BM Issue 139 - Nirmal Bang

RNI No. MAHENG/2009/28962 | Volume 9 Issue 11 | 16th - 30th Nov ’17 M umbai | Pages 48 | For Pr ivate Circulation

A BIG FIX

The government’s plans to inject `2.11 trillion worth of capital into the banking sector through recapitalisation bonds is being considered by many

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DB Corner – Page 5

Volume 9

Issue: 11, 16th - 30th Nov ’17

Editor-in-Chief & Publisher: Rakesh Bhandari Editor: Tushita Nigam Senior Sub-Editor: Kiran V Uchil Art Director: Sachin Kamble Junior Designer: Orianne Fernandes Operations: Namrata Sabbani Research Team: Sunil Jain, Vikas Salunkhe, Swati Hotkar, Nirav Chheda Printed and published by Mr Rakesh Bhandari on behalf of Nirmal Bang Financial Services Pvt Ltd, printed at Uchitha Graphic Printers Pvt Ltd 65, Ideal Ind. Estate, Senapati Bapat Marg, Lower Parel, Mumbai – 400013 and published at Nirmal Bang Financial Services Pvt Ltd, 19, Sonawala Building, 25 Bank Street, Fort, Mumbai-400001. Editor: Tushita Nigam

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Beyond Market 16th - 30th Nov ’17

A Big Fix The government’s plans to inject `2.11 trillion worth of capital into the banking sector through recapitalisation bonds is being considered by many as a quick-fix solution – Page 6 The Real Test The next few months up to the end of this fiscal are very crucial for the country, both politically and economically - Page 9 Today’s Action, Tomorrow’s Impact A series of changes, including simplification of returns filing norms, has been announced by the GST Council to provide relief to SMEs – Page 12 Code Of Deliverance The Insolvency and Bankruptcy Code promises to be a panacea for bad loan problem. But it has to surmount multiple litigations and defaulting promoters looking to game the system - Page 15 A Powerful Resurgence The entry of private players into the once beleaguered power transmission sector has transformed it for the better – Page 18 Highway To Glory In line with the government’s many reforms, the announcement of Bharatmala, an ambitious road connectivity project, heralds good times for the road construction sector – Page 22 Feeling The Pinch Unlike in the past, the festive season witnessed muted sales by brick-and-mortar stores following the implementation of the goods and services tax – Page 25 A Better Deal The slowdown in the Indian hotel industry is a thing of the past as its future now looks good owing to the skewed demand-supply scenario in the sector – Page 28 On A Roll AMCs are experiencing a prolonged spell of success on the bourses over the past few years, compelling several players to join the bandwagon – Page 32 Buckfast Recommendations – Page 36 Technical Outlook – Page 40 Mutual Funds: A Primer Mutual funds are an alternative investment avenue that an investor can consider as they help grow wealth over a period of time - Page 41 Important Jargon – Page 45 It’s simplified...

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A

TO THE RESCUE

number of issues have been plaguing the Indian public sector banks (PSBs) since quite some time now. Foremost of them is stressed assets. If this was not enough, the banking industry has also been facing the Herculean task of adhering to the Basel III norms. In an attempt to overcome the crisis in the banking sector, the Indian government has chalked out a plan to infuse capital into public sector banks. The plan, dubbed as recapitalisation package, will be implemented over the next two fiscals wherein a hefty sum of `2.11 trillion will be pumped into the banking sector. Of this amount, a majority will be infused through recap bonds. The cover story elaborates on the concept of recapitalisation bonds and explains how it will be implemented. Read on to understand how these bonds will help the beleaguered banking industry. Other topics covered in the latest issue of Beyond Market include the current political and economic state of the country, simplified norms for the Small and Medium Enterprises (SMEs) in India, clarity on the Insolvency and Bankruptcy Code which is aimed to solve the issue of bad loans, a visible transformation in the power transmission sector and the introduction of Bharatmala - a centrally-sponsored and funded road and highways project of the Government of India.

Apart from these, there are articles on the changing tides in the hotel industry and the hiccups faced by brick-and-mortar stores following the implementation of the goods and services tax (GST). While the Beyond Basics section in this issue features an article on Asset Management Companies (AMCs) that are looking at getting themselves listed on the stock exchanges, the Beyond Learning section has an article on the basics of mutual funds. Well, going back to the basics always brings clarity and enhances one’s knowledgE.

Tushita Nigam Editor

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It’s simplified...

The Indian stock markets look good in the coming fortnight.

I

n the previous fortnight, global ratings agency Moody’s Investors Service upgraded India’s credit rating for the first time since 2004 to Baa2 from Baa3 and stated that continued progress on economic and institutional reforms will enhance India’s high growth potential.

September quarter earnings of Indian companies have been ahead of expectations. Earnings results for the coming quarter too are expected to be positive. Also, metal prices saw some correction in the previous fortnight, affecting prices of metal stocks in India. In an attempt to revive growth, the government has announced a plan to pump in `2.11 trillion into state-run banks over the next two years through recapitalisation bonds and budgetary support. The Indian stock markets look good in the coming fortnight. The Nifty has support at the 10,310 level and the 10,275 level, thereafter. The expected target on the upper side is 10,550. Market participants are advised to look out for the election results of Gujarat and Himachal Pradesh, and price movements in crude oil as these events are bounds to have an impact on the Indian marketS.

Nifty: 10,326.90 Sensex: 33,478.35 (As on 21st Nov ’17)


Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. Investors are required to take an independent decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.


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A BIG FIX 6


The government’s plans to inject `2.11 trillion worth of capital into the banking sector through recapitalisation bonds is being considered by many


T

he government has finally taken the bull by the horn. After years of piecemeal approach towards capital infusion into public sector banks (PSBs), the government has announced a massive `2.11 trillion recapitalisation (recap) package to be implemented over the next two fiscal years. The PSB recap plan has three components. One, `1.35 trillion will come from recapitalisation bonds (explained later). Two, `18,000 crore will come from the government as budgetary support. And banks will raise the remaining `58,000 crore from the market. It is important to highlight that majority of capital infusion will take place through an instrument called recap bonds. Such instruments were successfully used in 1990s to capitalize PSBs in India. They are internationally accepted as a valid way of recapitalisation as it does not distort the fiscal math of the government. Perhaps because of this feature both ratings agencies and the Reserve Bank of India (RBI) have welcomed the move. Even markets have hailed the move and shares of PSBs listed on exchanges zoomed the day after the recap announcement. However, the government is yet to release operational details of the recap bonds. THE NEED It’s important to understand the backdrop against which such a massive recap move was announced. Few reasons warrant a massive capital support to PSBs. One, the banking system is currently saddled with stressed assets, both non-performing and restructured loans, to the tune of over `10 trillion or 12% of system loans. Out of this, 80% of the total systemic stress resides with PSBs. Banking Sector’s Stressed Assets On The Rise 16.0%

14.7%

14.0%

13.4% 11.5% 10.3% 9.5%

12.0% 10.0%

4.0% 2.0% 0.0%

Bad debt mess over the past few years has only worsened. Even regulatory dispensation by the RBI and various reforms by the government have failed to fix the bad debt issue. It was difficult to gauge the true health of the banking sector. It was needed to clean up the banking sector. Banks needed the capital to provide for or book losses for bad loans in order to clean up their books. Equally important was the need for banks to kick-start the credit cycle in the economy. The credit off-take has touched a multi-decadal low of 5% in April. Although credit demand is low from big private players, the demand is robust from small and medium companies. Capital is needed for continuous lending. Any meaningful economic recovery would need banks’ support. Banks also need to adhere to the Basel III norms applicable from 2019. Under Basel III norms, Indian banks need a capital adequacy requirement of 10.5% by 2019. Basel III is an international banking norm that Indian banks will have to abide by for a prudent banking system. Ratings agencies have also criticized India’s weak banking sector. For all the above reasons, fixing India’s banking sector was vital. RECAP BONDS As bit-by-bit infusion of capital into PSBs has fallen short of requirements, the government has taken the bold route of recap bonds to capitalize banks. Recap bonds are like any other bonds that offer coupons. Following is the flow: 1) The government will issue recap bonds and PSBs will subscribe it. 2) The government will get money by selling bonds. 3) This money with government will be invested in PSBs as capital. Capital Infusion Through Issue Of Recap Bonds

7.8%

8.0% 6.0%

Banks shied away from writing off assets and discontinued their lending businesses due to insufficient capital.

6.6%

5.2%

5.0% 3.3%

5.8%

2.5% 2.3%

FY05FY06FY07FY08FY09FY10FY11FY12FY13FY14FY15FY16FY17 GNPA Std Restrd SRs SDR 5:25 Total Stressed Assets

Source: Reserve Bank of India

Accelerated provisioning for toxic assets has led to rapid erosion of net worth. Capitalization ratios have dropped. Beyond Market 16th - 30th Nov ’17

Subscribes To Govt Bond

PSU Bank

Government Invests Capital In Bank

Thus, money from bank returns to the bank as capital. In a way it is only an accounting entry. But it is an accepted norm globally. Many countries including China, Indonesia, Chile, Philippines, Finland, Hungary, Argentina, Korea It’s simplified...

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and Malaysia have used recap bonds at different times to tackle bad debt issue in their economies. Bonds Issued For Bank Recapitalisation: International Country India Algeria Croatia

Year

Issuer

1980-90s 1996 1996

Government Government Agency For Rehabilition Of Banks Government Government Government Government Government Government Bank Restructuring Agency Bank Restructuring Agency KAMCO (AMC)

Ecuador Hungary Tanzania Uganda Poland Indonesia Malaysia

1999 1992 1992 1996 1994 1998 1998

Mexico

1996

Korea

1998

Source: IMF, 2003

Interest Rate 7.75%* 10% 5%

Below Market Linked To 91-day T-bill Rate 11% Linked to 91-day T-bill Rate Central Bank Discount Rate @ 5% 12% Market-based

Maturity (Years) 12 20 15

3-5 20,25,30 20 1-5 1.5-15.5 3-10 NA

Linked To 91-day T-bill Rate

10

Variable US Dollars

10

* Later Reset To 10%

In India, recap bonds worth `20,000 crore were issued by the government between 1985 and 1995. The government borrowed the amount from the banks and issued special non-marketable securities, which were, however, converted into marketable securities or perpetual bonds later on. WHY RECAP BONDS Straight capital infusion from the government has a cost in the form of higher fiscal deficit. Perhaps this is the reason why the government has been cautious about providing continuous capital in the past. But recap bonds do not massively alter the fiscal math of the government. Even under the International Monetary Fund (IMF) norm, recap bonds are not added to the accounting of the fiscal deficit. The only burden for the government is the interest outgo on bonds. But as PSBs get into proper shape, the dividend and capital appreciation makes up for that loss to the government. Also, coupon payments aid the profitability of PSBs. It’s a win-win for both. According to data compiled by State Bank of India (SBI), the government had an interest outgo of 0.07% of gross domestic product (GDP) between 1986 and 2001 on account of recap bonds. During the same period, PSBs paid dividend to the government amounting to 0.06% of GDP. So the net fiscal impact is very small. This implies that recap bonds do not crowd out private players. The government is still working on the modalities of recap bonds. Whether the government will issue the bonds or a 8


government agency? Will the bonds be converted to equity at a future date? What will be the price of issuing the bonds? All these questions will be answered eventually. WHY NOW The timing for using recap bonds to capitalize is apt. Post demonetisation, banks are surplus with liquidity. Healthy liquidity ratios ensure participation in recap bonds. Thus, recap bonds will convert banks’ excess liquidity into equity. The move will not strain banks’ balance sheets as they have higher Statuary Liquidity Ratios (SLRs). Tepid Recovery Expected In FY19 9.0% 8.0%

7.5%

7.0% 6.0%

8.0% 7.2%

7.1% 6.7%

6.4% 5.5%

5.0% 4.0% 3.0% 2.0%

1.0% 0.0%

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

Source: CEIC Data

Further, a series of banking reforms will accompany capital infusion. The government will use discretion while allocating capital to efficient banks. Steps taken in the past, especially on insolvency laws, will fructify eventually. Even private capital expenditure has bottomed out. All this will ensure that good money is not wasted on bad banks. IN A NUTSHELL Undoubtedly massive recapitalisation plan will help banks clean up their balance sheets. They will come forward and book losses on bad debts and continue with their banking business afresh. The sector will become healthier, which is the need of the hour. With fresh capital, PSBs will be in a better position to compete with private banks and non-banking finance companies, which have snatched market share from PSBs share of late. Recapitalisation of PSBs will help kick-start the capital expenditure cycle in the economy. The capital will also give comfort to ratings agencies and help banks meet international Basel III norms that will kick in by April ’19. It’s simplified...

