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FINTELLIGENCE ISSUE 11 | MAY - JUNE 2017

FOREWORD

Securities and Exchange Board of India (SEBI) has been instrumental in promoting healthy and orderly growth of the securities market while ensuring protection of its investors. In yet another step to keep up to the intention of protecting shareholders of listed entities, SEBI has enhanced the scrutiny and disclosures in relation to listed entities engaging in schemes of arrangements, vide its circular dated March 10, 2017. Prior to 2013, the mechanism for filing a scheme of arrangement was extremely flexible, which provided great leeway to corporate entities to achieve their commercial objectives without the hassle of requiring the approval or undergoing extensive scrutiny. SEBI acknowledged circumstances where schemes of arrangements were being used to circumvent certain regulations and were not always in the interest of public shareholders. With the new circular, SEBI has sought to establish a robust framework to regulate schemes of arrangement and prevent misuse of the exemption provided under Rule 19(7) of the Securities Contracts (Regulations) Rules, 1957. Though the circular overrides the 2015 circular in its entirety and have issued revised set of regulations, it will be applicable only for schemes filed after the date of the New Circular to avoid mislead and ambiguity.

When considering investment opportunities, the first challenge that almost every investor faces is a plethora of options like stocks, bonds, shares, money market securities, to the right combination of two or more of these. While, every option presents its own set of challenges and benefits, Mutual Funds offer a means to generate good inflation-adjusted returns. It allows investors to pool in their money for

a diversified selection of securities, managed by a professional fund manager. Based on medium or long-term investment, mutual funds have the potential to generate a higher return, as you can invest on a diverse range of sectors and industries while ensuring requisite liquidity, safety and transparency. Whether the objective is financial gains or convenience, mutual funds offer many benefits to its investors.

India is one of the fastest growing economies of the world with a positive long-term growth prospective. In order to maintain and strengthen this growth trajectory, it is important to ensure proper flow of credit in all sectors which can cater to rising demand, advancement of technologies and efficient output. Priority Sector Lending (PSL) has long been used by developed as well as developing nations as an instrument to channelize credit at preferential rates to strategic sectors of the economy. India has adopted this concept more than 40 years ago to correct the imbalances in certain strategic sectors of its economy namely, agriculture and small scale industries. Over the years, credit disbursed to these sectors through the PSL channel has increased multifold, with the norms being mandated on domestic as well as foreign banks. We have endeavoured to highlight this concept of priority lending and the policy framework in place through our article “Priority Sector Lending and Inclusive Growth”.

We are happy to release our Eleventh issue of Fintelligence, for the month of May – June, 2017. We hope you enjoy this edition of Fintelligence. Please write back to us on [email protected] with your valuable feedback and comments.

VIVEK VAISHNAV ROSHAN VAISHNAV

Revamping the Framework for Schemes of 05

Arrangements of Listed Entities

The Mutual Fund World 10

Priority Sector Lending and Inclusive Growth 15

About Vivro 20

TABLE OF CONTENTS

REVAMPING THE FRAMEWORK FOR SCHEMES OF ARRANGEMENTS

OF LISTED ENTITIES

05 REVAMPING THE FRAMEWORK FOR SCHEMES OF ARRANGEMENTS OF LISTED ENTITIES

In India, primarily the provisions of Sections 230-

234 of the Companies Act, 2013 (Sections 391-394

of Companies Act, 1956) read with rules framed

there under contain the elaborate provisions and

procedures with respect to Scheme of Arrangement

or Compromise (including Mergers, Demergers, etc.)

of companies. In addition to these provisions, Listed

Companies, as a part of their listing obligations, are

required to comply with regulations, directions,

guidelines and circulars issued by the SEBI from time

to time on the said subject matter.

Regulation 11 and Regulation 37 of the SEBI (Listing

Obligations and Disclosure Requirements) Regulations,

2015 required listed companies to ensure that any

Scheme of arrangement presented to a Court or

Tribunal does not in any way violate, override or limit

the provisions of securities laws or requirements of the

stock exchange(s) and also requires listed companies to

obtain a No-Objection Letter or Observation Letter from

the Stock Exchange before the scheme is presented

before a Court or Tribunal. Further, sub-regulation

(1) and (4) of this Regulation 37 empowers SEBI to

specify the requirements to be complied with, by listed

entities while framing and submitting a Scheme of

Arrangement.

Pursuant to the said power, the SEBI, vide its Circular

No. CIR/CFD/CMD/16/2015 dated November 30, 2015

(Earlier Circular), prescribed the broad framework

governing the Scheme of Arrangement by listed

entities. Subsequently with the intent to streamline and

more actively regulate the Scheme of Arrangement of

Listed companies, SEBI at its meeting held on January

14, 2017, decided to revise the procedural framework

relating to Scheme of Arrangement of Listed Entities

and pursuant to said decision, notified a revised

framework vide Circular No. CFD/DIL3/CIR/2017/21

(Revised Circular) which came into force from March

10, 2017. The Revised Circular also provides guidelines

for seeking exemption under rule 19(7) of Securities

Contracts (Regulation) Rules, 1957 (‘SCRR’).

