Oils’ group

rose by 2.9% due to higher price of LPG (12%), naphtha (7%), bitumen and furnace oil (3% each), ATF, HSD

and petroleum coke (2% each) and petrol (1%).

The index for this major group rose by 0.2% from the previous month. The index for ‘Manufacture of Food

Products’ group declined by 0.3% due to lower price of molasses (13%), gram powder (besan) (7%), bagasse

(6%), gur (5%), manufacture of macaroni, noodles, couscous & similar farinaceous products and processing

& preserving of fish, crustaceans & molluscs & products thereof (3% each), coffee powder with chicory,

manufacture of health supplements, ice cream, instant coffee, ghee, rice, non-basmati and powder milk (2%

each) and rice products, groundnut oil, buffalo meat, fresh/frozen, sooji (rawa), other meats,

preserved/processed, cotton seed oil, manufacture of starches & starch products and processed tea (1%

each).

However, the price of copra oil and spices (including mixed spices) (5% each), palm oil (3%), rice bran oil,

luoresce and chicken/duck, dressed-fresh/frozen (2% each) and wheat flour (atta), wheat bran, mustard oil,

sunflower oil and castor oil (1% each) moved up.

The index for ‘Manufacture of Beverages’ group rose by 0.4% due to higher price of spirits and aerated

drinks/soft drinks (incl. soft drink concentrates) (1% each). However, the price of rectified spirit and bottled

mineral water (1% each) declined.

The index for ‘Manufacture of Tobacco Products’ group rose by 4.3% for the previous month due to higher

price of cigarette (9%) and other tobacco products and biri (2% each).

The index for Manufacture of Textiles group rose by 0.3%. This was due to higher price of weaving & finishing

of textiles (2%) and synthetic yarn, woolen yarn, texturised & twisted yarn and viscose yarn (1% each).

However, the price of cotton yarn and manufacture of cordage, rope, twine & netting (2% each), and

manufacture of knitted & crocheted fabrics (1%) declined.

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

1.88

3.24

2.6

3.593.93

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Jul-17 Aug-17 Sep-17 Oct-17 Nov-17

WPI

Base rate 2011-12

Manufacturing PMI – November

The Indian manufacturing sector, although weaker than the long-run average, recorded its strongest

improvement in business conditions for 13 months, recording marked and accelerated increases in output

and new orders.

Furthermore, manufacturing companies observed a renewed increase in new export orders during

November. On the job front, greater production requirements led to the fastest rate of employment

creation since September 2012. Meanwhile, there was a pick-up in inflationary pressures, with input costs

increasing to the greatest extent since April.

The Nikkei India Manufacturing Purchasing Managers’ Index rose from 50.3 in October to 52.6 in November.

This indicated a substantial improvement of operating conditions in India’s manufacturing sector. At the

broad market group level, growth in consumer and intermediate goods offset a marginal deterioration in

investment goods category. The upward movement in the headline index was driven by a marked increase

in output. Furthermore, the rate of expansion quickened to the strongest since October 2016. A

combination of higher order book volumes and a decrease in GST rates reportedly contributed to greater

production. That said, the rate of growth remained weaker than the trend seen since the inception of the

survey in March 2005. Following the negligible decline in the prior month, new orders increased in

November. The only market groups category to not record a rise in new work was capital goods, as was the

case with output.

Source: www.tradingeconomics.com

Service PMI – November

The Indian service sector dipped into contraction territory during November, following growth in the

previous two months. This was matched by a reduction in new work.

According to the panelists, the deterioration in business performance was caused due to the goods and

service tax (GST). Meanwhile, cost pressures intensified during the latest survey period.

Posting below the no-change mark of 50.0 in November, the seasonally adjusted seasonally adjusted

Business Activity Index signalled a contraction of the service sector for the first time in three months. The

rate of decline was modest. With growth in manufacturing production offsetting the fall in services activity,

private sector output rose for the third consecutive month in November. Reflecting a slowdown in output

growth, the Nikkei Composite Output Index fell from 51.3 in October to a three-month low of 50.3 in

November. This signalled a broad stagnation in private sector output in India.

