2018

Volume 1

THIS MONTH

Season’s greetings!

In this issue, Mr. Arijit Basu, MD & CEO, SBI Life Insurance Company Limited, has presented

his thoughts on the Indian Capital Market and their recent experience in IPO. We thank Mr. Basu

for his contribution to the APAS Monthly publication.

This month, the APAS column presents its views on Price Discovery in Insurance Companies.

The Budget for the year 2018 held a subtle stand on all the sections of the economy. The key

highlights included introduction of the world’s largest Health Protection Scheme covering over 10

crore poor and vulnerable families, launched with a family limit up to INR 5 lakhs for secondary

and tertiary treatment, re-introduction of LTCG tax, reduction in tax rate for companies having net

turnover below INR 250 crore to 25%, etc., which have been covered in detail.

Economic survey 2018 highlighted a few important aspects, which included economic growth

expected to be around 7-7.5 per cent for FY'19, CPI inflation averaged at 3.3 per cent during April-

December, demonetization helping in increasing share of financial savings and many more

observations have been covered.

The economic indicators showed mixed performance. Manufacturing PMI grew at the fastest pace

in 5 years and rose from 52.6 in November to 54.7 in December. India’s annual infrastructure

output in December slowed to a 5-month low of 4%. India's Index of Industrial Production (IIP)

rose to a 17-month high of 8.4% in November. PMI services rose to 50.9 in December from 48.5

APAS

MONTHLY

in November, while composite PMI rose to 53 in December from 50.3 in November. CPI

inflation rose to a 17-month high of 5.21% in December from 4.88% in November. WPI inflation

fell to a 3-month low of 3.58% in December from 3.93% in November.

The Reserve Bank of India (RBI) released the sixth Bi-monthly Monetary Policy Statement, 2017-

18 on 7th February and kept the repo rate unchanged at 6%. The RBI also issued Master Direction

on Foreign Investment in India. The RBI also issued a circular on refinancing of external

commercial borrowings.

The Insurance Regulatory and Development Authority of India (IRDAI) issued clarification on

MISP guidelines. The IRDAI also issued a notification on obligatory cession.

The National Investment and Infrastructure Fund (NIIF) made its first investment.

The FDI policy has been further liberalized in key sectors.

The Securities and Exchange Board of India (SEBI) released a circular on benchmarking of

scheme’s performance to total return index.

We hope that this APAS Monthly is insightful. We welcome your inputs and thoughts and

encourage you to share them with us.

Ashvin parekh

On the cover

APAS COLUMN

Price Discovery in Insurance Companies

BUDGET 2018

Highlights of Budget 2018

GUEST COLUMN

Mr. Arijit Basu

MD & CEO, SBI Life Insurance Company Limited

Indian Capital Market and our recent experience in IPO

Economic

Survey

2018

Economic Survey 2018

Highlights of Economic Survey 2018

BANKING

➢ Sixth RBI Bi-monthly Monetary Policy

Statement, 2017-18

➢ RBI issued Master Direction on foreign

investment in India

➢ Refinancing of External Commercial

Borrowings

ECONOMY

➢ Index of Industrial Production – November

➢ Inflation update – December

➢ PMI update – December

➢ Core Sector – December

INSURANCE ➢ Clarification on MISP Guidelines

➢ Notification on Obligatory Cession

INFRASTRUCTURE ➢ National Investment and Infrastructure

Fund (NIIF) made its first investment

➢ FDI policy liberalized in key sectors

CAPITAL MARKETS

➢ Benchmarking of Scheme’s Performance to Total Return Index

CAPITAL MARKET SNAPSHOT

ECONOMIC DATA SNAPSHOT

October 3, 2017 was a golden day for SBI Life Insurance Company Ltd. (SBIL). This is the day which most

of us in SBIL were looking forward to for a long time. Finally, the company which was formed on March

29, 2001 by two giants – State Bank of India and BNP Paribas Cardif - was getting listed as a public listed

company on National Stock Exchange (NSE) & Bombay Stock Exchange (BSE).

Many of us in SBIL were very excited to see the clock strike 10 a.m. and find our shares trading in the

bourses. We also realized that the listing brought upon us a great responsibility to meet expectations of

new stakeholders in our venture, the investors, both institutional and retail.

Indian capital market is one of the oldest capital markets of Asia. While in mature markets IPOs have been

in existence since long, the IPO market in India has been developing since the transformation of the Indian

economy after the economic reforms of the 1990s. IPO has become one of the most preferred methods

of raising funds for various companies. The IPO market in India after a spell of lull is again showing signs

of robustness as a large number of companies are issuing or planning to hit the markets. In 1992, Securities

& Exchange Board of India (SEBI) was established to regulate the capital market (prior to which we had

CCI to look after this activity) and to provide a well governed environment for the Indian capital market.

SEBI was given the authority of monitoring and regulating the activities of the companies, bankers, lead

managers to the issue, stockbrokers and other mediators to the stock market.

The corporate governance practices of major companies have received wide- spread attention in recent

years, particularly the monitoring and control of publicly held corporations. These concerns have grown

markedly during the last few years in the wake of certain unsavoury practices noticed globally. Failings in

corporate governance can have an adverse impact on expansion plans, including treasury operations, as

companies with poor corporate governance will find it harder to access external funds. Also, such firms

may find that financing costs increase, credit ratings are down-graded and investor confidence weakens.

Modern corporations have to balance many competing considerations, reflecting material obligations to

customers, shareholders, employees, suppliers, creditors and others, as well as wider social

responsibilities to the communities in which they operate. However, the need to reflect the owners’ – or

shareholders’ – desires has typically been the focus for debate regarding corporate governance reform.

The protection of investors from risks arising from the separation of ownership and control has been the

central focus of corporate governance recommendations throughout the world. The mechanisms of

corporate governance are seen as integral tenets in the operation of modern corporations; “good”

corporate governance is viewed as essential in terms of safeguarding company assets and maintaining

Indian Capital Market and

our Recent Experience in IPO

Mr. Arijit Basu, MD & CEO, SBI Life Insurance Company Limited

and enhancing investor confidence, thus providing greater access to funds and reducing the potential risks

associated with fraud.