? THE

REAL TEST

T

he two important state assembly elections over the next one month will influence the political and economic course of the country. These elections will take Prime Minister Narendra Modi’s government at the Centre to the next general election in 2019, which is Beyond Market 16th - 30th Nov ’17

The next few months up to the end of this fiscal are very crucial for the country, both politically and economically

one-and-a-half years away. The two states - Himachal Pradesh and Gujarat - the former in the north and the latter on the west coast of the country - will have their election results declared on 18th December. Election in Himachal Pradesh was held on 9th November, while in It’s simplified...

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Gujarat, the two-phase poll is scheduled on 9th December and 14th December, respectively. The election results will determine whether PM Narendra Modi continues to enjoy uninterrupted political stability and clout, so very necessary to take bold measures to further reform the country’s economy with a view to unshackling more sectors and creating a more congenial environment for investment, especially foreign investment. India’s economy has stalled a bit in recent months following two bold initiatives by the central government the demonetisation of `1,000 and `500 currency notes last year (November ’16) and the introduction of the Goods and Services Tax (GST) regime in July this year. The election results will also go a long way in indicating which way the political wind is blowing as the next general election to the Lok Sabha is not too far away (it is scheduled to be held in April-May ’19). A victory for the BJP in Himachal Pradesh and Gujarat will ensure an unshakeable political stability for the central government over the next 18 months to 19 months till the next Lok Sabha election and this, in turn, will augur well for the economy. It will also buoy the Bharatiya Janata Party (BJP) and its allies and position them as front runners in the 2019 election. The Congress, already decimated in a series of state assembly elections after its terrible rout in the 2014 national election, badly needs a win to bolster the morale of its cadres. Present indications are that the Bharatiya Janata Party is ahead of the Congress party in both the states but the Congress is not giving up easily and is putting up a spirited campaign, 10


especially in Gujarat where the problems arising out of demonetisation and the introduction of GST in July this year are being used by the Congress to attack BJP. Nobody can dispute the fact that political stability is a very essential requisite for a rapid and smooth economic growth. The Indian economy was poised for a high growth rate, especially with healthy monsoon last year. The country’s fundamentals were (and are still) very strong and only unexpected external factors can adversely affect its smooth economic growth. The demonetisation initiative and GST were the two unexpected external factors, which caused some degree of disruption in the economy. The demonetisation initiative of November ’16 sucked out almost 85% of the country’s cash from the system. And in a country such as India, which is pre-dominantly a cash-based economy, it caused some degree of disruption. Small businesses and those in the informal sector were hard-hit and besides, private consumption also got affected due to this move. The remonetisation initiative took some time but it has now been successfully completed and people’s support for the central government is evidenced by resounding victory registered by the BJP in Uttar Pradesh early this year. The assembly elections in the two states and especially in Gujarat which has a large trader population and which has been impacted by demonetisation is, therefore, very crucial for the BJP, which has been ruling the western coastal state for more than two decades now. The introduction of the Goods and

Services Tax (GST) regime in July this year (just four months ago) has also resulted in some disruption and it must be said has also caused some degree of heartburn in the business community, which is numerically strong and politically influential in Gujarat and which over the last two decades has been a staunch supporter of the BJP. The increase in prices of some products owing to GST has also reportedly triggered a degree of unhappiness amongst some sections of the population across the country. The business community and Prime Minister Narendra Modi have enjoyed an excellent relationship over the years and this could come under strain should the BJP fare poorly in the Gujarat state assembly election. An additional point that needs to be highlighted here is that Narendra Modi was the Chief Minister of Gujarat before moving to Delhi in 2014 after being elected as the country’s Prime Minister. A defeat for the BJP would, therefore, directly affect Modi’s carefully cultivated image as a businessfriendly and development-oriented leader. This makes the Gujarat election a very prestigious one for Modi and BJP. Fortunately for Narendra Modi and the country, India’s economic fundamentals, as already mentioned earlier, are robust and the country has the capability to bounce back and regain the growth momentum it has lost in recent months. The country’s GDP growth has still been creditable even as globally several countries have witnessed an economic slowdown. It must be pointed out that radical initiatives and especially those related to the economic realm need to have the It’s simplified...

backing of the people to succeed.

combating inflation.

In this, Modi seems to have come up trumps as the electorate has thrown its weight firmly behind him and his party, the BJP, in recent elections. It is important to note that both demonetisation and the introduction of the GST regime - are for the country’s benefit in the medium to long term and this message seems to have got through to the people. If the country manages to tide over this fiscal (up to 31st Mar ’18), then things could get smoother for the economy, going forward.

Secondly, a good performance from the agriculture sector will boost the rural economy. It will put more money in farmers’ hands and this could help boost consumption, which has been on the lower side of late.

The government thus has a very important task before it, which is to ensure that economic disruptions are minimal over the next few months. Once this phase (hopefully temporary) passes by, then the benefits of these initiatives will begin to kick in. One bright spot for the country’s economy is the healthy rainfall it received this monsoon season. There have been reports of deficit rainfall in some parts of the country and of crop damage due to excessive rainfall in a few others, but overall monsoon rains have been heartening and things look bright for the agricultural sector. Agriculture contributes around 18% to the country’s GDP and a good contribution from this sector will go a long way in boosting the country’s economy on the whole. For one, there will be a good output of food grains after a few years of drought over the last decade. This will help in keeping prices of many food products at reasonable levels, thereby avoiding food inflation. The government is also actively tackling supply-side constraints which have contributed to inflation in the past and this combined with a good agricultural production should help in Beyond Market 16th - 30th Nov ’17

Segments such as tractors, two-wheelers, automobiles and gems and jewellery, among others, can benefit from a surge in rural spending. It can also have a positive social benefit; farmers can repay some of their debts. India was plagued by farmer suicides due to debt arising out of drought in the past few years –good agricultural performance can help alleviate farmers’ economic problems to a large extent. Though India’s economic growth will be slower this fiscal (FY18), it will still be creditable in the prevailing circumstances. The 8% growth talked about earlier by the political establishment is still some time away. However, growth will still be encouraging at around 6.5%. The International Monetary Fund (IMF) has estimated India’s economic growth at 6.7% for this fiscal, scaling it down by 50 basis points from its earlier estimate of 7.2%. This is primarily because of the problems associated with demonetisation and the introduction of the GST regime. However, the disruptions caused by the two initiatives are expected to dissipate over the short-term, and in the medium to long term, economic growth could touch the 8% mark. The IMF has pegged India’s economic growth at 7.4% in FY19 (next fiscal) as the beneficial effects of structural reforms will begin to materialize. The government needs to continue with its economic reforms process; there is a need to urgently look at labour market reforms and

ease land acquisition procedures. Both these are politically sensitive issues and, hence, victories in Himachal Pradesh and Gujarat elections are very important for Modi and the BJP as it will then render it easy for them to take more bold reforms measures, going forward. Union Finance Minister Arun Jaitley highlighted some important positive developments of demonetisation on 7th November, the eve of the first anniversary of demonetisation. India has moved to a more transparent and cleaner system with digital transactions increasing in number, he said, pointing out that less cash in the system makes corruption difficult. Demonetisation has helped in squeezing terror funding, including Naxalite violence, and unlike in the Congress-led UPA regime, there is no policy paralysis now, Jaitley said. The number of tax payers has increased post-demonetisation and e-filing of Income-Tax Returns (ITRs) has risen by 17% while in the individual filers’ category, the increase is over 23%. Net direct tax collections stand at `4.39 lakh crore in the first seven months of FY18, up 15.2% on a year-on-year (YoY) basis. The country’s economy has exhibited its resilience, admirably withstanding the disruptions of the last one year. The government has been pro-active in tackling the issues confronting the economy and as things stand now, normalcy should return in the next few months. The government seems to have got its act together on the economic front; political stability will lend it more muscle to pursue the reforms to their logical conclusion. The next few months up to the end of this fiscal are, therefore, very crucial for the country, both politically and economicallY. It’s simplified...

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A series of changes, including simplification of returns filing norms, has been announced by GST Council to provide relief to SMEs

TODAY’S ACTION,

TOMORROW’S IMPACT

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F

or a developing nation, the role of Small and Medium Enterprises (SMEs) is highly significant. SMEs are not only primary growth drivers but are also leading job generators for the economy and a major contributor to the national GDP. Not only that, SMEs also play a significant role in economic development through their high contribution to domestic production, significant export earnings, low investment requirements, operational flexibility and location-wise mobility. According to the SMB Chamber of Commerce and the Ministry of Micro, Small and Medium Enterprises (M/o MSME), India has over 48 million SMEs. These SMEs contribute 45% to India’s industrial output, 40% of the country’s total exports and create 1.3 million jobs every year. On 1st Jul ’17, the Goods and Services Tax (GST) was introduced in India. GST is an indirect tax applicable throughout India. It has replaced multiple cascading taxes levied by the central and state governments. It was introduced as an amendment to India’s constitution and is governed by a GST Council. The Council’s Chairman is the Finance Minister of India. Under GST, goods and services are taxed at the following rates: 0%, 5%, 12%, 18% and 28%. GST is seen as the biggest tax reform since India’s independence. Many experts believed that it would have a positive impact on businesses especially SMEs. Before the implementation of GST, unorganized SMEs grew faster than organized counterparts due to tax avoidance, and not having to pay social security benefits to employees, and excise duty. Also, the practices of understating the number of Beyond Market 16th - 30th Nov ’17

employees or setting up multiple ventures were quite common among a large number of SMEs, which prevented them from breaching tax thresholds. Under the new tax regime, these businesses have come under the indirect tax net for the first time.

reverse charge mechanism, which according to the GST law means the liability to pay tax is on the recipient of the supply of goods or services instead of the supplier of such goods or services in respect of notified categories of goods and services.

More businesses have been brought under the tax net by the threshold for GST exemption to `20 lakh from `1.50 crore. Prior to GST, no duty was paid by a manufacturer who had a turnover of less than `1.50 crore.

The GST law says that if you are dealing with unregistered suppliers and making payments up to `5,000 a day, reverse charge does not apply, which makes it really difficult for the accounts department of any company to keep track of transactions daily, ensuring that it stays within the `5,000 limit.

The threshold has since changed to `20 lakh due to which a large number of SMEs and start-ups have to pay a large chunk of their earnings towards tax. A `20 lakh turnover means sales of just `5,000 per day, which brings almost every grocery store and every small manufacturer or service provider under the GST net. Many small businesses with a turnover of less than `20 lakh have taken a hit. The reason being larger companies who commission work from them need to collect and pay the tax on behalf of unregistered vendors. The big companies in order to save themselves from trouble have started trimming their vendor list by removing small suppliers, which are yet to register under GST. Cash flow has been a huge problem for SMEs in the aftermath of demonetisation. Chawla, Chairman, Rajiv IamSMEofIndia and Jairaj Group, President-Faridabad Small Industries Association said, “Every rupee that has increased for larger companies has come at the cost of a smaller micro or small enterprise. Some kirana store is selling less and that is why goods at some larger store is selling more. This has been the biggest market setback.” One of the primary reasons for this is

According to Sunil Gupta, founder and Director, ExportersIndia.com, “This reform may cause some hiccups in the initial months, especially for SMEs that, so far, have worked on Excel-based platforms or maybe not even that. Other factors like cash flow-related issues, delays, and uncertainties can prove to be a challenge for SMEs, which they would need to overcome with better planning and execution.” JP Morgan’s Chief India Economist Sajjid Chinoy believes both GST and demonetisation are expected to have an impact on the informal sector, and the hope is that eventually SMEs will turn to formalization. Apart from cash crunch, increasing documentation under the GST has burdened SMEs with the regulatory work of filing taxes, which makes it difficult for them to focus on productive work. Speaking of the GST filing process, Firdaus Variava, owner of Bharat Floorings, a leading tilemanufacturing company said, “Instead of benefiting us, it is increasing the company’s expenses. We had to go on a fresh hiring spree for more manpower to deal with the additional work of filing of taxes.” It’s simplified...