Underlying data highlighted that service activity fell in response to a drop in new business during November.

According to anecdotal evidence, July’s GST continued to affect businesses as it led to sluggish demand and

lower customer turnout. As with the case with activity, the rate of contraction in new work was modest. In

contrast, the manufacturing sector reported growth in new work during November. Furthermore, the rate

of expansion accelerated to the fastest since October 2016.

Source: www.tradingeconomics.com

Core Sector Data – November

Continuing the upward trend, the eight core industries grew by 6.8% in November 2017, compared to the

production during November 2016.

According to data shared by the Ministry of Commerce, this has been the highest year-on-year growth

registered in the current financial year. The 6.8% growth in November 2017 out-paces the previous high of

5-per-cent growth reported during the sequential month (October 2017).

The growth in November was driven by a 16.6% increase in steel production over November 2016. Cement

production too increased by 17.3% in November 2017 over same month in 2016. Core sector growth during

November 2016 was hit by demonetization and had plunged to 3.2%.

Four of the eight industries (coal, natural gas, fertilizers and electricity) recorded a sequential dip in growth.

Coal was the only index that showed a year-on-year decline during November 2017. Coal production

declined by 0.2% during the month under consideration compared to the corresponding period of the last

financial year.

Compared to November 2016, crude oil production was up by 0.2%, natural gas production increased by

2.4%, petroleum refinery output grew by 8.2% during November 2017. Fertilizer production increased by

0.3% and electricity generation was up by 1.9% during the same period.

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

4.95.6

3.4

1.0

5.0

2.5

3.6

0.4

2.4

4.9 5.24.7

6.8

Co

re s

ect

or

dat

a %

Month

Core sector Trend - Monthwise

Financial Stability Report (FSR) – December 2017

The Reserve Bank of India released the Financial Stability Report (FSR) – December 2017. The FSR reflects

overall assessment on the stability of India’s financial system and its resilience to risks emanating from

global and domestic factors. The Report also discusses issues relating to development and regulation of

the financial sector.

The Financial Stability Report stated overall assessment of systemic risks, global and domestic macro-

financial risks, and the performance of financial institutions and risks. Overall assessment of systemic risks

laid down that India’s financial system remained stable. Commodities space has been firming up and

increased geopolitical risks implied that there could be volatility in commodity prices.

The global economy has picked up and the growth momentum appears sustainable. In the emerging

market context, exports have been growing at their fastest clip in six years on the back of a pick-up in

global growth. In terms of structural change, the information technology-led growth is possibly making

the world a lot more unequal. Domestic growth rebounded in 2017-18, Quarter 2, after initial hiccups

associated with the roll-out of the nationwide goods and services tax (GST). The overall investment climate

remained challenging though the situation has shown improvement since 2017-18, Quarter 1. The positive

signals of improvement - the decline in number and cost of stalled projects, the efforts to improve the

quality of government expenditure, ease of doing business ranking, India’s sovereign rating upgrade by

Moody’s and the bank recapitalization announcement are expected to provide a significant fillip to

investment sentiments in the coming quarters.

The overhang of liquidity conditions in the wake of demonetization has led to unprecedented fund flows

to both equity and debt mutual funds. Foreign portfolio investment (FPI) flows into the capital market

also remained buoyant with a greater preference for debt. Due to asset quality concerns, the overall risks

to the banking sector remained elevated. Credit growth of scheduled commercial banks (SCBs) showed

an improvement between March and September 2017, while public sector banks (PSBs) continued to lag

behind their private sector peers.