The main focus of various reports on corporate governance has been on the role of non-executive

directors, the appointment of audit and remuneration committees, the disclosure of information about

reward and bonus systems for directors and senior employees and the reporting structure for auditors. A

further aspect of these reports has been the establishment of an internal control system that includes the

whole spectrum of controls, financial and otherwise, to ensure adherence to management policies, the

safeguarding of assets and the completeness and accuracy of the records. The systems of control must

include procedures for reporting immediately, to appropriate levels of management, any significant

control failings or weaknesses that are identified, together with details of any corrective action

undertaken. This requirement has ensured that systems of control are now embedded in the operations

of most companies and form part of their culture.

This year (2018 -19), I personally see a lot of companies hitting the stock market with their issues. It will

be good to have more and more new age companies getting listed. More transparency, more openness

and finally good returns to the investors will improve the overall markets.

The insurance sector in India was reopened to the private sector more than two decades ago. Still, in

FY2016, the insurance penetration in India was 3.4%, far below the global average of 6.2%. The below-

average penetration of insurance, represents huge scope and opportunity for insurance firms. With

possible listing of the insurance companies, a view on valuation of insurance companies becomes a subject

of importance and interest. This article throws light on valuation of life and general insurance companies

and the factors that drive the value. The valuation of insurance companies is a very complex process and

it is difficult to arrive at an appropriate price. It is, therefore, not surprising that perceptions of value can

often differ widely between buyer and seller particularly in emerging markets like India, where there is a

great degree of uncertainty.

Life insurance, by its very nature, primarily sells long-term contracts with annual premiums and

expectation that a portion of those will get renewed year-on-year. Additionally, it considers life mortality

assumptions to create adequate reserves for future pay-outs because of death, maturity or surrender of

policies. These characteristics need to be captured in valuation approach appropriately. Also, the

regulations on distribution channels impact valuations.

Most of the capital issued by insurance companies gets burn out on agent commission and operational

expenditure (which is quite less after first year). Prime strength of an insurance company lies in its

distribution network and valuing such strength is quite difficult, given it needs to be evaluated on a

prospective basis.

Currently, there are certain valuation methodologies which are being used in the industry.

Appraisal value method

The value generation is hugely dependent on market share and new business growth rates which in turn,

is affected by product innovation and distribution capabilities. This may be highly biased towards

Price Discovery in

Insurance

Companies

operators with bancassurance tie-ups and banks as promoters, and hence would generate significantly

higher valuation.

For life insurance companies, overall split up of the valuation is based on two parameters, which combine

into appraisal value: Embedded value and Structural value.

Embedded value is the sum of net asset value (NAV) of the business that is value of the policies issued till

date and value-in-force business (VIF) that is present value of future cash flows from existing policies. NAV

is calculated subsequent to providing for policyholders’ liabilities. Policyholders’ liabilities are held in a

conservative manner as per regulations. VIF recognizes that this extra margin in the liabilities will be

released in future as policyholders’ claims are settled.

Structural value is usually derived by the value of one year’s new business (VONB) or new business

achieved profit (NBAP) multiplied by a capitalization factor (NBAP multiple) or projecting several years’

cash flows of all new business and computation of its present value. A high growth rate/increasing market

share trend may justify application of a higher NBAP multiple.

The three important elements for the computation of VONB or even computation of present value of cash

flows of all new business or value of the entire business as per discounted cash flow method include

financial forecast, choice of discount rate and terminal value computation beyond the forecast period.

An influential factor here is, the initial cost of customer acquisition which of course would be large in the

initial years of establishment and impact the embedded value of the company. As the company matures

and the in-force book (policies already sold and active) expands, the expectations of policy renewals and

increase in business contribute to net-positive cash flow. This appraisal value is mostly influenced by

structural value in the emerging countries, on expectations of increase in new businesses.

Relative valuation method

Relative valuation of companies would largely depend upon their current position, past and future

financial performance, product or distribution mix, growth strategy and parentage. This kind of valuation

methodology is based on peer-to-peer comparison of benchmarks, financial ratios and hence arriving at

valuation parameters.

Given the long gestation period (for life insurance specifically), the multiple based approach draws a hazy

picture of the industry multiples, as it may undermine the intrinsic value created by the company, the

growth rate and softer aspects developed over-time.

Ratios

Important ratios that need to be considered for evaluation of life insurance companies are business

growth, mortality ratio, expense ratio and persistency ratio. The efficiency of the company can be judged

on the basis of the selective selling it does, to maintain an optimum portfolio, which in turn can be judged

by the mortality ratio. Expense ratio is important because it helps evaluate the chunk occupied by

expenses into the NBAP (New business achieved profits) margins.

Following table compares three recently listed life insurance companies based on some ratios (at the time

of IPO):

Name of the Company Expense Ratio Persistency ratio P/EV P/E P/BV

HDFC Life 12.3 80% 4.1 65 15

ICICI Prudential 10.5 85% 3.2 29 9

SBI Life 7.8 77% 3.6 55 11.5

As ICICI Prudential was the first life insurance company to get listed, the anonymity in discovering the

intrinsic value could be clearly seen by its tepid listing. SBI Life also saw mild response, however, HDFC

Life garnered good response from the investors.

In case of general insurance, the current valuations present a clear picture of the growth of the sector.

Contrary to life insurance, general insurance is an annual business and the sector remains fairly distributed

with the private insurers being quite aggressive. However, despite the increase in awareness levels and

Government push, the penetration has been relatively low. The valuations in such scenario are based on

scope of new business achievable. This can be judged based on the strength of distribution network,

relevant tie-ups, other partnerships, etc. Other important aspects are claims ratio, quality of business

written, combined ratio, etc.