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Explaining his point, Variava said, “The tax slab is 28% and is the highest so far. We would like to make our tiles affordable to everyone. But such a high tax rate has triggered a negative reaction among cost-conscious customers.” As far as tax slabs are concerned, the government has categorized items in five major slabs, namely, 0%, 5%, 12%, 18% and 28%. However, since the introduction of goods and services tax, frequent changes in tax rates have taken place, which has not only increased business uncertainty but also resulted in many firms failing to register for the new tax. Owing to this, tax receipts were about $7.8 billion in July, which was a little over half the monthly target, mostly because millions of firms failed to comply with the new tax system. “Even some of the chartered accountants are struggling to understand GST in a better way. Also, taxes at the highest rate of 28% on some essential items like wooden sheets (used in basic furniture) and paints is causing a lot of hardships for customers. With the implementation of GST, the prices of input raw materials have gone up,” informed Mridula Shridhar, CEO of 25-year-old toy manufacturing company Kido Enterprises. Almost every sector has taken a hit

due to lack of cash flow after demonetisation, followed by GST. Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small and Medium Enterprises (FISME), said the housing sector, which had more than 60 product categories linked to MSMEs, was drastically hit, both directly and indirectly. States such as Punjab had suffered a revenue shortfall of about `8 billion in the first month of its launch, said Manpreet Singh Badal, Finance Minister Of Punjab, as the textile, engineering goods and other small industries were hit. In Karnataka there is a growing movement where traders and sellers are refusing to pay taxes on handmade goods since the last three months. The agitators are considering it as a form of satyagraha. Taking all these problems into consideration, the federal indirect tax body, GST Council, announced a series of changes to provide relief to SMEs. The Council also lowered tax rates on 27 products such as sliced dried mango, stationery items such as clips, unbranded ayurvedic medicines, etc. A decision to continue with two pre-GST era schemes that allow duty-free sourcing of materials for export production till March ’18 has been made. This decision will

improve liquidity of exporters by preventing their working capital from getting locked up in tax procedures. The Council decided to clear all tax refund claims of exporters for July by 10th October and for August by 18th October this year. “The early refund of GST for July and August will address liquidity concerns of exporters,” said Ganesh Kumar Gupta, President, Federation of Indian Export Organizations. The Council also reduced the tax rate on a few services such as job works in certain sectors from 12% to 5%. A new scheme called ‘composition scheme’ has been introduced under which a marginal flat rate of tax is levied and the threshold of annual sales has been raised to `1 crore. Small businesses with sales up to `1.5 crore can also now file quarterly tax returns instead of monthly returns. Tax payments can also be made on a quarterly basis. These new changes have given some relief and hope for SMEs. Relaxation in filing returns is expected to ease compliance burden. Commenting on the new changes, the Finance Minister of India, Arun Jaitley, said, “Big players pay the largest chunk of GST, while small tax payers who pay nominal or nil tax face high compliance impact. We are relaxing their compliance burdeN.”

Shogun Bonds A Shogun bond is a foreign bond that is publicly floated in Japan and denominated in currency other than yen (hence it is called a Euro-yen bond). More specifically, a shogun bond is issued in Japan by a non-Japanese borrower. For example, a US company may issue dollar-denominated bonds in Japan by the way of shogun bonds. The first public offering of shogun bonds was introduced in Tokyo in August 1985 by the World Bank, raising $300 million with the sale of 10-year bonds. The bond’s name is originally derived from the Japanese word for the traditional military leader of the Japanese army. It is similar, in concept to a samurai bond, but differs from it in that shogun bonds are issued in foreign currency, while samurai bonds are denominated in yen. This bond is also known as a geisha bond. 14



CODE OF DELIVERANCE

The Insolvency and Bankruptcy Code promises to be a panacea for bad loan problem. But it has to surmount multiple litigations and defaulting promoters looking to game the system

A

senior banker recently made a statement that defaulting promoters of companies, which have been referred for resolution or liquidation under the Insolvency and Bankruptcy Code (IBC) can be allowed to participate in bidding for their company’s revival. Beyond Market 16th - 30th Nov ’17

That statement created a flutter with questions raised whether an insolvent company should be handed over to the same promoters who may have brought it to ruin. This is just one of the latest in a series of twists in the regulatory regime of rescue and liquidation of failed

businesses that was introduced in December ’16. The IBC was brought in to clear the pile-up of bad loans that has now reached `8 lakh crore, and more than 1,500 insolvency applications have been filed under it. Of these, 200 have been admitted by the National It’s simplified...

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Company Law Tribunals (NCLT). The Reserve Bank has referred big NPA accounts, including those of Essar and Jaypee Group, as part of the two lists of 52 companies, for insolvency proceedings. But will the IBC, under which debt resolution has to happen in 270 days before mandatory liquidation of a firm kicks in, clean up the rot, revive the companies, put them into stronger hands, leave creditors with minimal losses and free up the much needed capital? Or will it end up like the earlier redressal mechanisms like corporate debt restructuring schemes that have led to evergreening of the burgeoning problem? WHAT’S UP? The promoters are using various arguments and resorting to prolonged litigations to stop their companies from slipping into the bankruptcy proceedings, and thereby losing them. So nine months have passed by, and the IBC remains a work in progress, with the government issuing amendments – the fresh set of rules came as latest as November – to close the loopholes and give the law even more teeth. ENCOURAGING START In the first case under the new insolvency regime, creditors were handed over a victory when ICICI Bank took Innoventive Industries to NCLT for defaulting on its debt. The company challenged the application on grounds that all remedies for enforcement against it were temporarily suspended, owing to a reprieve it had won under the Maharashtra Relief Undertaking (Special Provisions) Act, a state specific labour legislation. However, the Supreme Court 16


dismissed the contention that Innoventive was protected from creditors’ action by the state law. It held that once an interim resolution professional (IRP) takes control of a company, its erstwhile management loses the right to appeal. When the board is suspended, none of the erstwhile members of the board can take any action, it ruled. However, if there is any party, which can include the directors, the shareholders or any other party that can claim that they have been aggrieved by any of the decisions, they can appeal. WHAT’S A DISPUTE? In another important precedent laid down in the Mobilox case, the Supreme Court deliberated on what qualifies as ‘dispute’ under the Code. Since the IBC bars initiation of insolvency proceedings by an operational creditor if there is a pre-existing dispute between the parties, the answer to this question gains importance. The issue before the court was whether a ‘dispute’ can exist only if there are pending legal proceedings between the parties or will a rebuttal to a claim by the company also qualify as ‘dispute’. The country’s apex court interpreted that as long as the company in crisis can show that a genuine dispute exists, the NCLT has no choice but to reject an operational creditor’s insolvency application. Experts said the ruling has clarified that the requirement of a proceeding being initiated prior to a notice being issued under the insolvency law is not a requirement in case of a bona fide dispute. Otherwise, the operational creditors would use it just for debt recovery, which is not the objective of

the IBC, they said. GAMING THE SYSTEM? Minority creditors’ interests are hurt by the practice of selling soured loans back to promoters or their related entities by banks as they have to accept the loan recast terms that are favourable to the promoters. In the case of Synergies Dooray, the first to be resolved under IBC, a minority creditor Edelweiss ARC has accused promoters of gaming the system by buying out bad loans. According to the allegation, Synergies Castings, a related party of Synergies Dooray, first acquired loans given to its parent from various creditors and then transferred them to a non-related party, Millennium Finance, which it alleged was a proxy for the promoters. Edelweiss said that the transfer of Synergies Dooray’s loans to Millennium Finance just days before the bankruptcy proceedings were to begin was done to dodge IBC regulations, which strip promoters and related parties of voting rights. Synergies Dooray’s debt resolution plan approved a 94% haircut and settled for an upfront payment of less than half of the outstanding amount. In effect, the creditors got back only 6% of their dues. Between years 2008 and 2011, Synergies Castings had bought more than 75% of secured loans of Synergies Dooray. The outcome of the Synergies Dooray case will decide whether a related party can continue to influence the outcome of the bankruptcy resolution process. WHO IS A CREDITOR? Home buyers of Jaypee Infratech and It’s simplified...

Amrapali Builders have challenged the constitutionality of IBC on grounds that it denies remedy to creditors that do not fall within the ambit of ‘financial creditors’ and ‘operational creditors’. Hundreds of home buyers were left in the lurch after the NCLT on 10th August admitted a plea by IDBI Bank to initiate insolvency proceedings against the debt-laden realty company for defaulting on a `526 crore loan. Flat buyers do not fall in the category of secured creditors like banks under IBC and hence can get back their money after repayment of dues to secured and operational creditors. While the issue of constitutionality is still pending, the Supreme Court has issued interim directions to protect the interests of home buyers in the Jaypee Infratech case. It has directed the parent company of Jaypee to deposit `2,000 crore with the court. It has allowed representatives of home buyers to participate in meetings of the committee of creditors. KEEPING DEFAULTERS OUT

WILFUL

Tightening the rules further, the Insolvency and Bankruptcy Board of India this month ruled that promoters proposing turnaround plans will be subjected to a stringent test of creditworthiness and credibility. The same test will be applicable to any other party submitting a rescue plan for such companies. The turnaround professional appointed to put together a viable revival plan has to specify in the scheme details regarding the background of the promoter or any other party proposing a revival scheme. These include any convictions, disqualifications, Beyond Market 16th - 30th Nov ’17

criminal proceedings, categorization as wilful defaulter and any debarment by the capital markets regulator. The details should also include any transaction with the defaulting company in the previous two years. Experts said the amendments will keep a wilful defaulter from bidding for the company where lenders need to take a haircut and that the promoters should not get control of the company on a discount. However, the amendments could increase the burden on insolvency resolution professionals (IRPs). Some bankers feel it is legal for promoters to submit resolution plans, subject to the condition that there has not been any wrongdoing in terms of wilful default or fraud on their part. Other lenders have expressed concerns as it could potentially lead to defaulting promoters re-gaining control of the firm. Experts see rise in legal battles as promoters would challenge any observations by IRPs. SEVERAL RULINGS Various NCLT benches across the country have taken different views on maintainability of insolvency process during pendency of winding up proceedings before high courts. Various benches and the Appellate Tribunal have taken contrary views on several issues including non-payment of debt in case of petition by the operational creditor. In Jaypee Infratech case, while the NCLT bench at Allahabad admitted the insolvency petition, the SC initially suspended the insolvency proceedings only to reinstate it a few days later, with a rider that the parent company deposit `2,000 crore and the interim resolution plan be submitted within 45 days.