BANKING

The gross non-performing advances (GNPA) ratio and the stressed advances ratio of the banking sector

increased between March 2017 and September 2017. SCBs’ return on assets (RoA) remained unchanged

at 0.4% between March and September 2017 while PSBs have continued to record negative profitability

ratios. Overall, capital to risk-weighted assets ratio (CRAR) improved from 13.6% to 13.9% between March

2017 and September 2017. The share of large borrowers both in total SCBs’ loans as well as GNPAs

declined between March and September 2017. GNPAs of the NBFC sector as percentage of total advances

increased between March 2017 and September 2017. The network analysis indicates that the degree of

interconnectedness in the banking system has decreased gradually since 2012. The joint solvency-liquidity

contagion analysis shows that the losses due to default of a bank have declined.

From the perspective of larger financial system, SCBs continued to be the dominant players accounting

for nearly 47% of the bilateral exposure followed by asset management companies managing mutual

funds (AMC-MFs), non-banking financial companies (NBFCs), insurance companies, housing finance

companies (HFCs) and all-India financial institutions (AIFIs).

The Reserve Bank of India (RBI) Clarification on Banks under Prompt Corrective Action

RBI has come across some misinformed communication circulating in some section of media including

social media, about closure of some Public-Sector Banks in the wake of their being placed under the

Prompt Corrective Action (PCA) framework.

In this context, RBI has drawn attention to the press release issued on June 5, 2017. RBI has issued a

clarification stating that the PCA framework was not intended to constrain normal operations of the banks

for the general public.

It is further clarified that RBI, under its supervisory framework, uses various measures/tools to maintain

sound financial health of banks. PCA framework is one of such supervisory tools, which involves

monitoring of certain performance indicators of the banks as an early warning exercise and is initiated

once such thresholds as relating to capital, asset quality etc. are breached. Its objective is to facilitate the

banks to take corrective measures including those prescribed by the Reserve Bank, in a timely manner, in

order to restore their financial health.

The framework also provides an opportunity to the Reserve Bank to pay attention on such banks by

engaging with the management more closely in those areas. The PCA framework is, thus, intended to

encourage banks to eschew certain riskier activities and focus on conserving capital so that their balance

sheets can become stronger.

RBI has emphasized that the PCA framework has been in operation since December 2002 and the

guidelines issued on April 13, 2017 is only a revised version of the earlier framework.

Registration and Operations of International Financial Service Centre Insurance Offices (IIO) Guidelines, 2017

The insurance regulator has cleared the way for setting up of IFSC (International Financial Services Centre)

Insurance Offices (IIOs).

With this, the Insurance Regulatory and Development Authority of India (IRDAI) has put in place the

process of registration and operation of insurers and re-insurers in IFSC Special Economic Zones, in

alignment with the objectives of IFSC-SEZ. Insurers and re-insurers from India and abroad are eligible to

apply for registration to set up IIOs, subject to certain norms.

As per the IRDAI (Registration and Operations of IIOs) Guidelines, 2017, no person or entity shall

commence or undertake insurance or reinsurance business from an IFSC without obtaining prior

registration as an IIO from the Authority. The sole object of an IIO, on being registered with the Authority,

shall be to exclusively carry on insurance or reinsurance business from an IFSC. An IIO shall not engage

itself in any business other than those permitted by the Authority.

The registered IIO may be permitted to transact direct insurance business within the IFSC, from other SEZs

and from outside India. In the case of reinsurance business, the IIO may accept reinsurance business from

within the IFSC, from other SEZs and from outside India. It may also accept reinsurance business from

insurers operating in the Domestic Tariff Area in accordance with the order of preference for cession, as

per the existing norms. IIOs may be registered for carrying on business in various classes/sub-classes of

life, general, or health insurance as also reinsurance businesses.

The applicant should demonstrate a minimum assigned capital of ₹10 crore. In case the applicant is a

Foreign Direct Insurer, the applicant company shall possess paid-up equity capital as per existing

provisions.