Overall, various factors such as financial forecast for an entity based on industry growth rate, possible

market share, specific business strategy, Distribution capabilities and Embedded Value are critical inputs

for estimation of value of any insurance company. These factors are not only considered on standalone

company basis, but also compared for the competitive peers, to obtain a complete analysis. Since these

assumptions are inherently subjective, sensitivity checks on these assumptions need to be conducted to

derive possible valuation range. Value would also depend upon several other factors such as the leverage

for negotiation of the transacting parties, their strategic objectives and potential buyers’ expectations on

realization of any synergies, etc.

Still, anonymity of the sector has kept both the types of investors, retail and institutional, guessing about

appropriate valuation of companies.

-APAS

Key highlights of the Budget 2018 were as follows:

➢ Budget guided by mission to strengthen agriculture, rural development, health, education,

employment, MSME and infrastructure sectors

➢ World’s largest Health Protection Scheme covering over 10 crore poor and vulnerable families

launched with a family limit up to INR 5 lakh for secondary and tertiary treatment.

➢ Fiscal Deficit pegged at 3.5 %, projected at 3.3 % for 2018-19.

➢ INR 5.97 lakh crore allocation for infrastructure

➢ Disinvestment crossed target of INR 72,500 crore to reach INR 1,00,000 crore

➢ Comprehensive Gold Policy on the anvil to develop yellow metal as an asset class

➢ 100 percent deduction proposed to companies registered as Farmer Producer Companies with an

annual turnover up to INR 100 crores on profit derived from such activities, for five years from 2018-

19.

➢ Deduction of 30 percent on emoluments paid to new employees Under Section 80-JJAA to be relaxed

to 150 days for footwear and leather industry, to create more employment.

➢ No adjustment in respect of transactions in immovable property where Circle Rate value does not

exceed 5 percent of consideration.

➢ Proposal to extend reduced rate of 25 percent currently available for companies with turnover of less

than INR 50 crore (in Financial Year 2015-16), to companies reporting turnover up to INR 250 crores

in Financial Year 2016-17, to benefit micro, small and medium enterprises.

➢ Standard Deduction of INR 40,000 in place of present exemption for transport allowance and

reimbursement of miscellaneous medical expenses. 2.5 crore salaried employees and pensioners to

benefit.

➢ Relief to Senior Citizens proposed:

o Exemption of interest income on deposits with banks and post offices to be increased from

INR 10,000 to INR 50,000.

o TDS not required to be deducted under section 194A. Benefit also available for interest from

all fixed deposit schemes and recurring deposit schemes.

Budget 2018

Highlights of Budget 2018

o Hike in deduction limit for health insurance premium and/ or medical expenditure from INR

30,000 to INR 50,000 under section 80D.

o Increase in deduction limit for medical expenditure for certain critical illness from INR 60,000

(in case of senior citizens) and from INR 80,000 (in case of very senior citizens) to INR 1 lakh

for all senior citizens, under section 80DDB.

➢ More concessions for International Financial Services Centre (IFSC), to promote trade in stock

exchanges located in IFSC.

➢ To control cash economy, payments exceeding INR 10,000 in cash made by trusts and institutions to

be disallowed and would be subject to tax.

➢ Tax on Long Term Capital Gains exceeding INR 1 lakh at the rate of 10 percent, without allowing any

indexation benefit. However, all gains up to 31st January 2018 will be grandfathered.

➢ Proposal to introduce tax on distributed income by equity oriented mutual funds at the rate of 10

percent.

➢ Proposal to increase cess on personal income tax and corporation tax to 4 percent from present 3

percent.

➢ Proposal to roll out E-assessment across the country to almost eliminate person to person contact

leading to greater efficiency and transparency in direct tax collection.

➢ Proposed changes in customs duty to promote creation of more jobs in the country and also to

incentivize domestic value addition and Make in India in sectors such as food processing, electronics,

auto components, footwear and furniture.

The Ministry of Finance announced the outcomes of Economic Survey 2018. The findings of the survey

are as follows:

The Economic Survey 2018 has estimated that the Indian economy will grow by 7-7.5% in 2018-19,

thereby re-instating India as the world’s fastest-growing major economy.

The major highlights were as follows:

➢ Economic growth pegged at 7-7.5 per cent for FY'19.

➢ The growth to be higher at 6.75 per cent in FY'18 than advance estimates of 6.5 per cent.

➢ CPI inflation averaged 3.3 per cent during April-December, the lowest in the past six years.

➢ Fifty per cent increase in the number of indirect taxpayers due to Goods and Services Tax (GST).

➢ During the first eight months of 2017-18, tax collections are reasonably on track; and the robust

progress in disinvestment compensates to a great extent for the sluggish pace in non-tax revenue.

➢ Fiscal deficit overshot target by 12 per cent till November. Likely to normalize as the year

progresses.

➢ Weighted average collection rate (incidence) of GST is about 15.6 per cent. As such, the single tax

rate that would preserve revenue neutrality is between 15 to 16 per cent.

➢ Tax departments have gone in for contesting several tax disputes but also with a low success rate,

which is below 30 per cent.

➢ Largest firms account for much smaller exports than in other comparable countries. Top one per

cent of Indian firms account only for 38 per cent of exports unlike in other countries where they

account for substantially greater share – (72, 68, 67 and 55 per cent in Brazil, Germany, Mexico, and

USA, respectively).

➢ Five States -- Maharashtra, Gujarat, Karnataka, Tamil Nadu, and Telangana account for 70 per cent

of India's exports.

➢ Demonetization helped in increasing share of financial savings.

➢ Formal sector in the economy is substantially greater than currently believed. Formality defined in

terms of social security provision yields an estimate of formal sector payroll of about 31 per cent of

the non-agricultural work force; formality defined in terms of being part of the GST net suggests a

formal sector payroll share of 53 per cent.

Economic Survey 2018

Highlights of Economic Survey 2018 Economic

Survey

IIP (Index of Industrial Production) – November

Index of Industrial Production (IIP) or factory output for the month of November 2017 rose to a 17-month

high of 8.4%, compared to 2.2% in the month of October 2017 and 4.1% in September 2017. This was

mainly due to surge in manufacturing sector production.