In Schweitzer Systemtek versus Phoenix ARC, the NCLT bench at Mumbai held that the moratorium in terms of Section 14 of the Code applies only to the proceeding against the corporate debtor and not to the proceedings initiated against its directors and other guarantors. This means that the recovery proceedings under Debt Recovery Tribunal and Sarfaesi Act against the guarantors would continue despite the company being placed under insolvency. However, the high court in another case held that the moratorium would extend to the proceedings against the guarantors of the corporate debtors as well. In ICICI Bank versus Palogix Infrastructure, the NCLT bench at Kolkata held that specific power of attorney to initiate insolvency proceedings is required to be executed and a general power of attorney will not suffice. However, while deciding on the appeal, the NCLAT held that power of attorney itself is not required to initiate insolvency petition and a mere authorization would be good enough. STILL EVOLVING As an aftermath of the Asian crisis, Indonesia enacted its bankruptcy law in 1993. But 20 years later, Indonesia’s civil-law-based legal system doesn’t offer that much predictability, experts said. The laws in Singapore are still being tweaked, as latest as May, which has a more advanced insolvency regime. In India too, multiple litigations are likely to be triggered including in cases where the resolution process is already underway. It will be interesting to watch how the hurdles are removed without compromising on the goals of the CodE. It’s simplified...

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The entry of private players into the once beleaguered power transmission sector, has transformed it for the better.

A POWERFUL RESURGENCE

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ill some time back power used to be a major issue before the government. Today, however, power transmission is a much bigger issue before the present government. Apart from capacity augmentation, modernization of existing transmission infrastructure needs to be undertaken on a war footing. While power generation capacity was being scaled up over the years, transfer of power after its generation to the end consumer used to be a bigger challenge and remains so even today owing to lack of investments in the power transmission sector. Presently, power needs to be traded and transferred from states with excess power to those facing a problem of power deficit. REMOVING BOTTLENECKS State-owned Power Grid Corporation of India Ltd (PGCIL) was facing an onerous task of removing bottlenecks or supply constraints in the sector. At one point, PGCIL used to have a market share of close to 80% and its hands were full. Following a change in policy direction, the sector was opened up to private players resulting in leading power and infrastructure companies such as Sterlite Power, Kalpatru Power, Lanco, Reliance Infrastructure, GMR, and Adani Transmission, among others joining the bandwagon. POWER MODEL

TRANSMISSION

A typical power transmission company owns and operates transmission assets, which are regulated by the government. These assets are awarded on the basis of competitive bids over the 20 years to Beyond Market 16th - 30th Nov ’17

30 years power purchase agreement based on return on investments. Typically, a power generation company will use these assets to transmit power from the point of generation to the end consumer. The power generation company pays a certain amount of money for each unit of power transmitted through these transmission lines. The rates, which could be about 40 paisa to 70 paisa per unit of power transmitted, are determined on the basis of return on investments. A transmission asset which has a high cost of building would require a higher tariff to justify the cost and returns required to own these assets. They obviously own these assets with the intention of making a little over 400-500 basis points, over and above the yield on the long-term debt. Since the assets are well-regulated, they provide a predictable source of cash flow and other costs are built in the tariffs and are considered to be safe and secure. No wonder at one time the sector was crowded and everyone wanted a share in the pie, today many companies have either exited or sold their

transmission assets owing to excessive debt in their books or due to erosion of capital, despite the fact that this was supposed to be a rewarding business for them. ENTRY OF PRIVATE PLAYERS Today, a few companies have turned themselves into serious players. Either they are sole operators or they own these assets. For instance, Adani Transmission and Sterlite are pure transmission players. Both the companies have separated their transmission business. Earlier, these companies were run along with other businesses. Thankfully, competition is easing and power transmission companies with strong balance sheets and a focused approach towards this business are enjoying a number of advantages. Industry estimates suggest that over the last four years, the number of players bidding for these assets has fallen drastically as many developers and companies are facing balance sheet issues. The opening up of the sector to private players has not only made the

Share Of Transmission Segment In Total Power Sector Investments 120% 100%

Distribu on

Transmission

Genera on

`10 Trillion

`9-9.5 Trillion

FY12 to FY16

FY17 to FY21

80% 60% 40% 20% 0% Source: IndiGrid Oﬀer Document Filed With SEBI


19

India Power Capacity Particulars

MW

Total Thermal 2,19,450 Coal 1,93,427 Gas 25,185 Oil 838 Hydro (Renewable) 44,653 Nuclear 6,780 RES* (MNRE) 58,303

% Of Total 66.60% 58.70% 7.60% 0.30% 13.60% 2.10% 17.70%

Source: Ministry Of Power

sector more efficient but also brought down the overall cost of power generation in the sector. Owing to competition, players like PGCIL, which used to enjoy a monopoly in the segment, is being forced to match the best bids. Increased competition has brought down the cost of building these assets by 20% to 30% and new players are ready to work for slightly lower margins or return on investments apart from cost efficiency derived from the lean business model. Earlier banks used to refrain from funding these assets despite the assets being safe and secure. However, banks and the markets are now ready to fund these assets as they do not face the risk of group financials or credit worthiness. There is ample opportunity in the power transmission sector for both private companies and investors today. Moreover with little competition and several leading companies busy repairing their balance sheets, these power transmission companies can scale up faster and develop themselves to keep competition at bay. GROWING INTEREST

INVESTOR

Equity investors too have started looking at these businesses as investment opportunity not for safety of capital but also growth in the sector. Leading ratings agency, Crisil recently unveiled the Crisil 20


InfraInvex Index, which will track, measure and assess development, maturity and investment attractiveness of the infra sector.

relatively higher and there will be bigger assets up for bidding, thus offering an equal opportunity for private players in the sector.

This index shows power transmission is the most attractive segment from an investment perspective, followed by roads and highways.

NOT TOO MANY

The government intends to invest close to `3 lakh crore over the next four years, which is almost 50% higher than the amount of money invested in the last Five Year Plan, that is, during 2012-17. Stressing on the opportunities in the power sector, former Union Power Minister Piyush Goyal recently said that the power sector has an investment potential of `15 lakh crore over the next 4 to 5 years, thereby providing good opportunity for generation, distribution, and transmission sectors. Moreover, the government has set a task to electrify all the villages and connect all the remote places where electricity is not available. It also intends to provide stable and consistent power by connecting surplus power-producing states and merchant players with the transmission grid like a highway, which will, in turn, connect the deficit power area or remote or difficult areas where the cost of building infrastructure is relatively higher and require technical expertise. In the coming years it is expected that the size of the projects will be Transmission Lines In CKM 6th Plan 7th Plan 8th Plan 9th Plan 10th Plan 11th Plan 12th Plan As On Ministry Septemberof’17 Source: Power

Source: Ministry Of Power

52034 79455 117376 152269 198407 257481 367851 380402

Among private players, companies like Adani Transmission, which has about 5400 circuit kilometer (ckm) of transmission lines with an asset base of about `12,000 crore across the country is looking to expand its reach to about 20000 ckm by the end of 2022, taking its asset base to almost 40000 ckm. Transmission projects are typically funded to the extent of 70%, by debt instruments which have a yield of about 9% to 10%. Power Grid has equally tall targets to achieve. However, considering its current base of about 143000 ckm, growth in addition would be low given higher base effect. It plans to spend about `30,000 crore annually over the next two to three years. INVESTORS’ DILEMMA As an investor, the power transmission business should be looked at more from the perspective of safety and consistency of returns rather than exponential growth. These assets generate regulated returns. Thus, the residual value created for the shareholders is the actual amount of money left after paying interest on borrowed funds. The other important point is that these businesses will require more and more money over the next few years. So, the cash flow generated from these assets will be mostly redeployed at about 14% to 16% rate of return on investments, which effectively means that shareholders too will be making long-term returns similar to return on investments barring the effect or volatility in share priceS. It’s simplified...

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Disclaimer : Insurance is a subject matter of solicitation. Mutual Fund Investments are subject to market risks. ‘Investment in Securities/ Commodities markets are subject to market risks, read all the related documents carefully before investing.’ Nirmal Bang Securities Pvt. Ltd. Segment. *Nirmal Bang Commodities Pvt. Ltd. #Distributors. “The securities quoted are exemplary and are not recommendatory.” MCX SEBI No INZ000043630,

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he government is keen on improving business in the road sector. It has expedited the process of awarding road projects. Recently, it approved `7 lakh crore worth highway projects, including the ambitious Bharatmala project. This way, it hopes to enhance road construction to 40 km per day from 23 km per day. Construction and road companies are thrilled about their prospects after the announcement of the Bharatmala project. So, let us find out what exactly is the Bharatmala project and whether it would help sustain business momentum in the sector. THE BASICS Road construction in India adopts the following structure: The National Highway Development Program (NHDP) comes up with the blueprint map of building, upgradation, rehabilitation and broadening of existing national highways. National Highway Authority of India (NHAI) in conjunction with Public Works Departments (PWDs) of states implements the blueprint of NHDP. These projects are executed in seven phases. At the end of FY17, NHDP completed 58% of the projects, 22% are under construction, and 20% are yet to be awarded. Now, there will be phase-IV of roads projects, which would involve upgradation of two-lane highways and construction of paved shoulders on two-lane national highways and four-laning of some stretches. Most projects under this phase are likely to be awarded on Engineering Procurement Construction (EPC) and Hybrid Annuity Model (HAM) basis due to traffic in road projects. Implementation of this phase is Beyond Market 16th - 30th Nov ’17

expected to require an investment of around `73,000 crore. Analysts point out that NHDP had terminated close to 4,500 km of the 9,297 km of road projects awarded in FY11 and FY12. During FY11-12, most projects were awarded at premium as the economy was growing at 7% to 8% and the demand-supply equation favoured road developers. Despite this, for a large number of projects, construction activity could not pick up since NHAI could not provide hassle-free land. These projects may come up for rebidding after obtaining adequate land clearances. Given that the demand-supply equation is now unfavorable for road developers, the rebidding is likely to be more favourable, which is likely to improve business economics. BHARATMALA The Bharatmala project has been launched as an umbrella program with primary focus on optimizing the efficiency of the movement of goods and people across the country. This program envisages a corridor approach in place of the existing package-based approach. It is an umbrella project, with an estimated project cost of `5.4 trillion to build 34,800 km of roads of which phase I includes projects worth `3.5 trillion (24,800 km). The government intends to award projects under phase I over the next two years and complete the projects over the next five years. The detailed project report preparation for projects with 9,000 km is already being undertaken at present. Here are key projects planned under Bharatmala:

a) Economic Corridor The Bharatmala project aims to develop corridors of economic importance that will carry 25% of freight in the coming years. The government has identified 50 corridors by survey of freight movement across 600 districts in India, automated traffic surveys across 1,500 points, identifying shortest route for all origin-destination movement and satellite mapping of corridors for identifying upgradation requirement. Once the network of Economic Corridor along with its feeder and inter-corridor routes and national corridor is developed, it could carry 70% to 80% of freight traffic. Around 26,200 km of Economic Corridors have been identified to be developed as Economic Corridors out of which 9,000 km is being taken up in Phase-I of Bharatmala. b) National Corridors The existing Golden-Quadrilateral and North South-East West Corridors carry 35% of India’s freight. These will be called as National Corridors. The National Corridors have developed choke points, impacting logistics efficiency and, thus, there is a requirement to build Ring Road and bypasses/ elevated corridors in addition to lane expansion to decongest these National Corridors. c) Logistics Parks To improve the efficiency of freight traffic movement across the country, the government has identified 24 logistics parks. These parks will cater to production and consumption centers accounting for 45% of India’s road freight. It’s simplified...