INSURANCE

International Monetary Fund (IMF) and World Bank (WB) released the Financial System

Stability Assessment (FSSA) and Financial Sector Assessment (FSA)

On December 21, 2017, International Monetary Fund (IMF) and World Bank (WB) released a report –

India: Financial Sector Assessment Program 2017 (FSAP) on the Financial System Stability Assessment

(FSSA) and Financial Sector Assessment (FSA) respectively.

About FSAP:

FSAP is a joint program undertaken by International Monetary Fund (IMF) and the World Bank (WB) to

comprehensively assess and conduct in-depth analysis of a country’s financial sector.

• WB is only involved in conducting FSAP of developing countries and region.

• FSAP has been conducted since September 2010 in 29 countries (including India) at interval

of every five years.

• Last FSAP for India was conducted in 2011-12.

Highlights of Second Comprehensive FSAP for India:

The latest FSAP of India has acknowledged that India has recorded strong growth in past few years in

economic activity and financial assets.

During these years, size of India’s financial system has remained broadly stable in terms of Gross

Domestic Product (GDP).

• Growth in India’s financial industry has been supported by increased diversification,

technology-driven inclusion and commercial orientation.

• FSAP has lauded Indian Government’s efforts for tackling Non-Performing Assets (NPAs),

initiating recapitalization plan for public sector banks, passing of Insolvency and Bankruptcy

Code (IBC) and setting up of Insolvency and Bankruptcy Board of India (IBBI).

• Besides, FSAP report has also praised financial inclusion through Jan Dhan Yojana, promoting

digitization and introduction of AADHAR.

• FSAP has acknowledged Reserve Bank of India (RBI’s) initiatives of introduction of risk-based

supervision in 2013 through Supervisory Program for Assessment of Risk and Capital

(SPARC), Asset Quality Review (AQR) and the tightening regulations in 2015 for timely

identification of distressed assets.

• FSAP has positively reviewed setting up of new Enforcement Department of RBI and revising

and invoking Prompt Corrective Action (PCA) for banks.

FSAP observations about India’s banking, Securities markets and Insurance sector:

• Under FSAP, IMF administered a stress test on 15 largest Indian banks, including 12 public

sector banks (PSBs).

• The FSSA and FSA has outlined that India’s largest banks appear to be sufficiently capitalized

and profitable to withstand any economic uncertainties in future.

• However, some PSBs are vulnerable and may require capital infusion.

• Securities Market: FSAP report acknowledges that Securities and Exchange Board of India

(SEBI) has made significant regulatory changes in line with IOSCO (International Organization

of Securities Commissions) assessment published in 2013.

• Insurance Sector: In context of insurance solvency framework, India’s insurance regulator,

IRDAI has already been taking steps to implement risk based capital (RBC) system and is in

the process of formulating a “Risk Based Supervisory Framework” for monitoring potential

risks in the insurance sector.

NHAI Created National Highways Investment Promotion Cell (NHIPC)

The National Highways Authority of India (NHAI) has created a National Highways Investment Promotion

Cell (NHIPC) for attracting domestic and foreign investment for highways projects. The cell will focus on

engaging with global institution investors, construction companies, developers and fund managers for

building investor participation in road infrastructure projects.

The government has set an ambitious target of construction of 35,000 km of national highways in the next

five years involving an investment of INR 5,35,000 crores under Bharatmala.

Government also mentioned that the primary focus of NHIPC would be to promote foreign and domestic

investment in road infrastructure.

Cabinet approved the revised model concession agreement for PPP Projects in Major Ports

The Union Cabinet has approved the revised model concession agreement for public private partnership

projects in major ports. An official statement said amendments were made in the model concession

agreement to make the port projects more investor-friendly and make investment climate in the port

sector more attractive.

The amendments in the pact envisaged constitution of the Society for Affordable Redressal of Disputes -

Ports (SAROD-PORTS) as a dispute resolution mechanism similar to the provision available in highway

sector.

The approval would provide an exit route to developers by way of divesting their equity up to 100% after

completion of 2 years from the commercial operation date, similar to the MCA provision in highway

sector.