The General Index for the month of November 2017 stands at 125.6, which is 8.4% higher as compared to

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

over the corresponding period of the previous year stands at 3.2%.

As per Use-based classification, the growth rates in November 2017 over November 2016 are 3.2% in

Primary goods, 9.4% in Capital goods, 5.5% in Intermediate goods and 13.5% in Infrastructure/

Construction Goods. The Consumer durables and Consumer non-durables have recorded growths of 2.5%

and 23.1% respectively.

The Indices of Industrial Production for the mining, manufacturing and electricity sectors for the month

of November 2017 stand at 107.4, 127.5 and 140.1 respectively, with the corresponding growth rates of

1.1%, 10.2% and 3.9% as compared to November 2016.

As many as 15 out of 23 industry groups in the manufacturing sector showed positive growth in November

2017 as compared to November 2016.

Under manufacturing, the industry group ‘Manufacture of pharmaceuticals, medicinal chemical and

botanical products’ has shown the highest positive growth of 39.5%, followed by 29.1% in ‘Manufacture

of computer, electronic and optical products’ and 22.6% in ‘Manufacture of other transport equipment’.

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

(-) 15.9%, followed by (-) 13.1% in ‘Manufacture of wearing apparel’ and (-) 11.2% in ‘Manufacture of

electrical equipment’.

ECONOMY

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

1.2

4.3

3.8

2.2

8.4

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

IIP (% YoY)

Base rate 2011-12

CPI (Consumer Price Index) – December

India's consumer price index (CPI) or retail inflation rose to a 17-month high of 5.21% in the month of

December 2017 – higher than 4.88% in November 2017 and 3.41% in December 2016.

The annual CPI in rural and urban areas rose by 5.27% and 5.09% respectively.

The Consumer food price index (CFPI) stood at 4.96% compared to 4.35% in November 2017 and 1.37% in

December 2016.

Major indicators of CPI were all positive with food & beverages at 4.85%, pan, tobacco & intoxicants at

7.76%, clothing & footwear at 4.8%, housing at 8.25%, fuel & light at 7.9% and miscellaneous at 3.79%.

Vegetable prices grew 29.13% in December as compared to 22.48% in November.

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

3.36 3.283.58

4.885.21

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

CPI

Base rate 2011-12

WPI (Wholesale Price Index) – December

India's wholesale price index (WPI) inflation fell to a 3-month low of 3.58% in December 2017, gradually

lower than 3.93% in November and higher than 2.1% in December 2016.

The rate of inflation in the WPI Food Index also eased to 2.91% in December from 4.1% in November. The

index of primary articles declined by 2.9% from the previous month.

Under primary articles, ‘Food Articles’ group declined by 4.3% due to lower prices of fruits and vegetables

(14%), peas/chawali (6%), gram and egg (5% each), rajma and poultry chicken (4% each), coffee and fish-

inland (3% each), urad and tea (2% each) and maize and masur (1% each).

On the other hand, ‘Non-Food Articles’ group rose by 1.8% due to higher prices of floriculture (19%), copra

(coconut) (8%), raw silk, gingelly seed and guar seed (7% each), raw cotton (6%), raw wool and raw rubber

(4% each), hides (raw) and soyabean (3% each), cotton seed, rape & mustard seed and castor seed (2% each)

and raw jute, skins (raw), sunflower and coir fibre (1% each).

‘Minerals’ group also declined by 5.4% due to lower prices of copper concentrate (14%), lead concentrate

and zinc concentrate (7% each). ‘Crude Petroleum & Natural Gas’ group rose by 4.8% due to higher price of

crude petroleum (7%). However, the price of natural gas declined by 1%. Fuel and power index rose by 1.6%.

The index for ‘Coal’ group rose by 0.6% due to higher price of lignite (18%).

Manufacturing group, which has the highest weightage in WPI, grew by 0.1%.

Under manufacturing group, food products declined by 0.4%, tobacco products tumbled by 2.1%, textiles

were down by 0.4% and plastic products plunged by 0.1%. However, sectors like beverages, wearing apparel,

paper products, chemical products, pharma products and non-metallic products rose by 0.2%, 1%, 0.3%,

0.5%, 1.2% and 0.2% respectively.

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

3.24

2.6

3.593.93

3.58

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

WPI

Base rate 2011-12

Manufacturing PMI – December

The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) grew at the fastest rate in 5 years in

December.

The Manufacturing PMI rose to 54.7 in December from 52.6 in November, marking its fifth straight month

above the 50 level that separates expansion from contraction.

This has come in the backdrop of a pickup in merchandise exports and output of 8 infrastructure sectors in

November and has stoked expectations of a sustained revival in the Indian economy.

Merchandise exports grew at a 6-year high of 30.5% in November, while the index for core sectors expanded

at its fastest pace in 13 months at 6.8%.

India’s manufacturing sector witnessed higher payroll figures in December, while the rate of job creation

rose to its highest since August 2012.

The new orders sub-index, a proxy for domestic demand, also rose to 56.8 in December, the highest since

October 2016.

Stronger demand allowed firms to raise prices at the fastest pace in 10 months to make up for rising input

costs.

Source: www.tradingeconomics.com

Services PMI – December

India’s services sector bounced back into the growth zone in December after a contraction in November.

The Nikkei India Services Purchasing Managers’ Index (PMI) Business Activity Index rose to 50.9 in December

from 48.5 in November, signaling a renewed increase in activity.

The Nikkei India Composite PMI Output Index, which includes both services and manufacturing, rose to 53

from 50.3 in November, the highest since October 2016.

Stable new orders and improved output helped services bounce back in December, but the Goods and

Services Tax (GST) hindered many firms from securing new business.

Hiring in services firms rose at the fastest pace since September and remained above average, underpinned

by an overall improvement in the outlook of future business conditions.

Business sentiment was broadly similar to November’s 4-month high and an expected improvement in

demand conditions was cited as the key factor behind business confidence.

Cost inflationary pressures also eased from November, translating into service providers raising output

prices at the slowest pace since mid-2017 in December.