Introduction

REVAMPING THE FRAMEWORK FOR SCHEMES OF ARRANGEMENTS OF LISTED ENTITIES 06

Objectives of the Revised Framework:

Comparison: Earlier Circular Vis-à-Vis Revised Circular

Brief regulatory and procedural requirements under Earlier Circular and Revised Circular is discussed here with an intent

to highlight the changes that the Revised Circular has brought either by introducing new requirement(s) or by amending

the existing requirement(s):

Based on the reading of the revised framework and from the minutes of SEBI meeting held on 14th January, 2017,

the following objects can be deduced:

Sr. No.

Particulars Earlier Circular Revised Circular

1 Designated Stock Exchange

For Coordinating with SEBI, Stock Exchange having Nationwide Trading Terminal to be appointed as Designated Stock Exchange.

2 Processing Fees No such fees While filing the draft Scheme of Arrangement with SEBI, Fees @ 0.1% of post scheme paid up capital with a cap of Rs. 5,00,000.

3 Exemption from Compliance

No exemption was available Exemption granted to Schemes solely providing Merger of Wholly owned Subsidiary with its Parent Company.

4 Pricing Restriction No Restriction Compliance with Preferential issue pricing guideline (Considering the date of board meeting as relevant date) as enshrined in SEBI (ICDR) Reg. 2009 for issue of shares under scheme of arrangement if –a. Shares are to be allotted to shareholders of Unlisted Entity; orb. Shares are to be allotted only to the selected group of shareholders.

5 Conditions for Scheme of Arrangement between Listed and Unlisted Entities

No condition Scheme of Arrangement between listed and unlisted entities permitted only on fulfillment of following conditions – a. Disclosure of Information (similar to information to be given in

Abridged prospectus under SEBI (ICDR) Reg., 2009) of unlisted entities by listed entity to its shareholders and a Due Diligence Certificate of Merchant Banker certifying accuracy and adequacy of such disclosure.

b. Minimum 25% shareholding of merged entity to be comprised of pre-scheme public shareholders of listed entities and QIB of unlisted entity.

c. Unlisted entities can be merged with listed entity only if the latter is listed on a stock exchange having nationwide trading terminals.

To actively regulate and strengthen the process of reverse mergers (an unlisted entity merging into a listed entity) with a view to prevent the misuse of the merger process in order to circumvent listing through an Initial Public Offer process.

To protect the interest of public shareholders and to improve the disclosure standards in the Scheme of Arrangement involving Listed and Unlisted entities;

To promote and ensure wider and larger participation of public shareholders in the Scheme of Arrangements;

To prevent the squeezing out of public shareholders of listed entities more particularly when small listed entity is merged with large unlisted entity;

1 2 3 4


Sr. No.


6 Valuation Report Valuation Report from an Independent Chartered Accountant (except where no change in shareholding pattern of Listed/Resultant Entity)

7 Fairness Opinion Fairness Opinion from a SEBI registered Merchant Banker (MB) on the valuation of assets /shares done by the Valuer

8 Submission of Documents

Submission of following documents with Stock Exchange:a. Draft Scheme of Arrangementb. Valuation Reportc. Report of Audit Committeed. Fairness Opinion of MBe. Pre and Post Shareholding Pattern of Unlisted Entityf. Audited Financials for 3 years.g. Auditor’s Certificateh. Compliance with LODR Regulations.

Same submissions and in addition: A. To comply with LODR Regulations, the Compliance with the

conditions of Circular also needs to be certified by MD, CS & CFO.B. Due Diligence Certificate of a Merchant Banker certifying accuracy

and adequacy of Disclosure of information of the unlisted entity.

9 Auditor’s Certificate Auditor’s Certificate certifying that accounting treatment in Scheme is in compliance with Accounting Standard/s.

10 Redressal of Complaints

Report on Complaints containing details of complaints received on draft scheme to be submitted to Stock Exchange within 7 days of expiry of 21 days of filing of draft scheme with the Stock Exchange. Report on Complaints to be uploaded on the Company’s and Stock Exchange’s Website.

11 Explanatory Statement Explanatory Statement shall include followings:a. Observation Letter of Stock Exchangeb. Pre and Post Scheme expected capital structurec. Fairness Opinion of MB

Same except that additionally disclosure of information about unlisted entity (same as is given in abridged prospectus) shall also be included.

12 E-voting Facility Mandatory where Scheme of Arrangement involves:a. Additional allotment of Shares to promoter and promoter

groupb. Listed Entity and other entity involving promoter and

promoter group or subsidiary of promoters.c. Parent and subsidiary company where parent listed company

has acquired shares of subsidiary from common promoter.