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Logistics parks would follow hub and spoke model, which will facilitate consolidated movement of freight by deploying larger carrying capacity trucks between the two hub points. Once developed, these routes are expected to bring efficiency of freight movement on existing corridors and reduce logistics cost by 25%. Around 5,000 km is being taken up under this category in Phase-I of Bharatmala. d) Border And Connectivity

International

The government has identified 3,300 km of border roads to be built along the international border. Around 2,000 km of roads are required for connecting India’s major highway corridor to international trade points so as to facilitate Export-Import (EXIM) trade with our neighbours: Nepal, Bhutan, Bangladesh and Myanmar. About 2,000 km is being taken up under this category in Phase-I of Bharatmala. e) Coastal And Port Connectivity The government has identified 2,100 km of coastal roads to be built along the coast of India. These roads would boost both tourism and industrial development of the coastal region. Of the 2,100 km of coastal roads, 2,000 km of port connectivity roads have been identified to facilitate EXIM trade with an emphasis on improving connectivity to non-major ports. The roads identified have been synergized with the Sagarmala program and are being taken up under this category in Bharatmala’s Phase-I. Green-Field Expressways Certain sections of National and Economic Corridors have traffic exceeding 50,000 Passenger Car 24


Units and have also developed several choke points. About 1,900 km of these stretches have been identified for development of green-field expressways. Around 800 km is being taken up under this category in Phase-I of Bharatmala. Given these ambitious projects, interest in construction stocks is expected to sustain after the government’s announcement of construction of massive 84,000 km length of roads in the next five years. Select construction companies such as Dilip Buildcon, KNR Constructions, PNC Infratech and Sadbhav Engineering are expected to see sustained investor interest as these companies are likely to see handsome growth in their order books in the remaining part of the present fiscal. This should enhance the possibility of better-than-expected revenue growth in these companies for FY18. There are a few factors, which point out why investor sentiment in the construction sector will be further boosted in the next few months. First, analysts anticipate that almost 70% to 80% of the orders of Phase-I (34,800 km) of 84,000 km road projects will be construction work - Engineering Procurement and Construction (EPC). This addresses the funding issue of projects as construction work entails payment by the government for the work done by companies. This is a big positive for the sector. Analysts estimate that private sector would bear only 20% of funding of the project as opposed to 60% to 70% in FY12, which put a strain on balance sheets of large companies. Second, in recent months, the government has addressed arbitration cases of infrastructure companies who could prove the veracity of their arbitration claim. This provided relief

to investors as companies received capital, which would be used in working capital management. Besides, analysts point out that the government has managed to fix land acquisition issues by paying high prices for land. Thirdly, analysts foresee that Phase-I (34,800 km) of the total 84,000 km would have larger (length and size) road projects than the remaining part of the total project. It is estimated that the per kilometre cost for 84,000 km on cost of `6,92,000 crore turns out to be around `8 crore. The Phase-I of 84,000 km begins with 34,800 km Bharatamala. For Phase-I, which includes 34,800 km length of road projects, the per km cost would turn out to be `15 crore. For the remaining 49,200 km road projects, the per km cost turns out to be in the range of `3 crore to `5 crore. This means the phase I would entail large-sized road projects and the remaining road projects would be smaller in size. Also, analysts expect projects awarded to touch 8,000-9,000 km for FY18 from 5,000 km in FY17. Fourth, the government plans to de-centralize implementation and monitoring of these projects among multiple agencies such as NHAI, MORTH, PWD and state authorities, which analysts believe would result in speedier implementation and construction of projects. Lastly, bidding activity, which had almost stalled due to lack of clarity on the implementation of Goods and Services Tax (GST) is also expected to pick up due to higher awarding of roads projects. This should boost the order book of the aforementioned construction companieS. It’s simplified...

FEELING THE PINCH

Unlike in the past, the festive season witnessed muted sales by brick-and-mortar stores following the implementation of the goods and services tax

P

ost the implementation of the Goods and Services Tax (GST), brick-and-mortar retailers have been passing the benefits of lower tax of 5% from 7% earlier, on products costing less than `1,000 to boost demand. However, these brick-and-mortar Beyond Market 16th - 30th Nov ’17

retailers have not been able to pass on the increase in tax benefit post GST roll-out to customers on apparel and footwear costing above `1,000. Garments and footwear above `1,000 per piece attracted 12% tax rate with the roll-out of GST from 1st July onwards from around 7% earlier. Brands and retailers have failed to

pass on the benefits of lower goods and services tax to customers as demand remained weak. On the contrary, these brick-andmortar retailers gave discounts to push big-ticket purchases and counter online retailers in this festive season as sales remained muted. It’s simplified...

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Fashion retailers and brands like Shoppers Stop, Westside, Marks and Spencer, Tommy Hilfiger, Jack and Jones, Body Shop and Fusion Beats, among others, either gave discounts or promotional offers to push big-ticket sales and lure customers. Usually, brick-and-mortar retailers refrain from offering sales during the festive season as in previous years. Shoppers Stop had an offer running at its stores. On purchase of merchandise worth `5,000, the buyer was eligible for a discount of `2,000 on the next purchase. Govind Shrikhande, Managing Director, Shoppers Stop said, “Our average ticket size of sale in the store is around `2,800 to `3,000. The main purpose of this offer is to push big-ticket purchases above `5,000. We will continue this offer till November end. Individual brands too have multiple offers running.” Shrikhande said that post the implementation of GST there was a slight dip in sales in the month of August but with the early advent of the festive season, demand had recovered. Shoppers Stop also witnessed good traction in the east during Durga Puja. Industry experts said that due to pressure from online retailers, mainly in fashion category, brick-and-mortar retailers in India have been forced to adopt smart marketing and promotion techniques during the festive season to boost sales. According to Anil Kumar, CEO, Redseer Consulting, “Brick-and -mortar retailers have to counter aggressive online discounts mainly in the fashion category, which was higher this festive season compared to last year. E-tailers generated their highest ever sales performance over the five festive days from 20th September to 24th September this 26


year. The industry managed to generate `9,000 crore of sales, up 40% from a year ago.” Consultants too said e-commerce companies such as Flipkart, Amazon and Paytm Mall have been offering steep discounts this festive season because of which offline retailers too have been forced to have some offers in the stores to attract customers. Moreover, post demonetisation and implementation of GST, the overall economy is witnessing slow growth. Sales in apparel category as compared to last quarter is expected to grow around 14% to 15%. While compared to last year, it is likely to remain flat or grow marginally. Brands like Fusion Beats offered `1,000 off on shopping of `5,000 and above. Shopping for `2,000 and above at Westside Home could get the buyer 200 Clubwest points. Louis Philippe’s offer allowed buyers to earn 3X points on any purchase from the latest collection. Also, Marks & Spencer had offers on all women’s tops. On purchase of 2 tops, buyers would get 20% off; on 3 tops, they would get 30% and 50% discount was being offered on select items even in November. Additional 10% cashback was being given to buyers using Axis and HSBC cards at Marks & Spencer. At Being Human, a person purchasing merchandise worth `5,555 would get free shopping worth `1,055. Similarly, by shopping for `10,000, customers were allowed free shopping worth `2,555, and by shopping for `10,055, customers could make purchases worth `4,055 for free. Most brands had some promotional offers in the beginning of the festive season this year. But as Diwali

approached, freebies and discounts became aggressive. Brands like Marks & Spencer, Globus and Fusion Beats, among others announced aggressive discounts as Diwali neared. Discounts are likely to continue post the festive season till demand improves. Other brands too said that they have not yet passed on the rise in price hike to customers. Kavindra Mishra, Chief Executive Officer and Managing Director, Pepe Jeans said, “Most brands have absorbed the rise in price hike as demand is not very strong. Brands and retailers are waiting for the new winter collection mainly in the North and also wedding season, as they would try to pass on the tax increase during this period.” Vasanth Kumar, Executive Director, Max Fashion, echoed similar sentiments. He said, “While the company has passed on lower GST to customers on goods costing below `1,000, the company has not taken any price hike on goods costing over `1,000.” However, consumer durable players refrained from giving steep discounts to customers this festive season as their costs have increased due to inflationary trend of commodity prices and increase in tax post GST. After offering deep discounts of 20% to 50% in the month of June and July ahead of implementation of GST, consumer durable companies refrained from offering aggressive discounts this festive season as they had already managed to clear old stocks and their input costs too have increased with metal prices going up by around 10%, Kamal Nandi, Business Head and Executive Vice President, Godrej Appliances said. Last year during the festive season average discounts were around 25% It’s simplified...

to 35%. And in some products and old stocks, the discounts offered were as high as 50%. This festive season it was around 15% to 25%, industry experts said. From mid-July new stocks post GST came with a price increase of around 3% to 4% owing to the implementation of 28% GST for most items like refrigerators, air conditioners and microwave ovens. Nandi said, “Apart from GST our input costs too have gone up as copper and steel prices went up by 10% in the last six months. Most consumer durable manufacturers including us will refrain from giving any deep discounts and soon after the festive season post Diwali, we are contemplating increasing prices by 3% to 4% due to increase in costs.” After the implementation of GST, consumer durable players witnessed a drop in sales by around 10% to 15% in the month of July while it was flat in the month of August. Rajat Wahi, Partner, Deloite explained, “The situation is tricky as consumer durable players want to get back sales which dipped in the last couple of months post the implementation of GST as prices increased, because of which they should have given aggressive discounts. “But at the same time their costs have gone up and due to GST, product prices too have gone up. While brands went slow on discounts, retailers took a step ahead especially online players,

to get back sales.” However, industry experts feel that online retailers tried to take advantage of the situation and focused on spending money on promotions and offers to take away business from neighbourhood stores. As per a report by global auditing firm PricewaterhouseCoopers (PwC), organized retailers in the country will have to revisit their growth strategy as they have been found short of the early promises shown by the industry. “At 8% to 10% penetration, organized retail is far short of initial estimates and has led to several global and Indian players exiting on not achieving profitability and scale,” said Anurag Mathur, Retail and Consumer Goods Practice Leader, PwC India. According to the survey conducted by PwC India, with 40 large retailers including global retailers, the reason enumerated by them for not being able to match expectations included ground realities that were different than envisioned. This resulted in faltering on execution in a bid to scale up fast. In the process, value proposition got ignored and competition from well-funded online players posed a new challenge, the report said. Infrastructural challenges for retailers unable to keep pace with expectations included unavailability of quality real

estate, access to capital and acquiring, developing and retaining talent. Moreover, rapid scale expansion resulted in a large percentage of new stores putting pressure on profitability. Furthermore, the one-size-fits-all approach too didn’t work in the heterogeneous Indian markets, the report said. To add to the woes, competition from online retailers posed a new challenge as discounts and sales have become a way of life and there has been a shift in how consumers buy with increased focus on non-food grocery retail by consumers, the report stated. However, Indian organized retail remains an unparalleled opportunity as the market size is seen rising to $983 billion by 2020 from $553 billion in 2016. The unparallel opportunity is based on facts that India has 17% of the world population and 3% of global consumption with per capital income quadrupling in the last 15 years to $1,600 and consumption being driven beyond the metros. India’s high economic growth, strong positioning as investment hub and stable government from world perspective, economic reforms and tax reforms, improving market sentiments, large earning and spending by young population, urbanization, burgeoning e-commerce and digitization at domestic level, will act as main driving factors for growth in the retail sector in IndiA.

Autarky In models of international trade, a situation in which there is no cross-border trade is known as Autarky. It is the situation of not engaging in international trade; self-sufficiency. The idea that a country should be self-sufficient and not take part in international trade. The experience of countries that have pursued this Utopian ideal by substituting domestic production for imports is an unhappy one. No country has been able to produce the full range of goods demanded by its population at competitive prices. Indeed, those that have tried to do so have condemned themselves to inefficiency and comparative poverty, compared with countries that engage in international trade. Beyond Market 16th - 30th Nov ’17


27

The slowdown in the Indian hotel industry is a thing of the past as its future now looks good owing to the skewed demand-supply scenario in the sector

A BETTER DEAL 28



T

he last few years have been difficult for the Indian hotel industry. Hotel companies have been battling a drop in revenue per available room (RevPAR) and occupancy rates across the markets owing to poor demand, which was compounded by a number of domestic and global factors. Global macro events like Chinese meltdown, falling crude oil prices, slow growth in the US and European economies and resultant recessionlike situation in the banking and finance industry hit the global and Indian hospitality sector. After the global meltdown, the overall hotel room occupancies dipped from 71.4% in FY07 to a low of 59.5% in FY10. Since then all-India room occupancies have remained in the region of 60% continuing to be the biggest cause of worry for the hotel industry as lower occupancy resulting from low demand deteriorated the financials and credit profiles of many hotel companies. Also, listed hotel companies like Royal Orchid, Kamat Hotels, Hotel Leela and Indian Hotels are engaged with the banks and are restructuring or aggressively looking to reduce their debt. BACK ON THE GROWTH PATH Nevertheless, the good news is that the Indian hotel industry is back in the limelight with growth picking up. For the first time since FY07, almost after 10 years, the hotel industry’s overall all India occupancy rates crossed 65% in FY17. Moreover, fiscal 2017, witnessed an increase in demand. Consulting firm HVS in its report indicated a 9.6% growth in overall demand in FY17, whereas supply only increased by about 5.9%, Beyond Market 16th - 30th Nov ’17

resulting in increased occupancy of 65.6% as against 63.3% in year 2015-16.

announcements, leading to contraction in supply despite the demand being high.