Source: www.tradingeconomics.com

Core Sector Data – December

Growth of the eight core sectors slowed to a 5-month low of 4% in December 2017 due to negative

performance of segments like coal and crude oil. The output growth recorded in December is the lowest

since July 2017, when these core sectors had witnessed 2.9% expansion.

In November, the figure stood at 6.8%, which was revised to 7.4%.

These eight industries – coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and

electricity – had witnessed a growth of 5.6% in December 2016.

The output of coal and crude oil sectors contracted 0.1% and 2.1% respectively during December 2017.

Growth in steel and electricity generation slowed to 2.6% and 3.3% respectively in December as against

15.9% and 6.4% in December 2016.

Refinery products, natural gas, fertilizer and cement recorded healthy growth in December. Cement

production remained the biggest growth driver, rising 19.6% in December.

Cumulatively, the growth in the eight core sectors during April-December this fiscal slowed to 4% as

against 5.3% in the same period last fiscal.

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

5.6

3.4

1.0

5.0

2.5

3.6

0.4

2.4

4.9 5.24.7

6.8

4.0

Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

Co

re s

ect

or

dat

a %

Month

Core sector Trend - Monthwise

Sixth RBI Bi-monthly Monetary Policy Statement, 2017-18

On the basis of an assessment of the current and evolving macroeconomic situation at its meeting on the

8th of February, 2016, the Monetary Policy Committee (MPC) released the Sixth Bi-monthly Monetary

Policy Statement 2017-18 and kept the policy repo rate under the liquidity adjustment facility (LAF)

unchanged at 6.00 percent.

Consequently, the reverse repo rate under the LAF remains at 5.75 per cent, and the marginal standing

facility (MSF) rate and the Bank Rate at 6.25 per cent. The decision of the MPC is consistent with the

neutral stance of monetary policy in consonance with the objective of achieving the medium-term target

for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting

growth.

GVA growth for 2017-18 is projected at 6.6 per cent. GVA growth for 2018-19 is projected at 7.2 per cent

overall – in the range of 7.3-7.4 per cent in H1 and 7.1-7.2 per cent in H2 – with risks evenly balanced. The

inflation outlook beyond the current year is likely to be shaped by several factors. First, international crude

oil prices have firmed up sharply since August 2017, driven by both demand and supply side factors.

Second, non-oil industrial raw material prices have also witnessed a global uptick. Firms polled in the

Reserve Bank’s IOS expect input prices to harden in Q4. In a scenario of improving economic activity, rising

input costs are likely to be passed on to consumers. Third, the inflation outlook will depend on the

monsoon, which is assumed to be normal. Taking these factors into consideration, CPI inflation for 2018-

19 is estimated in the range of 5.1-5.6 per cent in H1, including diminishing statistical HRA impact of

central government employees, and 4.5-4.6 per cent in H2, with risks tilted to the upside. The projected

moderation in inflation in the second half is on account of strong favorable base effects, including

unwinding of the 7th CPC’s HRA impact, and a softer food inflation forecast, given the assumption of

normal monsoon and effective supply management by the Government.

BANKING

RBI issued master direction on Foreign Investment in India

The Reserve Bank of India, in consultation with the Government of India, has revised the regulations on

foreign investment in India and has repealed and replaced the Foreign Exchange Management (transfer

or issue of security by a person resident outside India) Regulations, 2000 (Notification No. FEMA 20) and

Foreign Exchange Management (Investment in a firm or a proprietary concern in India) Regulations, 2000

(Notification No. FEMA 24) both dated May 3, 2000 with the Foreign Exchange Management (Transfer or

issue of security by a person resident outside India) Regulations, 2017 dated November 7, 2017

(Notification No. FEMA 20 ( R )).

It may be recalled that the Reserve Bank had informed that the rationalization exercise is being

undertaken vide press release on “RBI rationalizes FEMA Regulations” dated February 4, 2016. The

rationalized regulations have been framed keeping in view the objective of promoting ease of doing

business, both from the regulatory as well as supervisory perspective.

Consequent to the rationalization, the Master Direction on ‘Foreign Investment in India’ consolidating all

the instructions relevant to foreign investment in India has been issued on 4th January, 2018.

Below are some of the key changes and clarifications in the Master Direction.

• Venture capital funds (VCFs): RBI has specifically carved out VCFs from the definition of

‘investment vehicle’. Accordingly, investments by VCFs with foreign investment will be subject to

downstream investment requirements.

• Foreign portfolio investors (FPIs):

o FPI ceiling: Investments made by FPIs through offshore funds, global depository receipts

and euro convertible bonds would not be counted to calculate the ceiling on FPI holdings

and only investment in capital instruments acquired through primary and secondary

markets would be included.

o Short-selling by FPIs: Short selling by FPIs is permissible only if a 2% headroom is available

for foreign investment and/or aggregate FPI investment limits. The designated custodian

bank has to report all short selling transactions and lending and borrowing of equity

shares by FPIs to RBI on a daily basis.

o Investment by FPIs in non-convertible debentures (NCDs): Consistent with the approach

adopted by SEBI, the Master Direction provides that FPIs can invest in primary issuance

of ‘to be listed’ NCDs/ bonds only if listing is committed within 15 days of such investment

and in unlisted NCDs or bonds only if such instruments have a minimum residual maturity

of 3 years and end use restrictions on investments in real estate business, capital market

and purchase of land.

• Funds for downstream investment by Indian entity: Foreign owned and controlled Indian entities

(FOCCs) are prohibited from using funds borrowed in domestic markets for making downstream

investments. Subscriptions by non-residents (NRs) to NCDs of an Indian company will not be

considered as funds borrowed in domestic markets. Accordingly, funds raised by FOCCs by issuing

NCDs to FPIs can be used for making downstream investments. Ability of NRs other than FPIs to

subscribe to NCDs of an Indian company for making downstream investments continues to be

curtailed by the external commercial borrowing regulations of the RBI.