Mandatory for all Scheme of Arrangements

13 Majority approval of public shareholders

For cases mentioned in point (12) above Same and additionally for following cases as well:a. Merger involving unlisted entity results in reduction of voting rights of

pre-scheme public shareholders of listed entity by more than 5 % of total capital of merged entity.

b. Scheme provides for transfer of whole or substantially the whole of the undertaking of listed entity for a consideration not in form of listed equity shares.

14 Prior Approval of SEBI for changes in Draft Scheme

No such requirement Prior approval of SEBI for any changes in Scheme of arrangement after the draft is filed with SEBI (except as mandated by Tribunal/regulatory authority).

15 Post Scheme approval filing with Stock Exchange

Upon sanction of scheme by High Court/NCLT, following documents shall be filed with Stock Exchange:a. Copy of Order of HC/NCLTb. Result of Shareholders’ Votingc. Statement of Changes in approved scheme as compared to draft scheme along with reasonsd. Compliance Status with Observation Lettere. Application seeking exemption from Rule 19(2)(b) of SCRR, 1957f. Report on Complaints.

16 Listing Timeline Within 30 days of order of HC/NCLT, steps are taken to list the specified securities and within 45 days of order of HC/NCLT, trading commences.

17 Conditions for seeking exemption under Rule 19(7) of SCRR for listing of unlisted entity post-merger

- Shares sought to be listed are allotted by unlisted entity pursuant to Scheme of Arrangement- Min. 25% of post-scheme paid up capital shall be allotted to public shareholders of Transferor Company- Transferee company will not issue any shares not covered by scheme- No outstanding warrants /instruments entitled to be received equity share are pending as on the date of application.

REVAMPING THE FRAMEWORK FOR SCHEMES OF ARRANGEMENTS OF LISTED ENTITIES 08

Sr. No.


18 Post Scheme Lock-in Requirement

- No Lock-in in the Scheme of Demerger of unit of listed entity into Unlisted Entity, if the paid up capital of the unlisted entity is just what is required for the purpose of incorporation.

- If Post-merger unlisted entity seeking listing has paid up capital more than what is required for incorporation purpose

a. 3 Years Lock-in for Promoters’ holding to the extent of 20% of post- merger paid up capital.

b. 3 Years Lock-in of entire pre-scheme paid up capital of the unlisted entity.

Entire pre-scheme paid up capital of the unlisted entity shall be Locked-in as per following if division of listed entity is hived off to an unlisted entity and post scheme, unlisted entity seeks listing:a. 3 Years Lock-in for Promoters’ holding to the extent of 20% of post-

merger paid up capital.b. 1 Year for the remaining shares.No lock-in is required, if post scheme shareholding pattern of unlisted entity is similar to the shareholding pattern of the listed entity.

Compliances under revised circular:

The revised circular has put some additional compliance obligations on the part of listed entities proposing Scheme

of Arrangement. The compliances with these obligations depend, mainly, upon the parties of the Scheme and on the

surviving entity (Transferee Entity).

Table of Compliances by a Listed Entity under the Revised CircularSr. No. Compliances of Revised Circular Scheme of Arrangement between/amongst

Two Listed Entities Listed and Unlisted Entities

Transferee - Unlisted Transferee - Listed

1 Preferential Issue Pricing Guidelines Only if allotment to selected group

Only if allotment to selected group

Yes

2 Submission of Compliance report signed by CS,CFO & MD Yes Yes Yes

3 Valuation report from Independent CA Yes Yes Yes

4 Fairness opinion of Merchant Banker on Valuation Yes Yes Yes

5 Disclosure of Information (Format of Abridged prospectus) No Yes Yes

6 Due Diligence Certificate of Merchant Banker on accuracy and adequacy of disclosure of information

No Yes Yes

7 Min. 25% of post capital to be held pre-scheme public shareholders of listed entity and QIB of unlisted entity

No Yes Yes

8 Approval of Majority Public shareholders through e-voting:

a. Allotment of additional shares to promoters Yes Yes Yes

b. Reduction in Voting rights of Pre-public shareholders by > 5% No Yes Yes

c. Scheme involves transfer of undertaking If equity shares are not allotted

If listed equity shares are not allotted

No

9 Prior Approval of SEBI for change in Draft scheme Yes Yes Yes

10 Application for Exemption under Rule 19(7) of SCRR, 1957 N.A. Yes No

11 Lock in requirement in case of de-merger N.A. Yes No

12 Steps to list shares in 30 days and commencement of trading in 45 days and post scheme advertisement

Yes Yes Yes

13 Payment of processing fees to SEBI Yes Yes Yes


Conclusion

The Revised circular has not changed the basic procedure as prescribed in the Earlier circular

but has brought some substantive changes in the current framework governing the Scheme of

arrangement of listed entities. The new changes brought in by the revised circular are mainly

focused on protecting the interest of public shareholders in the scheme of arrangement involving

unlisted entities. This revised framework, will surely, restrict misuse of provisions to structure

transactions, bring symmetry in valuation practices, improve corporate governance and disseminate

greater information to public shareholders.