ROOM RENTALS ON UPWARD TRAJECTORY

While demand grew at a decent pace over the last four to five years, stressed balance sheets and underutilized room inventory forced most hotel companies to stay away from making additional investments or building more hotels or adding rooms, thus keeping supply growth minimal or restricted to fewer markets where demand is high.

One direct impact of improvement in demand is an upswing in room rentals. This is because of the fact that international tourist arrivals increased from this year. For instance, in August ’17 the number of foreign tourist arrivals was 7.24 lakh, which grew by 11% as compared to 6.52 lakh tourist arrivals in August ’16. This has consistently improved. In August ’15, this figure was about 5.99 lakh tourists. Not just on a monthly basis, the tourism ministry in its statement earlier said that Foreign Tourist Arrivals (FTAs) from January to July ’17, were 56.74 lakh, a growth of 15.7% as against 49.03 lakh in the corresponding period last year. Foreign Tourist Arrivals (In Lakh) Month

2016

2017

% Change

January February March April May June July Total

8.5 8.5 8.1 5.9 5.3 5.5 7.3 49

9.8 9.6 9.1 7.4 6.3 6.7 7.9 56.7

15.3 12.9 12.3 25.4 18.9 21.8 8.2 15.7

Source: Tourism Ministry

Currently the ARR (Average Room Rentals) are at the highest since the last 4 years. The overall average all-India ARR stood at `5,658 in fiscal 2017. As per ICRA (Indian Credit Rating Agency), the Indian hotel industry is witnessing an upward trend in revenue per available room which has grown by almost 3% in quarter 1 of year 2017-18. Besides demand, spike in rentals is also attributed to the fact that there are no bigger project

CONSISTENT IMPROVEMENT IN OCCUPANCY RATES This is also the reason why occupancy rates have started improving quite a lot owing to rising demand over and above additional supply being created (since supply is stagnant due to no new projects). Indian Hotel Room Occupancy Rates FY07 FY10 FY16 FY17

71.4 59.5 63.3 65.6

Source: Media Reports And Ra ngs Agencies

The hotel business has very huge operating leverage advantage because of a high component of fixed expenses. In a rising market, they have strong operating margins as they can absorb some of the fixed costs with increasing revenue per room as well as occupancies. For instance, in Q1FY18, the hotel industry in the country marked overall operating margins of around 12.6% as against 11.7% operating margins reported in the corresponding quarter last year. With rising room rentals and occupancy, they can display greater profitability and higher cash, which can be used to repair their balance sheets at the same time, putting growth capital back in business. It’s simplified...

29

Overall Average Room Rate (in `) Year

Rates

2007-08 2013-14 2014-15 2015-16 2016-17

7,989 5,611 5,532 5,527 5,658

Source: HVS

MORE ROOM FOR GROWTH India is estimated to drive the global economy as a thriving emerging market, which makes it really lucrative for the hospitality industry. Several positive factors such as improved ranking in ease of business, easier e-visa processing, Make in India campaign, etc are expected to bring in days of glory for the travel and tourism industry. International tourist arrivals have been improving. It is expected to stay the same. Thus, it will definitely impact RevPAR positively, which will again improve operating profit. This is evidence that the Indian travel and tourism industry is back in the saddle, resulting in better days for the hospitality sector. In addition to this, the negative impact of GST and demonetization is waning owing to clarity on taxation and improvement in currency availability, helping hotel companies

to leverage on the pick-up in demand. Rating agency ICRA in its assessment estimated that supported by strong domestic demand revenue per available room is likely to improve by 9% in the current fiscal, that is 2018. Besides, free trade agreements signed by the government in the recent past and many multinational companies opening up their manufacturing base in India as a result of the government’s policy of domestic procurements to boost the long term employment in the country, will help improve hotel demand. The demand is likely to get better from foreign countries and business class visitors in the coming months. Moreover the pace of supply is expected to remain lower with execution delays and stressed balance sheets of companies. What is important is that one needs to be careful while selecting stocks in the sector considering balance sheet stress, which may not get resolved easily as in some cases the balance sheet strength is hugely impaired and assets could be liquidated with bankers now having more muscle under the new bankruptcy policy introduced by the government of India recently.

This is good news for the companies which can take the advantage of the situation. Competent players and companies with resources can benefit from consolidation in the sector and buy some of these assets at very cheap prices to play on long-term growth in the sector. What is important is that the long term potential of the sector remains intact. In the last Union Budget, the government demonstrated its commitment to build five special tourism zones. It is also planning to launch the Incredible India campaign yet again, which will boost demand for the hospitality industry in the coming months. The government is developing more ports, building airports and roads to provide better connectivity, thus boosting the hotel industry further. Importantly, in the coming years domestic tourists will play a large part in providing growth considering the fact that India has a huge population with diverse cultures. With the improving infrastructure, growing employment and working class population, higher per capita income and increase in economic activity, India’s hotel industry will experience better times in the days aheaD.

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Contact at: 022 - 3926 9600 | E-mail: [email protected] Disclaimer : Insurance is a subject matter of solicitation. Mutual Fund Investments are subject to market risks. ‘Investment in Securities/ Commodities markets are subject to market risks, read all the related documents carefully before investing.’ Nirmal Bang Securities Pvt. Ltd. Segment. *Nirmal Bang Commodities Pvt. Ltd. #Distributors. “The securities quoted are exemplary and are not recommendatory.” MCX SEBI No INZ000043630,

32



I

ndian Asset Management Companies (AMCs) have been on a roll since the past three years. Domestic fund houses have seen unprecedented participation from retail investors, surge in equity assets and positive folio numbers largely due to the rise in the equity markets. Like all the bull markets, even the current one has brought in a set of new sectors for investors such as Insurance and AMCs. Despite the increase in the number of players, the Indian mutual fund industry remains concentrated with the 10 largest AMCs contributing over 80% of the industry’s total assets under management (AUM) from FY15 to FY17. ICICI Prudential AMC, HDFC AMC, Reliance AMC, Birla Sun Life AMC and SBI Funds Management are the five largest AMCs, together contributing 57% of the quarterly average assets under management (QAAUM) for quarter ending 31st Mar ’17 and 30th Jun ’17. According to the data from the Association of Mutual Funds in India, AUM of the mutual fund industry stood at `20.40 lakh crore as on September ’17, up by 29% against last September. While around half a dozen insurance companies have been listed in the past few months, few others might hit the streets in the coming months. But in the AMC space, only Reliance Nippon Life AMC will be listed on the stock exchanges. Deepak Parekh, Chairman, HDFC has also announced that HDFC AMC would be listed on the exchanges in the next financial year. UTI AMC’s plan to get itself listed on Beyond Market 16th - 30th Nov ’17

the exchanges has been delayed owing to shareholders’ internal problems. But with government’s aggressive stance on disinvestment, some positive progress can be expected sooner than later. In the initial days, Reliance Nippon Life AMC received tremendous response from retail investors. This can also lead to many other fund houses planning to list their stocks on the exchanges. With huge inflows and a large number of investors investing money for a longer duration through Systematic Investment Plans (SIPs), mutual funds have come of age. Not only do fund houses make profits from the sale of mutual funds, but also through Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs). From investors’ perspective, investments in public offering of AMCs offer the positive option of stable investment proposition and a huge under-penetrated market, which could offer investors a solid long-term stock story. This article sheds light on the Indian mutual fund industry and how IPOs would change the face of the industry in the years to come. HISTORY OF ASSET MANAGEMENT COMPANIES In the year 1963, Indian mutual fund industry commenced operations with the formation of the Unit Trust of India by an Act of the Parliament. For the next two-and-a-half decades, UTI remained the only player in the mutual fund industry. As per the Association of Mutual Funds in India (AMFI), UTI’s AUM increased from just `25 crore in 1965 to `6,700 crore in 1988.

In the year 1987, public sector financial companies entered the mutual fund industry. Prominent players included State Bank of India (SBI), which promoted the first non-UTI mutual fund. The SBI Mutual Fund started its operations in June ’87. The total AUM of the mutual fund industry surged to `47,000 crore billion by the end of 1993. Finally, in 1993, the mutual fund industry opened up to the private sector. The first mutual fund regulations were formalized, the 1993 SEBI (Mutual Fund) Regulations which were later substituted by more comprehensive and revised Mutual Fund Regulations in 1996. During the period from 1993 to 2003, the number of mutual fund houses increased with many foreign mutual funds houses also participating in the industry. Later in February ’03, following the repeal of the Unit Trust of India Act, 1963, UTI was bifurcated into two separate entities, the Specified Undertaking of the Unit Trust of India (SUUTI) and the UTI Mutual Fund. Since then the mutual fund industry has witnessed healthy growth, supported by various regulatory measures and investor education initiatives, reaching an AUM of `17.5 lakh crore as of 31st Mar ’17, up from `3.3 lakh crore as of 31st Mar ’07, reporting a compounded annual growth rate (CAGR) of 18% over this 10-year period. The mutual fund industry is likely to continue its double digit growth going forward, feel market participants. Traditional products will continue to garner demand. However, to cater to different audiences and bring more investors into the fold, the industry will need to innovate and develop It’s simplified...

33

specialized products like AIFs, which will allow product innovation around real estate and structured credit, and eventually other forms of products such as infrastructure investment trusts (INvITs). BUSINESS OF AMCs As said earlier, most assets of the mutual fund industry are skewed towards top 10 players. But here we would like to dig deeper into the business of Reliance AMC. This is because the business of all top fund houses remains the same, with some marginal difference in PMS and performance of equity schemes. So, Reliance Nippon Life AMC is one of the largest asset management companies in India, managing a total AUM of `3.62 lakh crore as of 30th Jun ’17. It is involved in managing mutual funds (which includes both active as well as ETFs), managed accounts, including portfolio management services (PMS), alternative investment funds (AIFs), pension funds and offshore funds and advisory mandates. For the financial year 2016, Reliance Nippon Life AMC was ranked the second most profitable asset management company in India, according to ratings agency ICRA. Currently, Indian fund houses have around 2,200 schemes and Reliance Nippon Life AMC manages 55 open-ended mutual fund schemes including 16 ETFs and 174 closed-ended schemes for Reliance Mutual Fund as of 30th June ’17. They have a pan-India network of 171 branches and approximately 58,000 distributors including banks, financial institutions, national distributors and independent financial advisors. They also provide portfolio management services to high net 34


worth individuals and institutional investors including the Employees’ Provident Fund Organization (EPFO) and Coal Mines Provident Fund Organization (CMPFO). Their subsidiary, Reliance AIF Management Company Ltd manages two alternative investment funds, which are privately pooled investment vehicles registered with markets regulator SEBI. Further, Reliance AMC also manages pension assets under the National Pension System (NPS) and offshore funds through our subsidiaries in Singapore and Mauritius and have a representative office in Dubai, which enables them to cater to investors across Asia, the Middle East, the UK, the US, and Europe. They also act as the advisor for India-focused equity and fixed income funds in Japan and South Korea. An AMC’s profit depends on expense ratios, which is a measure of the expenses to be incurred to operate or run the scheme, and refers to the annual fund operating expenses of a scheme, expressed as a percentage of the fund’s daily net asset. Typically, expense ratio of debt funds is lower, while for equity schemes it depends on their assets - but is usually between 1.75% and 2.5%. Even though expense ratios of AMCs have fallen in the last few years, the surge in equity assets has led to top fund houses making huge profits year after year. KEY RISKS TO THE FUND MANAGEMENT BUSINESS Even as the AMC business looks to be long-term in nature, there are few risks that investors should understand before buying into such issues. In fund management, investment professionals and personnel remain key risks. The company’s

performance depends largely on the efforts and ability of the senior management, particularly its chief executive officer (CEO), its chief investment officers (CIOs), its fund managers and other investment professionals like financial analysts. In the past too, there have been instances of outflows and poor performance of equity schemes after a ‘star’ fund manager’s departure from the organization. Another major risk with AMCs is regarding their equity performance. Underperformance of investment products impacts profitability. In the equity markets, there are upside and downside cycles. Similarly, in the fund management business, rising markets is not a guarantee of strong performance of equity schemes. Many investments, held by mutual funds for which the company provides asset management services, can be illiquid or volatile in nature, which may result in losses. Many other investments, including investments in equity, are subject to potential capital losses. Mutual fund houses make profits by charging fees through expense ratios. However, in case of poor schemes, returns or outflows from equity schemes could impact profitability. The market regulator has often asked fund houses to reduce their expense ratios. And if the company’s revenue declines without a commensurate reduction in its expenses, its profit after tax (PAT) will also decline. The financial services industry is rapidly evolving and intensely competitive. Low barriers to entry have also resulted in many smaller participants entering the market. In such a scenario, there might be consolidation among AMCs in the future. Any such consolidation may create stronger It’s simplified...