• Issue of partly paid shares: Partly paid shares are required to be fully called up within 12 months

from its issuance. The Master Direction relaxes this requirement if the issue size is greater than

INR 5 billion. In such a scenario, listed companies are required to comply with the requirements

of SEBI ICDR Regulations and appoint a monitoring agency. The relaxation is also available to

unlisted companies, subject to such company appointing a monitoring agency on the same lines

as required in case of listed companies. Further, it has been clarified that partly paid shares cannot

be issued in lieu of funds payable to a non-resident (NR) by an Indian company.

• Amendment to tenure of convertible instruments: The tenure of compulsorily convertible

debentures and preference shares can be amended in accordance with the Companies Act, 2013.

• Mandatory divestments by FPIs, NRIs and OCIs: FPIs, NRIs and overseas citizens of India (OCIs)

that breach their prescribed ceiling are required to mandatorily divest their holding within 5

trading days after settlement.

Refinancing of External Commercial Borrowings

In terms of the extant provisions in paragraphs 2.15 and 2.16 (xiii) of Master Direction No. 5 dated January

1, 2016 on ‘External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by

Authorised Dealers and Persons other than Authorised Dealers’, as amended from time to time, Indian

corporates are permitted to refinance their existing External Commercial Borrowings (ECBs) at a lower all-

in-cost. The overseas branches/subsidiaries of Indian banks are however, not permitted to extend such

refinance.

In order to provide a level playing field, it has been decided, in consultation with the Government of India,

to permit the overseas branches/subsidiaries of Indian banks to refinance ECBs of highly rated (AAA)

corporates as well as Navratna and Maharatna PSUs, provided the outstanding maturity of the original

borrowing is not reduced and all-in-cost of fresh ECB is lower than the existing ECB. Partial refinance of

existing ECBs will also be permitted, subject to same conditions.

As per the circular, all other aspects of the ECB policy remain unchanged.

Clarification on MISP Guidelines

The Insurance Regulatory and Development Authority of India (IRDAI) issued a circular on clarification on

Motor Insurance Service Provider (MISP) Guidelines.

It may be recalled that IRDAI had issued

a. Guidelines on Motor Insurance Service Provider vide Circular No. IRDA/ INT/ GDL/ MISP/ 202/

08/ 2017 dt. 31st August 2017

b. Circular on MISP – IRDA/INT/CIR/MISP/246/11/2017 dt.01st Nov 17

The clarifications are on two aspects.

1. Creation of panel of insurers by MISP

The Authority is in receipt of representations from insurance companies that they are not included in

the panel of Insurance brokers/ MISPs as it is not compulsory for Insurance broker/ MISP to empanel all

insurance companies for selling motor insurance policies through MISP even if they are willing to enter

into Service Level Agreements (SLAs).

The guidelines 5 (f) of Guidelines on MISP issued on 31.08.17 and point no. 4 of IRDA circular

dt.01.11.2017, state that an insurance intermediary, based on objective and transparent criteria, can

enter into service level agreement with general insurers for selling motor insurance policies. The

Authority is of the view that with the commission / remuneration levels for the insurance intermediaries

and MISP being stipulated, the creation of a panel of insurers is restrictive, which can lead to

undesirable market practices. Therefore, to remove misgivings in the minds of the stakeholders, it is

clarified that neither the insurance broker, nor the MISP, can create such a panel of insurers for selling

motor insurance policies. However, the insurance companies should enter into service level agreements

with insurance brokers/ MISPs based on transparent and objective criteria.

2. Roles and responsibilities of MISP vis-à-vis Original Equipment Manufacturers (OEMs)

INSURANCE

It is reported that the Original Equipment Manufacturers (OEMs) are exercising undue influence, both

on the insurance intermediary and the automobile dealer, who have become MISP without having

corresponding accountability for their actions.

In order to ensure that MISP guidelines work in the interest of the customers, it is advised that no MISP

or insurance intermediary can enter into an agreement with the OEM which has an influence or bearing

on the sale of motor insurance policies.

Notification on Obligatory Cession

The IRDAI, after consultation with the Advisory Committee and with the previous approval of the Central

Government, issued a notification on obligatory cession.

This notification shall be applicable to Indian reinsurers and other applicable insurers as per the

provisions of Section 101A of Insurance Act, 1938.

The percentage cession of the sum insured on each general insurance policy to be reinsured with the

Indian reinsurers shall be 5% in respect of insurance attaching during the financial year beginning from

1st April 2017 to 31st March 2018. Apportionment of obligatory cession for the FY 2017-18 will be at 5%

and 0% between General Insurance Corporation of India and ITI Reinsurance Ltd. respectively.

Terms and conditions

a. Sum insured limits for cession:

i. The following sum insured limits for obligatory cession shall be applicable from 1st April 2017

to 30th September 2017.

Class Limit of cession in sum insured

Fire, IAR large risks INR 750 crore (MD + LOP) per risk

Marine cargo/DSU insurance INR 50 crore per policy/bottom/sending

Marine hull INR 50 crore per vessel

War & SRCC INR 50 crore per vessel

All liability products excluding financial liability INR 25 crore per policy including USA and INR 50 crore per policy excluding USA

Financial, credit and guarantee lines, mortgage insurance, special contingency policies, etc.

INR 50 crore per policy

Machinery breakdown, boiler explosion and related loss of profit INR 100 crore per risk

Contractor’s all risks, erection all risks, advance loss of profit, DSU insurance

INR 500 crore per risk (MD + LOP)

Oil & energy INR 50 crore per risk

Others No limit

ii. No sum insured limit shall be applicable for the cessions made during the period from 1st

October 2017 to 31st March 2018.

iii. In view of the above, the Indian reinsurers may require the ceding insurer to give immediate

notice of underwriting information of any cession exceeding an amount specified by the

former. The ceding insurer shall inform to the Indian reinsurers at all times whenever the

cession exceeds such specified limits.

b. Commission: Percentage of commission on obligatory cession for different classes of business

shall be as follows:

i. Minimum 5% for motor TP and oil & energy insurance

ii. Minimum 10% for group health insurance

iii. Average terms for aviation insurance

iv. Minimum 15% for all other classes of insurance business

Commission over and above can be as mutually agreed between Indian reinsurers and the ceding

insurer.

c. Profit commission: The Indian reinsurers shall share the profit commission, on 50%:50% basis,

with the ceding insurer based on the performance and surplus of the total obligatory portfolio of

the ceding insurer, after factoring the following:

i. Incurred loss % (to be worked at the end of 3 financial years)

ii. Management expenses at 2%

iii. Profit at 5%

iv. Commission at 15%

v. Loss ratio at 50% to 78%

No profit commission is payable if the loss ratio exceeds 78%. Profit commission shall not exceed 14%.