Enhanced Role of Merchant Bankers

One of the important features of the revised circular is the role of Merchant Banker in the scheme of Arrangement

proposed between a listed entity and an unlisted entity. Keeping in mind the interest of public shareholders of

listed entity, the revised circular provides for disclosure of information pertaining to unlisted entity (the information

as are given in Abridged Prospectus under SEBI (ICDR) Regulations, 2009). Further, the Merchant Banker has

been assigned the role of ascertaining adequacy and accuracy of the information so disclosed. This role casts an

obligation on the Merchant Banker to carry out a due diligence process of the unlisted entity, at least to the extent

of information to be disclosed in the explanatory statement to be sent to the shareholders of listed entity at the

time of seeking their approval for the Scheme of Arrangement.

A ‘Mutual Fund’ is an investment vehicle that allows

several investors to pool their resources in order

to purchase stocks, bonds and other securities.

These collective funds (referred to as Assets Under

Management or AUM) are then invested by an expert

fund manager appointed by a mutual fund company

(called Asset Management Company or AMC). The

combined underlying holding of the fund is known as

the ‘portfolio’, and each investor owns a portion of this

portfolio in the form of units.

THE MUTUAL FUND WORLD

THE MUTUAL FUND WORLD 10

Investors pooltheir money

Fund Managerinvests pooled

money insecurities

Income and dividends are

generated

Income is distributed

amongst the shareholders

1

4

2

3

11 THE MUTUAL FUND WORLD

Professionally Managed

MFs are managed by professional

fund managers, responsible for making wise investments

according to market

movements and trend analysis.

Diverse Portfolio

MFs allow you to invest your savings

across a variety of securities and diversify your assets

according to your objectives, and risk tolerance.

Affordability

MFs provide investors the freedom to

earn on their personal savings. Investments can

be as less as Rs. 500.

Liquidity

MFs offer relatively high

liquidity.

1 2 3 4 5

The mutual fund industry in India began in 1963

with the formation of the Unit Trust of India (UTI)

as an initiative of the Government of India and the

Reserve Bank of India. Much later, in 1987, SBI Mutual

Fund became the first non-UTI mutual fund in India.

Subsequently, the year 1993 heralded a new era in the

mutual fund industry. This was marked by the entry of

private companies in the sector. After the Securities

and Exchange Board of India (SEBI) Act was passed

in 1992, the SEBI Mutual Fund Regulations came into

being in 1996. Since then, the Mutual fund companies

have continued to grow exponentially with foreign

institutions setting shop in India, through joint ventures

and acquisitions. As the industry expanded, a non-profit

organization, the Association of Mutual Funds in India

(AMFI), was established on 1995. Its objective is to

promote healthy and ethical marketing practices in

the Indian mutual fund Industry. SEBI has made AMFI

certification mandatory for all those engaged in selling

or marketing mutual fund products.

Why invest in Mutual Funds (MF)?

Each mutual fund scheme has its own objective that

determines its assets allocation and investment

strategy.

These are classified according to their maturity period,

or investment objective. One can also classify mutual

funds as ‘Open Ended Funds’ - where investors may

What are the different types of Mutual Funds?

Tax Saving

Certain mutual fund investments are tax efficient.

For example, domestic equity

mutual funds investors do

not need to pay capital gains tax if they remain invested for a

period of above 1 year.


invest or redeem at any point in time and ‘Close Ended

Funds’ - where investors can invest only during the

initial launch period known as the NFO (New Fund

Offer) period.

Mutual funds classified according to their investment

objective range from Equity Funds (with substantial

risk), to Money Market Funds (which are very safe).

Other types include debt schemes, index funds,

balanced funds, etc.

EQUITY FUNDS

These are funds that invest in equity stocks/shares

of companies. These are considered high-risk funds,

however they also tend to provide high returns. Equity

funds are best suited for long term investments and

offer tax efficiency if invested for more than 12 months.

Large Cap Funds: Large cap funds are those funds

which invest a larger proportion of their corpus in

companies with large market capitalization. These are

stocks of usually large and well-established companies

that have a strong market presence and are generally

considered as safe investments. One important fact

about large caps is that information regarding these

companies is readily available in newspapers and

magazines. Most of the large cap companies have

good disclosures and therefore there is no dearth of

information for an investor looking into them.

Mid cap Funds: Mid-caps lie between large cap stocks

and small cap stocks. These represent mid-sized

companies that are relatively more risky than large cap

as investment options, yet, they are not considered as

risky as small cap companies. They rank between the

two extremes on all the important parameters like size,

revenues, employee and client base.

Small cap Funds: Small cap companies have smaller

revenue and client bases, and usually include the start-

ups or companies in the early stage of development.