competitors in the market or leave the company at a disadvantage. One of the bigger risks to Indian AMCs is international competition. Though now not many foreign players are present in India, this might change, if the sector continues to grow and remain profitable. Everyone is aware that competition from multinational companies may be difficult to withstand for domestic fund houses. Increased competition may result either in a decrease in AUM market share or force the company to reduce its management fees so as to preserve such market share. IN A NUTSHELL The mutual fund industry has grown

exponentially over the last decade, particularly in the past three to four years. However, opportunities for further growth exist. The demonetisation exercise has disrupted the economy in general and the financial sector. Digital payments have been further encouraged on the back of promotion of a cashless economy, one of the key outcomes of demonetisation. The rural and semi-urban population is now ‘financially included’, indicating that there is potential to create specific products to suit their needs. Also, pension and insurance funds will see more traction, and penetration into products such as ETFs will increase. Listing of AMCs has many advantages like participating in the financial markets

where several hundred investors are investing and this will also bring in a lot of transparency for investors. Like any other financial instrument, for AMCs too, profit from innovation will be integral to its success, and technology will help them to develop and customize products to meet individual needs. We might see different types of ETFs and equity schemes, which might help Indian investors make money in the longer term. But with the surge in the equity markets and government’s efforts to digitize the economy, mutual funds can play a very important role in bringing in unutilized money into the financial markets through this investment routE.

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EQUITIES | DERIVATIVES | COMMODITIES* | CURRENC Y | MUTUAL FUNDS# | IPOs# | INSURANCE# | DP Contac t: 022-39269600 | e -mail: [email protected] | w w w.nirmalbang.com 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610 Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. Through Nirmal Bang Securities Pvt. Ltd. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors investment in securities is subject to market risk. investment in securities is subject to market risk



35

Buckfast Recommendations Finance is a maze of umpteen possibilities and choices. And it is easy for individuals to lose their way in this tangle. In such a scenario, an expert comes handy. For, he alone can wade through the enigmatic world of finance and simplify choices for investors. Buckfast Research, the research arm of Buckfast Financial Advisory Services Pvt Ltd, recommends mutual fund schemes that can be considered by investors.

About Buckfast Research Buckfast Research, the research arm of Buckfast Financial Advisory Services Pvt Ltd is guided by Mr Vijai Mantri and a team of professionals with more than 50 years of cumulative experience with leading Indian and Global Mutual Fund companies. A number of parameters have been taken into consideration while making the recommendations. Some of the guidelines are track record of the scheme and consistency, risks associated with the scheme, fund house pedigree and credentials of the fund manager. However, there is no specific time frame for the investment as such. It depends entirely on an investor’s objectives, investment timeline, risk tolerance and type of scheme he/she wishes to invest in. By and large, equity schemes are suggested with a long-term investment horizon. Disclaimer Mutual Fund Investments are subject to market risks. Please read the offer document carefully before investing. Source: ACE MF, NAV as on 17th Nov ’17. SIP returns as on 30th Sept ’17. M=Months, Y=Year, D=Days Past performance is no guarantee of future performance. Returns are of Growth option of Regular plans Returns which are below 1 year period are Annualized Returns

Diversified Funds Historic Return (%) SCHEME NAME

NAV

1 Year

3 Years

5 Years 7 Years 10 Years AUM (Cr)

Axis Focused 25 Fund

Lumpsum 25.20 38.77

14.55

18.49

-

-

2213

MOSt Focused Multicap 35 Fund

26.00

36.17

21.46

-

-

-

9966

L&T India Spl. Situations Fund

49.19

37.00

13.43

19.53

13.74

11.10

1184

145.65

43.00

15.45

22.23

14.29

7.39

551

Principal Growth Fund

SIP Axis Focused 25 Fund

25.20

29.92

18.67

18.82

-

-

2213

MOSt Focused Multicap 35 Fund

26.00

28.63

22.65

-

-

-

9966

L&T India Spl. Situations Fund

49.19

21.84

15.49

18.51

17.47

16.49

1184

145.65

25.83

18.96

21.00

19.32

15.95

551

Principal Growth Fund

36



Large Cap Funds Historic Return (%) SCHEME NAME

NAV

1 Year

3 Years


MOSt Focused 25 Fund

Lumpsum 20.77 26.24

12.32

-

-

-

Invesco India Growth Fund

31.75

36.38

13.41

19.42

12.68

9.74

228

Mirae Asset India Opportunities Fund

46.85

34.49

14.78

21.67

15.29

-

5232

IDFC Focused Equity Fund

38.65

48.03

12.10

15.54

9.16

8.22

707

IDFC Focused Equity Fund

38.65

41.04

19.57

16.97

14.18

12.44

707 228

849

SIP Invesco India Growth Fund

31.75

25.75

15.29

18.05

16.63

15.16

Mirae Asset India Opportunities Fund

46.85

23.19

17.29

20.62

19.18

-

5232

Reliance Top 200 Fund

32.33

19.28

13.38

17.29

16.30

14.84

5751

Mid and Small Cap Funds SCHEME NAME

Historic Return (%)

NAV

1 Year Lumpsum

3 Years

IDFC Sterling Equity Fund

54.63

50.23

17.04

Reliance Small Cap Fund

42.86

50.81

HDFC Small Cap Fund

42.13

47.09

L&T Emerging Businesses Fund

26.82

55.95

5 Years 7 Years 10 Years

AUM (Cr)

21.26

15.26

-

1896

22.66

32.11

22.59

-

5143

19.46

23.22

14.44

-

1518

25.76

-

-

-

2283

SIP IDFC Sterling Equity Fund

54.63

37.62

22.10

23.15

20.62

-

1896

Reliance Small Cap Fund

42.86

29.24

32.91

28.93

-

5143

L&T Emerging Businesses Fund

24.19

26.82

37.38

29.29

-

-

-

2283

Mirae Asset Emerging Bluechip

50.10

25.72

24.28

31.05

28.46

-

4820

NAV

1 Year

3 Years

ELSS Schemes (Tax Saving u/s 80-C) Historic Return (%) SCHEME NAME


IDFC Tax Advt(ELSS) Fund

Lumpsum 55.75 43.15

16.18

21.64

14.24

-

MOSt Focused Long Term Fund

16.97

37.64

-

-

-

-

701

L&T Tax Advt Fund

54.75

36.22

15.12

19.54

12.79

11.70

2730

Mirae Asset Tax Saver Fund

16.31

41.31

-

-

-

-

656

740

SIP IDFC Tax Advt(ELSS) Fund

55.75

32.35

18.66

21.03

19.41

-

740

Mirae Asset Tax Saver Fund

16.31

28.50

-

-

656

MOSt Focused Long Term Fund

-

-

16.97

29.01

-

-

-

-

701

214.38

25.45

18.79

20.90

19.36

15.90

379

NAV

1 Year

3 Years

Principal Tax Savings Fund

Dynamic Equity Funds Historic Return (%) SCHEME NAME


ICICI Pru Dynamic Plan

Lumpsum 256.08 14.98

13.90

16.24

15.43

15.16

8641

Tata Equity P/E Fund

134.80

22.83

25.35

21.66

19.07

2067


28.86


37

Balanced Funds Historic Return (%) SCHEME NAME

NAV

6 month

1 Year

3 Years

5 Years

AUM (Cr)

147.93

16.47

23.65

13.09

19.30

17073

L&T India Prudence Fund

25.84

11.36

24.72

13.40

18.99

7776

Mirae Asset Prudence Fund

13.52

17.38

25.62

-

-

881

Reliance Reg Savings Fund-Balanced Option

54.51

20.11

27.07

12.70

17.43

9906

Principal Balanced Fund

75.08

27.15

34.41

14.67

18.31

552

HDFC Balanced Fund

Equity Savings (Arbitrage MIP) Funds Historic Return (%) SCHEME NAME

NAV

6 month

1 Year

3 Years

5 Years

AUM (Cr)

HDFC Equity Savings Fund

34.67

8.52

15.10

10.19

11.03

3690

Reliance Equity Savings Fund

12.46

11.86

17.07

-

-

1513

DSPBR Equity Savings Fund

12.17

9.49

13.31

-

-

1295

Principal Equity Savings Fund

34.36

9.39

13.97

7.94

7.69

24

Monthly Income Plans Historic Return (%) SCHEME NAME

NAV

AUM (Cr)

3 month

1 Year

3 Years

5 Years

10.69

12.07

1459

ICICI Pru MIP 25

39.15

9.63

12.17

Reliance MIP

40.98

9.01

8.83

8.98

10.61

2409

SBI Magnum MIP

38.14

6.65

7.95

10.40

10.58

1558

Aditya Birla SL MIP II-Wealth 25

38.66

9.02

13.09

12.00

13.95

2446

Income & Dynamic Bond Funds Historic Return (%) SCHEME NAME

NAV

3 month 6 month

1 Year 3 Years 5 Years

AUM (Cr)

ICICI Pru Long Term Plan

21.28

-2.33

7.02

5.24

10.33

11.41

3529

UTI Dynamic Bond Fund

19.88

-0.95

5.64

5.86

9.73

10.07

1712

Franklin India IBA-A

59.83

5.14

7.92

7.88

8.81

9.37

964

SBI Regular Savings Fund

29.67

3.68

7.47

8.35

9.46

10.03

1367

Accrual Funds Historic Return (%) SCHEME NAME

38

NAV

3 month 6 month

1 Year 3 Years 5 Years

AUM (Cr)

Baroda Pioneer Credit Opp Fund

13.18

5.56

8.13

8.15

-

-

959

BOI AXA Corporate Credit Spectrum Fund

12.96

6.55

8.97

8.90

-

-

1349

Franklin India Dynamic Accrual Fund

59.96

6.30

8.87

8.80

10.09

9.32

2895

Aditya Birla SL Corp Bond Fund

12.65

4.78

8.34

7.75

-

-

4291



Short Term Funds Historic Return (%) SCHEME NAME

Aditya Birla SL Short Term Fund

NAV

1 month 3 month 6 month 1 Year 3 Years

65.16

3.21

4.69

AUM (Cr)