National Investment and Infrastructure Fund (NIIF) made its First Investment

The National Investment and Infrastructure Fund (NIIF) made its first investment, partnering with DP

World to create an investment platform for ports, terminals, transportation and logistics businesses in

India, the finance ministry said in a statement on Monday. DP World is a Dubai-based company which

operates multiple related businesses – from marine and inland terminals, maritime services, logistics and

ancillary services to technology-driven trade solutions.

According to the press release, the platform will invest in opportunities in the ports sector, and beyond

sea ports into areas such as river ports and transportation, freight corridors, port-led special economic

zones, inland container terminals, and logistics infrastructure including cold storage.

“The platform would invest up to $3 billion of equity to acquire assets and develop projects in the sector,”

DP World said in a separate statement. It said the partnership follows the memorandum of understanding

(MoU) signed in May 2017 and the visit to India of Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince

of Abu Dhabi, and DP World Group Chairman and CEO Sultan Ahmed bin Sulayem in February 2016.

This would be NIIF’s first investment and would set a good example of how NIIF could work with

international capital and expertise to invest at scale to build critical infrastructure in India.

NIIF was registered with the Securities and Exchange Board of India as a Category II Alternate Investment

Fund on December 28, 2015. The fund has been set up as a fund of funds structure with an aim to generate

risk adjusted returns for its investors alongside promoting infrastructure development.

INFRASTRUCTURE

FDI policy further liberalized in key sectors

The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, has given its approval to a number

of amendments in the FDI policy. These are intended to liberalise and simplify the FDI policy so as to

provide ease of doing business in the country. In turn, it will lead to larger FDI inflows contributing to

growth of investment, income and employment.

Government has put in place an investor friendly policy on FDI, under which FDI up to 100%, is permitted

on the automatic route in most sectors/ activities. In the recent past, the Government has brought FDI

policy reforms in a number of sectors

Measures undertaken by the Government have resulted in increased FDI inflows in to the country. During

the year 2014-15, total FDI inflows received were USD 45.15 billion as against USD 36.05 billion in 2013-

14. During 2015-16, the country received total FDI of USD 55.46 billion and in the financial year 2016-17,

total FDI of USD 60.08 billion has been received, which is an all-time high.

It has been felt that the country has potential to attract far more foreign investment, which can be

achieved by further liberalizing and simplifying the FDI regime. Accordingly, the Government has decided

to introduce a number of amendments in the FDI Policy.

The amendments, as per the press release, are as below.

1. Single Brand Retail Trading (SBRT): Extant FDI policy on SBRT allows 49% FDI under automatic

route and FDI beyond 49% and up to 100% through government approval route. It has now been

decided to permit 100% FDI under automatic route for SBRT.

2. Civil aviation: As per the extant policy, foreign airlines are allowed to invest, under government

approval route, in the capital of Indian airline companies, up to 49% of their paid-up capital.

However, this provision was presently not applicable to Air India. It has now been decided to do

away with this restriction and allow foreign airlines to invest up to 49% under approval route in

Air India.

3. Real estate broking services: It has been decided to clarify that real estate broking service does

not amount to real estate business and is therefore, eligible for 100% FDI under automatic route.

4. Power exchanges: Extant policy provides for 49% FDI under automatic route in power exchanges.

However, FII/FPI purchases were restricted to secondary market only. It has now been decided to

allow FIIs/FPIs to invest in power exchanges through primary market as well.

5. Issue of shares against non-cash considerations: As per the extant FDI policy, issue of equity

shares against non-cash considerations like pre-incorporation expenses, import of machinery etc.

is permitted under government approval route. It has now been decided that it shall be permitted

under automatic route in case of sectors under automatic route.

6. Pharmaceuticals: FDI policy on pharmaceuticals sector provides that the definition of medical

devices as contained in the FDI policy would be subject to amendment in the Drugs and Cosmetics

Act. As the definition contained in the policy is complete in itself, it has been decided to drop the

reference to Drugs and Cosmetics Act from FDI policy. Further, it has also been decided to amend

the definition of medical devices contained in the FDI policy.

Benchmarking of scheme’s performance to total return index

SEBI released a circular on benchmarking of scheme’s performance to total return index.

Mutual funds are required to disclose the names of benchmark indices with which the AMC and trustees

would compare the performance of the scheme in scheme related documents.

At present, most of the mutual fund schemes (other than debt schemes) are benchmarked to the Price

Return variant of an Index (PRI). PRI only captures capital gains of the index constituents. On the other

hand, Total Return variant of an Index (TRI) takes into account all dividends/ interest payments that are

generated from the basket of constituents that make up the index in addition to the capital gains. Hence,

TRI is more appropriate as a benchmark to compare the performance of mutual fund schemes.

With an objective to enable the investors to compare the performance of a scheme vis-à-vis an

appropriate benchmark, it has been decided that

a. Selection of a benchmark for the scheme of a mutual fund shall be in alignment with the

investment objective, asset allocation pattern and investment strategy of the scheme.

b. The performance of the schemes of a mutual fund shall be benchmarked to the Total Return

variant of the Index chosen as a benchmark as stated in para (a) above.

c. Mutual funds shall use a composite CAGR figure of the performance of the PRI benchmark (till the

date from which TRI is available) and the TRI (subsequently) to compare the performance of their

scheme in case TRI is not available for that particular period.