Small cap stocks are potentially big gainers as they are

yet to be discovered within the sector and can show

growth potential in large numbers once unfurled in

the market. However, as these enterprises are small

ventures, these should be researched properly.

Multi cap Funds: Multi-cap funds can shift their

portfolios across market caps. They can hold large-cap

or mid-cap stocks, or a mix of both. More importantly,

they can take exposure to any type of stocks at the

opportune moment.

Global Funds: These are funds where the investment

made by the fund can be in a company in any part of

the world. They are different from international/foreign

funds because in global funds, investments can be

made even in the investor’s own country.

Tax Saving Funds (ELSS): These are funds that invest

primarily in equity shares. Investments made in these

funds qualify for deductions under Section 80C of the

Income Tax Act. They have a lock in period of 3 years

and are considered high on risk, however also offer

high returns in comparison to other Tax saving options

like PPF or Insurance.

DEBT FUNDS

The aim of income funds is to provide regular and

steady income to investors. Such schemes generally

invest in fixed income securities such as bonds,

corporate debentures, Government securities and

money market instruments. Such funds are less risky

compared to equity schemes.

Gilt Funds: These funds invest exclusively in

government securities of medium and long term

maturities issued by central and state governments.

NAVs of these schemes also fluctuate due to change

in interest rates and other economic factors as is the

case with income or debt oriented schemes.

Income Funds: They invest in corporate bonds,

government bonds and money market instruments.

However, they are vulnerable to the changes in interest

rates and are suitable for those who have a long term

investment horizon.

Dynamic Bond Funds: They invest in debt securities

of different maturity. These funds are actively managed

and the portfolio varies dynamically according to the

interest rate view of the fund managers. These funds

Invest across all classes of debt and money market

instruments with no cap or floor on maturity, duration

or instrument type concentration.

Short Term Funds: These funds invest predominantly

in debt securities with a maturity of upto 3 years in

13 THE MUTUAL FUND WORLD

comparison to a Regular Income Fund. These funds

tend to have an average maturity that is longer than

Liquid and Ultra Short Term Funds but shorter than pure

Income Funds. These funds are suitable for conservative

investors who have low to moderate risk taking appetite

and an investment horizon of 1 to 2 years.

Ultra Short Term Funds: They invest in very short term

debt securities with a small portion in longer term debt

securities. Most ultra-short term funds do not invest

in securities with a residual maturity of more than 1

year. Also referred to as Cash or Treasury Management

Funds, Ultra Short Term Funds are preferred when you

are willing to marginally increase your risk with an aim

to earn commensurate returns.

Fixed Maturity Plan (FMP’s): FMPs, as the name

suggests, are mutual fund schemes with a defined

maturity period. These schemes normally comprise

of debt instruments which mature in line with the

maturity of the scheme, thereby earning through

the interest component (also called coupons) of the

securities in the portfolio. FMPs are normally passively

managed, i.e. there is no active trading of debt

instruments in the portfolio.

BALANCED FUNDS

The aim of balanced funds is to provide both growth

and regular income as such schemes invest both in

equities and fixed income securities in the proportion

indicated in their offer documents. These are

appropriate for investors looking for moderate growth.

They generally invest 40-60 per cent in equity and debt

instruments. NAVs of such funds are likely to be less

volatile compared to pure equity funds.

INDEX FUNDS

These are funds that invest in instruments that

represent a particular index on an exchange so as to

mirror the movement and returns of the index e.g. such

as the Standard & Poor’s 500 Index (S&P 500).

Gold Funds: They invest in various forms of gold. It can

be in the form of stocks of gold mining companies or

Gold ETF’s. Gold funds offer the convenience of buying

gold at low cost with no fear of theft or concerns of

storage. You can sell these units at market linked prices

at any point in time.

MONEY MARKET FUNDS

These are funds that invest in liquid instruments e.g.

Treasury Bills, Commercial Papers etc with a maturity

of less than 91 Days and have a high credit rating. They

are considered safe investments for those looking

to park surplus funds for a temporary period until the

intended objective is achieved. Money markets are

also referred to as cash markets.

There are several methods of investing into Mutual

Funds – Lump sum Investments, Systematic

Investment Plans, Systematic Transfer Plans. In terms

of exits investors have the option to outright sell

investments made, or opt for a staggered approach

using a Systematic Withdrawal Plan.

Lump Sum Investments are suited for those who have

non-recurring income or accumulated capital. Lump sum

investments are usually popular among middle aged

investors who have accumulated savings over the past

few years and a greater appetite to take higher risks.

Systematic Investment Plan or SIP is a systematic

manner for investing money in mutual funds on a

predefined periodic basis, as per the options available in

the scheme usually being weekly, monthly, or quarterly.

SIP is an approach which inculcates a steady habit of

investing, assists in planning monthly expenditure,

accumulates savings over a period of time and

averages purchases in high and low markets to create

a smoothened efficient yield on investments. It is best

suited for those with predictable recurring incomes.