INFRASTRUCTURE

Under provision of additional land to the Concessionaire, land rent has been reduced from 200% to 120%

of the applicable scale of rates for the proposed additional land. Concessionaire would pay Royalty on

"per MT of cargo/TEU handled" basis which would be indexed to the variations in the WPI annually. This

will replace the present procedure of charging royalty which is equal to the percentage of Gross revenue,

quoted during bidding, calculated on the basis of upfront normative tariff ceiling prescribed

by Tariff Authority for Major Ports (TAMP). This would resolve the long pending grievances of Public

Private Participation (PPP) operators that Revenue share is payable on ceiling tariff and price discounts

are ignored. The problems associated with fixing storage charges by TAMP and collection of Revenue

share on storage charges which has plagued many projects will also get eliminated.

Concessionaire would be free to deploy higher capacity equipment/facilities/technology and carry out

value engineering for higher productivity and improved utilization and/or cost saving of Project assets.

"Actual Project Cost" would be replaced by "Total Project Cost".

The new definition of "Change in Law" will also include

• imposition of standards and conditions arising out of TAMP guidelines/orders,

Environmental Law & Labour Laws and

• increase and imposition of new taxes, duties, etc. for compensating the Concessionaire.

Since the viability of the project was affected, concessionaire will now be compensated

for the increase and imposition of new taxes, duties etc. except in respect of

imposition/increase of a direct tax, both by Central & State Government.

Provision for commencement of operations before COD would lead to better utilization of assets provided

by the Port in many projects before the formal completion certificate. Provision regarding refinancing is

aimed at facilitating availability of low cost long term funds to Concessionaire so as to improve the

financial viability of the projects. Extending the provision of SAROD-PORTS for redressal of disputes to the

existing Concessionaires also by introducing the Supplementary Agreement to be signed between the

Concessionaire and the Concessioning Authority. Introduction of Complaint Portal for the use of port

users. A Monitoring Arrangement has been introduced for keeping periodical status report of the project.

The amendments have been proposed keeping in view the experience gained in managing PPP projects

in port sector during the last twenty years and to obviate the problems being faced on account of certain

provisions in the existing MCA. The amendments in the MCA have been finalized after extensive

consultation with the stakeholders.

Investment by Foreign Portfolio Investors (FPI) in Government Securities Medium Term Framework – Review

Limits for FPI Investment in Government Securities has been amended from time to time. RBI has issued

a notification in this regard. SEBI also issued a circular to all Foreign Portfolio Investors in this regard. The

limits for investment by FPIs for the quarter January – March 2018 is increased by INR 64 billion in Central

Government Securities (Central G-Secs) and INR 58 billion in State Development Loans (SDLs). The revised

limits are allocated as per the modified framework prescribed in the RBI/2017-18/12 A.P.(Dir Series)

Circular No.1 dated July 3, 2017, and given as under –

Limits for FPI investment in Government Securities

(₹ Billion)

Central Government Securities State Development Loans

General Long

Term

Total General Long

Term

Total Aggregate

Existing

Limits

1,897 603 2,500 300 93 393 2,893

Revised

Limits

1,913 651 2,564 315 136 451 3,015

This above mentioned revised limits will be effective from January 01, 2018.

SEBI Board Meeting

The SEBI Board conducted a board meeting in the last week of December. The following topics

were covered during the board meeting.