This circular is applicable to all schemes of mutual funds with effect from February 1, 2018.

CAPITAL MARKETS

CAPITAL MARKETS SNAPSHOT

Source: National Stock Exchange Source: Bombay Stock Exchange

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

Sources: APAS Business Research Team

The Bombay Stock Exchange (BSE) Sensex rose almost

28 percent in 2017 and the rally has continued in the

new year. The valuation of the index is seen at over

26 times their underlying average EPS. Due to

demonetization, a general fear of holding cash has

emerged in the market, leading to increased

formalization of savings. According to RBI data, in

2016-17, household savings jumped to a historical

high of INR 1,825 billion. Also, bank deposits almost

reached INR 11,000 billion in 2016-17. Apart from

that, FIIs net purchase amounted to INR 9568 crores

and DIIs net purchase amounted to INR 398.73 crores

for the month of January 2018.

1-J

an-1

8

3-J

an-1

8

5-J

an-1

8

7-J

an-1

8

9-J

an-1

8

11

-Jan

-18

13

-Jan

-18

15

-Jan

-18

17

-Jan

-18

19

-Jan

-18

21

-Jan

-18

23

-Jan

-18

25

-Jan

-18

27

-Jan

-18

29

-Jan

-18

31

-Jan

-18

CNX Nifty (Jan-2018)

1-J

an-1

8

3-J

an-1

8

5-J

an-1

8

7-J

an-1

8

9-J

an-1

8

11

-Jan

-18

13

-Jan

-18

15

-Jan

-18

17

-Jan

-18

19

-Jan

-18

21

-Jan

-18

23

-Jan

-18

25

-Jan

-18

27

-Jan

-18

29

-Jan

-18

31

-Jan

-18

BSE Sensex (Jan-2018)

10.0010.8011.6012.4013.2014.0014.8015.6016.4017.2018.0018.80

Indian VIX (Jan-2018)

7.10

7.20

7.30

7.40

7.50

7.60

1-J

an-1

8

3-J

an-1

8

5-J

an-1

8

7-J

an-1

8

9-J

an-1

8

11

-Jan

-18

13

-Jan

-18

15

-Jan

-18

17

-Jan

-18

19

-Jan

-18

21

-Jan

-18

23

-Jan

-18

25

-Jan

-18

27

-Jan

-18

29

-Jan

-18

31

-Jan

-18

GIND10Y(Jan-2018)

63.00

63.20

63.40

63.60

63.80

64.00

64.20

1-J

an-1

8

3-J

an-1

8

5-J

an-1

8

7-J

an-1

8

9-J

an-1

8

11

-Jan

-18

13

-Jan

-18

15

-Jan

-18

17

-Jan

-18

19

-Jan

-18

21

-Jan

-18

23

-Jan

-18

25

-Jan

-18

27

-Jan

-18

29

-Jan

-18

31

-Jan

-18

$/₹ (Jan-2018)

ECONOMIC DATA SNAPSHOT

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

^ 5-year yield

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

Countries GDP CPI

Current

Account

Balance

Budget

Balance

Interest

Rates

Latest 2017* 2018* Latest 2017*

% of GDP,

2017*

% of GDP,

2017*

(10YGov),

Latest

Brazil 1.4 Q3 0.6 2.6 2.9 Dec 3.4 -0.7 -8.0 8.63

Russia 1.8 Q3 1.8 2.1 2.5 Dec 3.7 2.5 -1.5 8.13

India 6.3 Q3 6.6 7.3 5.2 Dec 3.5 -1.5 -3.3 7.43

China 6.8 Q4 6.8 6.5 1.8 Dec 1.6 1.2 -4.3 3.85*

S Africa 0.8 Q3 0.8 1.4 4.7 Dec 5.4 -2.5 -3.9 8.47

USA 2.5 Q4 2.3 2.6 2.1 Dec 2.1 -2.4 -3.5 2.70

Canada 3.0 Q3 3.1 2.2 1.9 Dec 1.5 -3.0 -1.7 2.29

Mexico 1.8 Q4 2.0 2.1 6.8 Dec 6.0 -1.7 -1.9 7.62

Euro Area 2.7 Q4 2.3 2.3 1.3 Jan 1.5 3.2 -1.2 0.7

Germany 2.8 Q3 2.5 2.5 1.6 Jan 1.7 7.9 0.6 0.7

Britain 1.5 Q4 1.6 1.4 3.0 Dec 2.7 -4.5 -2.9 1.51

Australia 2.8 Q3 2.3 2.8 1.9 Q4 2.0 -1.7 -1.5 2.82

Indonesia 5.1 Q3 5.1 5.3 3.3 Jan 3.8 -1.6 -2.8 6.19

Malaysia 6.2 Q3 5.8 5.3 3.5 Dec 3.9 2.6 -2.9 3.94

Singapore 3.1 Q4 3.5 2.6 -3.9 Dec 0.6 18.5 -1.0 2.20

S Korea 3.0 Q4 3.1 3.0 1.0 Jan 2.0 5.5 0.9 2.77

CAREER WITH APAS

We are growing our client base and service activities. We invite applications from candidates with

business and transaction advisory services experience as well as from risk management and research

and learning backgrounds. Candidates with banking, insurance and capital markets companies may also

apply.

Ideally candidates with 6 – 10 years of relevant experience, in the age group of 29 – 34 years will meet

the requirement. Only candidates with Post Graduate qualifications in Finance and / or Chartered

Accountants may apply. We do prefer management students with engineering background.

Kindly email us your application on info@ap-as.com

Disclaimer – This informative APAS Monthly has been sent only for reader’s reference. Contents have

been prepared on the basis of publicly available information which has not been independently verified

by APAS. Neither APAS, nor any person associated with it, makes any expressed or implied

representation or warranty with respect to the sufficiency, accuracy, completeness or reasonableness

of the information set forth in this note, nor do they owe any duty of care to any recipient of this note

in relation to this APAS Monthly.

Contact Us: 022-6789 1000

info@ap-as.com

www.ap-as.com