Systematic Transfer Plan or STP is a mechanism

available in the mutual fund world to transfer

investments from a ‘holding fund’ (usually being a

liquid scheme) to the end investment scheme on a

pre-defined transfer period – Daily, weekly, fortnightly,

monthly, quarterly). STP is a manner in which those

MODES OF INVESTMENT AND EXIT


OPTIONS OFFERED

Most mutual fund schemes offer three options – Growth, Dividend Payout and Dividend Reinvestment.

Growth – In the growth option, profits made by the

scheme are invested back into it. This results in the

net asset value (NAV) of the scheme rising over time.

When the scheme gains, the NAV rises and in case

of a loss it goes down. The growth option reinvests

the gains over and over again and the returns are

compounded, resulting in higher proceeds, at the time

of maturity. This option is usually recommended for

those who are looking to create a corpus for long-term

goals.

Dividend Payout - The profits earned by the mutual

fund schemes are paid out on a periodic basis in the

form of dividend. Dividend earned from mutual fund

schemes are tax free in the hands of the investor. This

option is recommended for those who are looking for

distributed income from their investments. The Net

Asset Value of the scheme will go down in tandem with

the dividend declared, as the profits are paid out of the

NAV of the scheme.

Dividend Reinvestment – In this option the dividend

declared by the Fund is reinvested back in the scheme

in the form of fresh units purchased as per the NAV

applicable for that particular day. It increases the

number of the units you hold for the same cost price.

Conclusion The mutual fund industry of India is continuously evolving. The AUM of the Indian MF Industry has grown from ` 3.26 trillion as on 31st March 2007 to ` 17.89 trillion as on 28th February, 2017, a five-fold increase in a span of less than 10 years! The Industry’s AUM had crossed the milestone of `10 Trillion (`10 Lakh Crore) for the first time in May 2014 and in a short span of two years and nine months, the AUM size has crossed `17.89 lakh crore last month and is expected to cross ` 20 trillion by the end of 2017.

As an asset class, mutual funds have been gaining popularity as it offers significant benefits of portfolio diversification, liquidity, tax efficiency and professional management. It is an optimum way to make investments in equity and debt instruments and an effective manner to plan investments aligned to goals and aspirations.

with lump sum investment plans can stagger their

investments systematically into mutual funds of their

choosing over a predefined period of time. Fund houses

offers two options which are Fixed and Variable - where

fixed denotes a specific amount pre decided and

Variable denotes the appreciated value.

The traditional redemption route is to sell your mutual

funds and redeem your gain/loss adjusted capital.

Systematic Withdrawal Plan or SWP is a facility offered

by mutual funds to redeem units. The plan allows

investors to exit their investments in small portions

at regular intervals to meet their short-term goals or

regular monthly income needs. These intervals can be

monthly or quarterly or annually. Retired individuals or

Home makers can utilize this facility to the best of their

requirement.

PRIORITY SECTORLENDING AND INCLUSIVE GROWTH

15 PRIORITY SECTOR LENDING AND INCLUSIVE GROWTH

Priority Sector Lending (PSL) has long been used

by developed as well as developing nations as an

instrument to channelize credit at preferential rates

to specified sectors of the economy that may not get

timely and adequate credit in the absence of such

special dispensation. In India, PSL is an important role

given by Reserve Bank of India (RBI) to the banks in

order to synchronize the lending activities with national

importance and priorities.

Conventionally, the objective of PSL has been to

ensure that vulnerable sections of society get access

to credit and there is adequate flow of resources to

those segments of the economy which have higher

employment potential and help in making an impact on

poverty alleviation. However, over the last four decades,

the Indian economy has not only undergone a structural

transformation but has also been increasingly integrated

into the global economy, resulting into a shift of national

priorities from lending to vulnerable sections to increase

employability, create basic infrastructure and improve

competitiveness of the economy, thus creating more

jobs.

Commercial banks nationalized;

emphasis on lending to agriculture, export

sector, and Small Scale Industries (SSI)

Public banks to lend one third of its outstanding credit

portfolio to PSL

Public and private banks to lend 40% of portfolio to PSL

by 1985

For all banks with more than 20 branches: PSL

to increase to 40% of adjusted net bank credit (ANBC). Direct

and indirect agriculture lending set at 13.5% and 4.5% of ANBC

RBI Circular regarding the PSL

Certificates

1969 19801974 2012 2016

Formalization of PSL on basis of

report submitted by the Informal Study

Group

Private banks to lend one third of its outstanding credit

portfolio to PSL

Foreign banks to lend 15% of portfolio

to PSL by 1992

RBI Circular on PSL based on

recommendations of Internal Working Group

1972 19881978 2015

EVOLUTION OF PSL

PRIORITY SECTOR LENDING AND INCLUSIVE GROWTH 16

Priority Sector Lending

Lending by scheduled commercial banks to certain sectors identified as “priority sectors” by the Reserve Bank of India is called as Priority Sector Lending.