1. Amendments to the SEBI (Credit Rating Agencies) Regulations, 1999 and SEBI (Listing Obligations

and Disclosure Requirements), 2015

CAPITAL MARKETS

2. Additional methods for listed entities to achieve minimum public shareholding (MPS)

requirements

3. Issuance of refund orders/allotment letters/share certificates through electronic mode under

SEBI (Issue of Capital and Disclosure Requirements Regulations), 2009

4. Norms for Shareholding and Governance in Mutual Funds

5. Proposed framework for listing of Security Receipts issued by ARCs under SEBI (Public Offer and

Listing of Securitized Debt Instruments) Regulations, 2008

6. Amendments to the SEBI (Infrastructure Investment Trusts) Regulations, 2014 and SEBI (Real

Estate Investment Trusts) Regulations,2014

7. Easing of Access Norms for Investment by Foreign Portfolio Investors (FPIs)

8. Consultation Paper for "Amendments to the SEBI (Investment Advisers) Regulations, 2013"

9. Fees Payable by Stock Brokers Trading in "Options" in Commodity Derivatives

CAPITAL MARKETS SNAPSHOT

Source: National Stock Exchange Source: Bombay Stock Exchange

Sources: APAS Business Research Team Sources: APAS Business Research Team

Sources: APAS Business Research Team

Financialization of savings and the increasing

preference for equity as an asset class have

emerged as the mega trends in India in the year

2017 and these trends are getting entrenched.

In the year 2017 domestic inflows, particularly

through the mutual fund route, have

outstripped Foreign Portfolio Investment by a

wide margin. By the end of December 2017

Domestic institutional investors (DIIs) sold

equities worth a net INR 206.68 crore while

foreign portfolio investors (FPIs) bought shares worth a net INR 172.32 crore.

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29

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CNX Nifty (Dec - 2017)

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29

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BSE Sensex (Dec-2017)

10.00

10.80

11.60

12.40

13.20

14.00

14.80

15.60

16.40

17.20

Indian VIX (Dec-2017)

6.80

6.90

7.00

7.10

7.20

7.30

7.40

7.504

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24

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26

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28

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GIND10Y(Dec-2017)

63.40

63.60

63.80

64.00

64.20

64.40

64.60

64.80

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29

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$/₹ (Dec-2017)

ECONOMIC DATA SNAPSHOT

* The Economist poll or Economist Intelligence Unit estimate/forecast;

^ 5-year yield

Quarter represents a three-month period of a financial year beginning 1st April

Countries GDP CPI

Current

Account

Balance

Budget

Balance

Interest

Rates

Latest 2017* 2018* Latest 2017*

% of GDP,

2017*

% of GDP,

2017*

(10YGov),

Latest

Brazil 1.4 Q3 0.8 2.5 2.8 Nov 3.4 -0.7 -8.0 8.62

Russia 1.8 Q3 1.9 2.1 2.5 Dec 3.8 2.3 -2.1 8.13

India 6.3 Q3 6.5 7.4 4.9 Nov 3.4 -1.5 -3.1 7.32

China 6.8 Q3 6.8 6.5 1.7 Nov 1.6 1.3 -4.3 3.88*

S Africa 0.8 Q3 0.7 1.2 4.6 Nov 5.3 -2.3 -3.9 8.61

USA 2.3 Q3 2.2 2.4 2.2 Nov 2.1 -2.5 -3.5 2.43

Canada 3.0 Q3 3.0 2.3 2.1 Nov 1.5 -2.9 -1.8 2.05

Mexico 1.5 Q3 2.1 2.1 6.6 Nov 5.9 -1.9 -1.9 7.52

Euro Area 2.6 Q3 2.2 2.1 1.5 Nov 1.5 3.1 -1.3 0.45

Germany 2.8 Q3 2.4 2.3 1.7 Dec 1.7 7.9 0.6 0.45

Britain 1.7 Q3 1.5 1.3 3.1 Nov 2.7 -4.0 -3.0 1.25

Australia 2.8 Q3 2.4 2.9 1.8 Q3 2.0 -1.4 -1.7 2.68

Indonesia 5.1 Q3 5.1 5.3 3.6 Dec 3.9 -1.6 -2.8 6.30

Malaysia 6.2 Q3 5.8 5.3 3.4 Nov 3.9 2.5 -3.0 3.92

Singapore 3.1 Q4 3.1 2.4 0.6 Nov 0.6 18.3 -1.0 2.04

S Korea 3.8 Q3 3.1 2.9 1.5 Dec 2.1 5.5 0.8 2.51

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