Sectors like agriculture, farm credit, MSMEs, Export Credit, Education, Housing, social infrastructure, renewable energy, micro enterprises, advances to weaker sections, etc. are considered to be priority sectors. Such sectors are considered to be of economic and national importance and are given special dispensation in form of loans under PSL concept, as a measure to balance resources and growth in all areas of the economy.

Priority Sector Lending Norms

PSL by Scheduled Commercial Banks is governed by Reserve Bank of India vide its various circulars, latest being, RBI Master Circular no. FIDD.CO.Plan.BC.4/04.09.01/2015-16, dated July 1, 2015. This circular is applicable to all Scheduled Commercial Banks and Foreign Banks, but excludes Regional Rural Banks.

All banks have been given an overall target of 40 per cent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher for contribution towards PSL. Such target implementation period is restricted to maximum of five years starting from April 1, 2013 to March 31, 2018 for Domestic Banks and Foreign Banks having 20 or more branches and till March 31, 2020 for Foreign Banks having less than 20 branches. The targets and sub-targets for banks under priority sector are as follows:

Priority Sector Target for Scheduled Commercial Banks and Foreign Banks with 20 branches and above

Foreign Banks with less than 20 branches

Eligible Categories Under Priority Sector

Agriculture 18 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher

7/8 percent of the Target for Small and Marginal Farmers to be achieved in a phased manner (Foreign Banks with 20 branches and above excluded from the sub-target currently. Will be included post 2018 after review in 2017)

Not Applicable Farm Credit, Agriculture Infrastructure and Ancillary Activities

Micro, Small and Medium Enterprises (MSMEs)

7.5 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher

(The sub-target for Micro Enterprises for Foreign Banks with 20 branches and above excluded from the sub-target currently. Will be included post 2018 after review in 2017)

Not Applicable Investment in Plant and Machinery for Manufacturing Enterprises, Service Enterprises (Rs 5 - 10 cr.), MSME factoring transactions on ‘with recourse’ basis by banks, Khadi and Village Industries and Other Finance to MSMEs

Export Credit Incremental export credit over corresponding date of the preceding year, up to 2 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, depending upon the sanctioned limit criteria and implementation phase defined

To be allowed up to 32 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher

Includes pre-shipment and post shipment export credit (excluding off-balance sheet items), as defined in Master Circular on Rupee/Foreign Currency Export Credit and Customer Service to Exporters - Upto 2 per cent of the target, subject to maximum of Rs 25 cr. per borrower for units having turnover of up to Rs 100 cr.

Education No specific targets No specific targets

Includes loans to individuals for educational purposes including vocational courses upto Rs 10 lacs irrespective of the sanctioned amount

Housing No specific targets No specific targets

Loans extended for purchase/ construction (Rs 20 - 35 lakhs), repairs to damaged dwelling units (In range of Rs 2 - 5 lakhs), loans to governmental agency for slum clearance and rehabilitation (Upto Rs 10 lakhs), construction loans for weaker and low income groups and loans to National Housing Board (Upto Rs 10 lakhs)


Besides meeting the target by direct lending to the above stated priority sectors, investments by banks in securitised assets and assignments/ outright purchases of any loan asset, representing loans to various priority sectors, except ‘Others’ category, is also eligible for classification under respective categories of priority sector (direct or indirect) depending on the underlying assets, provided such advances and pool of assets, so purchased or securitised, were eligible to be classified as priority sector advances before their securitisation/purchase and fulfill the RBI guidelines on securitisation and outright purchase/ assignment respectively. However, since July, 2011, investments in securitised assets originated by NBFCs and purchase/assignment undertaken by NBFC, wherein the underlying assets are loans against gold jewellery, are not eligible for priority sector status.

The banks may opt for Inter Bank Participation Certificates (IBPCs) on a risk sharing basis, provided the underlying assets are eligible to be categorized under priority sector and the banks fulfill the Reserve Bank of India guidelines on IBPCs. Bank Credit to MFIs for on-lending to individuals and to members of SHGs/ JLGs will also be categorized as priority sector advances, subject to the prescribed conditions by RBI.

RBI, vide its circular no. FIDD.CO.Plan.BC.23/04.09.01/2015-16 dated April 7, 2016 has issued guidelines pertaining to Priority Sector Lending Certificates (PSLC), a mechanism to enable banks to achieve the PSL target and sub-targets by purchase of these instruments in the event of shortfall. This also incentivizes banks with surplus achievements to sell the same, thereby, enhancing lending to the categories under priority sector. Under the PSLC mechanism, the

Meeting the PSL Targets

Priority Sector Target for Scheduled Commercial Banks and Foreign Banks with 20 branches and above

Foreign Banks with less than 20 branches

Eligible Categories Under Priority Sector

SocialInfra-structure

No specific targets No specific targets

Loans for building social infrastructure like schools, health care, drinking water, etc. and bank credit to Micro Finance Institutions for on-lending (Upto Rs 5 cr. per borrower)

Renewable Energy

No specific targets No specific targets

For purposes like solar based power generators, biomass based power generators, wind mills, micro hydel plants, street lighting systems, remote village electrification (Upto Rs 15 cr.) whereas individual household limit will be Rs 10 lakhs.

Others No specific targets No specific targets

Loans to individual borrowers (Upto Rs 0.50 lakh) having not more than 1 lakh and 1.60 lakh in rural and non-rural areas respectively, distressed persons (Upto Rs 1 lakh) and State Sponsored Organizations for SCs/STs for specific purposes

Micro Enterprises

7/ 7.5 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, to be achieved in a phased manner by March 2017.

The sub-target for Micro Enterprises for foreign banks with 20 branches and above would be made applicable post 2018 after a review in 2017.

Not Applicable

Advances to Weaker Sections

10 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.

Foreign Banks with 20 or more branches have been allowed implementation period of five years starting from April 1, 2013 and ending on March 31, 2018.

Not Applicable Loans to Small and Marginal Farmers, Artisans, village and cottage industries, Beneficiaries of Government Sponsored Schemes, SCs, STs, Self Help Groups, Distressed farmers indebted to non-institutional lenders, women, person with disabilities, minority communities, etc. are eligible to be classified as Weaker Sections.

PRIORITY SECTOR LENDING AND INCLUSIVE GROWTH 18

Monitoring and Non Achievement of PSL Targets

In order to ensure continuous flow of credit to priority sectors, the RBI requires the data on such advances to be furnished on quarterly and annual intervals by banks, as per the revised reporting formats.

While computing priority sector target achievement from financial year 2016-17 onwards, shortfall / excess lending for each quarter will be monitored separately. Scheduled Commercial Banks having any shortfall in

lending to priority sector shall be allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD and other Funds with NABARD like NHB/SIDBI/ MUDRA Ltd. , as decided by the Reserve Bank and the interest rates for such contribution shall be decided by RBI from time to time. Non-achievement of priority sector targets and sub-targets will be taken into account while granting regulatory clearances/approvals for various purposes.

seller sells fulfillment of priority sector obligation and the buyer buys the obligation with no transfer of risk or loan assets.

The duration of the PSLCs will depend on the date of issue with all PSLCs being valid till March 31st and expiring on April 1st. A bank can purchase and issue PSLCs as per its requirements. The net position of PSLCs sold and purchased has to be included while reporting the quarterly and annual priority sector

returns. However, with regard to ascertaining the underlying assets, as on March 31st, the bank must have met the priority sector target by way of the sum of outstanding priority sector portfolio and net of PSLCs issued and purchased. There are only four eligible categories of PSLCs i.e. PSLC General, PSLC Small and Marginal Farmer, PSLC Agriculture & PSLC Micro Enterprises.

COUNTRY SECTORS/ACTIVITIES UNDER FOCUS IMPLEMENTING AGENCY

Small businesses, students/education, Low income groups in rural areas/ for creation of electricity, waste disposal facilities, Low income groups, elderly and handicapped/housing (involves credit guarantee in lending to some of these sectors)

Micro enterprises,Small and Medium Enterprises(involves sectoral targets,credit guarantee)

Industry including SME sector/long-terminvestment credit, Rural housing,Agriculture, Micro credit (involves creditguarantee, interest subsidy and sectoral targets for some of these sectors)

Agriculture, Micro and Small Enterprises(involves sectoral growth targets,credit guarantee, interest rate subsidy)

Agriculture and agro-based industries,Rural infrastructure(involves interest subsidies)

US Government Departments (either independently, or in collaboration with private investment companies)

Private bankinginstitutions

Public banking institutions(either directly or throughlocal commercial banks)

Public bankinginstitutions

Public bankinginstitutions

US

EU

Brazil

People’s Republic of China

Russian Federation

Denmark Ireland

PSL in Emerging Economies


Conclusion

With a view to achieve sustainable and scalable

financial inclusion, multiple strategies are

being used such as appropriate relaxations

in guidelines, introduction of new financial

instruments and other supporting measures.

Priority Sector Lending is one such important

role given to banks by RBI. PSL includes only

those sectors as part of the priority sector,

that impact large sections of the population,

the weaker sections and the sectors which are

employment-intensive such as agriculture, and

Micro and Small enterprises. Hence, significant

steps towards the contribution to priority

sectors aim to provide inclusive growth to the

economy of the country.

However, such regulatory binding on all banks

to extend priority sector loans, often with

diluted credit standards, may result in gross

shortfalls or a lot of bad loans or both. Given

the Basel III norms, wherein banks are forced

to aim at higher internal profitability to cover

risks, such PSL loans may just act contrary to

the objective. It will be interesting to watch

how the Government would be confronting this

to strike a trade-off between profitability and

inclusive growth.

ABOUTVIVRO

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