7.49

6.52

8.86

20900

3582.95

4.16

6.47

9.11

8.98

9.00

8875

HDFC Regular Savings Fund

33.83

2.64

4.70

6.68

6.62

9.00

5446

UTI Banking & PSU Debt Fund

13.97

6.07

5.95

7.50

6.98

9.14

1016

Franklin India ST Income Plan

Ultra Short Term Funds Historic Return (%) SCHEME NAME

Aditya Birla SL Savings Fund Franklin India Ultra Short Bond Fund-Super Inst ICICI Pru Flexible Income Plan L&T FRF

NAV

1 month 3 month 6 month 1 Year 3 Years

AUM (Cr)

333.77

5.68

5.94

7.47

7.10

8.61

23.43

7.08

7.23

8.23

8.37

9.35

23453 11584

325.45

5.18

5.95

7.23

7.08

8.48

23155

16.76

6.29

6.52

7.59

7.48

8.44

541

Liquid Funds Historic Return (%) SCHEME NAME

NAV

3 month 6 month

1 Year

3 Years 5 Years

AUM (Cr)

225.33

6.45

6.59

6.74

7.70

8.32

11248

Franklin India TMA-Super Inst

2527.60

6.37

6.54

6.72

7.72

8.35

3129

Kotak Floater-ST

2774.43

6.39

6.53

6.70

7.69

8.29

11222

Axis Liquid Fund

1872.97

6.42

6.55

6.72

7.65

8.24

20503

Aditya Birla SL FRF-Short Term Plan

Arbitrage Funds Historic Return (%) SCHEME NAME

NAV

3 month

1 Year

3 Years

5 Years

AUM (Cr)

Axis Enhanced Arbitrage Fund

12.34

5.75

5.80

6.57

-

1322

Reliance Arbitrage Advantage Fund

17.37

5.77

5.70

6.88

7.69

8222

L&T Arbitrage Opp Fund

12.52

6.17

5.86

6.76

-

382

Returns as on 31st Oct ’17 RETURNS

Buckfast Fundamental Market Model (BFMM) is a asset allocation model, which analyses historical market behaviour taking into consideration various aspects such as fundamental ratios, long-term trends. It aims to reduce volatility in the short to medium-term without compromising the opportunity for long-term wealth creation. Currently as per BFMM, we suggest 0% allocation to equity and 100% to debt.


Buckfast Investment Fundamental Value Market Model Addition in Nifty (One time)

Last 1 month

4.83%

0.52%

-4.31%

Last 3 months

2.18%

1.59%

-0.59%

Last 6 months

10.97%

8.66%

-2.31%

Last 1 year

19.87%

15.92%

-3.95%

Last 2 years

13.30%

11.53%

-1.77%

Last 3 years

7.48%

7.64%

0.16%

Last 4 years

13.14%

13.26%

0.12%

Last 5 years

12.86%

12.96%

0.10%

Since Aug 2011

10.56%

10.06%

-0.50%


39

T

TECHNICAL OUTLOOK

he Indian equity markets made an all-time high of 10,490.45 on Monday, 6th November. Following this, the Nifty retraced almost 396 points from the high. Further, it managed to take support of the psychological mark of 10,000 and bounced back towards the 10,350 level. Looking at the momentum, there is a high probability that the Nifty may retest the 10,490 level in the upcoming trading sessions, provided it sustains above the 10,240-10,200 range.

pants are advised to stay light with their positions. Technically, the overall view is positive as the Nifty is under a strong momentum. The Nifty has a resistance at 10,500/10,740 levels, whereas it has support at the 10,000/9,940 levels. Market participants should be stock-specific, and follow the trend with a trail stop loss level till it reverses from trading perspectives.

Technically, the Nifty is trading in an upward sloping channel, demonstrating a positive view. The channel indicates that the Nifty has strong support at the 10,000 level. As long as it sustains above the 10,000-mark, the uptrend will remain intact.

On the Nifty Options front for the October series, the highest Open Interest (OI) build up is witnessed near 10,200 and 10,000 Put strikes, whereas on the Call side, it is observed at the 10,500 and 10,700 strikes. The stock markets are likely to remain bullish towards the end of November and early December with bouts of selling pressure near the resistance levels.

December will be a crucial month given the fact that there wil be less participation by FIIs ahead of the Christmas holiday. This event is likely to have a bearing on the Indian markets. It is also important to note that the Nifty is trading near the all-time high. Hence, some profit booking at higher levels may be witnessed. Therefore, market partici-

The October expiry has seen higherthan-average rollovers in Nifty (72.69%) and lower-than-average rollover in Bank Nifty (68.63%) with a positive cost of carry, indicating mixed bias. Fertilizer (89.76% - long rollover), Cement (87.80% - short rollover) and Realty (89.52% - long rollover) saw much higher rollovers compared to corresponding period of

the previous expiry. Select stocks from Realty, Banking and Fertilizer sectors are expected to outperform while certain stocks from Cement and Oil & Gas sectors are likely to underperform in this expiry. India VIX, which measures the immediate 30-day volatility in the market, remained in the range of 11-15 in November. Going forward, VIX will likely remain at elevated levels. The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options has been in the range of 1.1-1.55 in November. Going forward, it is expected it to remain sideways, implying a positive undertone in the market. OPTIONS STRATEGY BULL CALL SPREAD It can be initiated by ‘Buying 1 lot 30NOV 10400 CE (`50) and Selling 1 lot 30NOV 10500 CE (`25).’ The net combined premium outflow comes to around 25 points, which is also your maximum loss. The maximum profit in this strategy is capped at 75 points. It will generate profit above 10,425. One can book profits on a gain of 50 to 75 pointS.

Nifty Daily Chart

40



MUTUAL FUNDS: A PRIMER Mutual funds are an alternative investment avenue that an investor can consider as they help you grow wealth over a period of time

M

utual funds have gained popularity in recent past as an attractive asset class. This is mainly on account of limited investment opportunities coupled with financialization of savings. Also, bank fixed deposits, gold and real estate have started losing their shine Beyond Market 16th - 30th Nov ’17

as they no longer provide attractive returns as those offered by mutual funds thanks to the bull run in the equity markets. Mutual fund houses provide a gamut of schemes, which enables an investor to invest as per his/her risk appetite - be it debt funds, equity

funds, balanced funds, index funds, capital protection funds or commodity funds. This brings us to the moot question, what are mutual funds? Mutual fund is a trust that is professionally managed by It’s simplified...

41

investment managers, also termed as fund managers. They pool the savings of a plethora of investors and then invest those savings in securities like bonds, stocks, money market instruments and commodities such as precious metals. The investment is made in accordance with the objective of the fund/scheme, which is predefined. Thus, investors with a common financial goal will invest in a particular fund/scheme. Therefore, if investors choose to invest in a banking sector scheme, investment managers will invest in banking sector stocks. If an investor decides to invest in a balanced scheme, the investment manager will invest in a blend of equity and debt in the proportion spelt out in the scheme’s investment objective. One of the principal benefits that mutual funds bring to the table is that mutual funds enable retail investors to have a professional manage their investments even if their contribution is as low as a thousand rupees. Active management of mutual funds is best left to professionals who understand the asset classes well rather than laymen who often tend to get influenced by hearsay. In order to achieve your investment goals, it is essential to select the right mutual fund scheme and without any exaggeration the choice is overwhelming. Currently, there are 45 fund houses, 1,200 schemes on offer. Of these approximately 400 are equity funds, around 300 are debt schemes and around 426 are hybrid schemes. In addition to this, there are more than 800 FMPs (Fixed Maturity Plans), some international funds, arbitrage funds, etc. Mutual fund schemes can belong to 42


different asset classes and have varied structures with different investment objectives. For example, within equity schemes itself you will have several choices - large-cap funds, mid-cap funds, flexi-cap funds, index funds and sector-specific funds, among others. In debt, you have monthly income plans (MIPs), short-term plans, long-term plans, gilt funds, etc. It is, therefore, essential to have an understanding of the different types of schemes that are on offer to decide, which type to invest in. After filtering the type, it makes it easier to zero in on a particular scheme based on performance. Broadly, mutual fund schemes can be classified based on maturity, asset class and the investment objective. Let us delve into each of this to get a better understating of the different investment options. PROFILING MATURITY

BASED

ON

Open-Ended Scheme Open-ended schemes are the most commonly prevailing schemes. Here, subscription and redemption are permitted on an on-going basis. Investors can enter and exit the scheme at any point in time at the applicable NAV.

subscription for a limited time frame at the time of launch. These are listed on stock exchanges. For example, Fixed Maturity Plans (FMPs). Interval Schemes Interval schemes are a blend of both open and close-ended funds. These are open for subscription or redemption at predetermined intervals at the prevailing NAV. For example, DSP Blackrock Micro-cap Fund, a pure play equity mutual fund, closed for subscription after reaching a sizable AUM. PROFILING BASED ON ASSET CLASS Equity Funds Equity fund schemes are those that invest in the equity markets. Capital appreciation is a primary objective over the medium- to long-term. On account of being linked to the stock markets, which tends to be volatile, these funds are defined as high-risk investments (the extent of risk can vary depending on whether you invest in mid-cap or large-cap or sector-specific schemes). Only those who have a risk appetite with the ability to hold the investment over the medium- to long-term should consider this asset class. Debt Fund/ Fixed Income Funds

Close-Ended Scheme

Funds that invest in rated fixed income securities such as corporate bonds, debentures, government securities, commercial papers and other money market instruments fall under the category of debt fund or fixed income funds.

A close-ended scheme is one where the maturity is pre-defined. For example, a two-year or a three-year product. These schemes are open for

These debt/fixed income funds are mainly targeted at investors who are risk-averse and are seeking regular and steady income.

Liquidity is the primary benefit, which makes open-ended schemes an attractive proposition from the point of view that as funds are accessible with a lead time of a day.


Balanced Or Hybrid Funds

Sector Funds

Balanced or hybrid funds are blended funds, which invest in a mix of asset classes. The objective is to reduce the risk of a pure equity fund as generally returns on bond and equities are inversely proportional.

Sector funds invest primarily in a particular identified sector such as pharma, banking and consumer durables, among others (example, Reliance Pharma Sector Fund). They tend to be risky as the risk is concentrated on the performance of one particular sector, which may be impacted by cyclicality or regulation or any other eventuality.

For example, HDFC Prudence is a balanced mutual fund scheme with an investment objective of varying debtequity mix between 25:75 and 40:60, respectively depending on the prevailing market conditions. PROFILING BASED INVESTMENT FOCUS

ON

Under equity mutual funds, there are several funds, which can be differentiated based on the focus. Index Funds These funds are passive funds and the goal of these funds is to mirror the performance of the benchmark/index it tracks such as CNX Nifty Index (example, HDFC Index-Nifty Plan). Thus, the value of the fund varies in proportion to the movement in the benchmark index. There may be a slight variation in returns from the benchmark on account of tracking error (example, new additions/ deletions from the index). Diversified Funds Diversified mutual funds provide investors with the benefit of diversification by investing in companies spread across sectors and market capitalization (example, mid-cap funds, large-cap funds, etc). They are generally meant for investors who do not want the performance of their investments to be impacted by underperformance or outperformance of a particular sector or a particular category of stocks. Beyond Market 16th - 30th Nov ’17

Tax-Saving Funds (ELSS) Tax-saving funds are equity-oriented funds that qualify for deduction under the Income Tax Act (example, L&T Tax Advantage Fund). These funds typically have a lock-in period of 3 years in order to qualify for tax saving. The funds’ returns are linked to the equity markets and, hence, are considered to be risky. Exchange-Traded Funds (ETFs) As the name suggests, exchange-traded funds track an index, a commodity or a basket of assets as closely as possible, and trade like shares on the stock exchanges (example, Kotak Banking ETF). These funds are backed by physical holdings of the commodity, and invest in stocks of companies. By virtue of being listed on the stock exchanges, these mutual funds give the investor the flexibility to buy or sell on the stock exchanges. International Funds For those investors who prefer to have an exposure to companies located in other countries, these funds are preferred by them (Example, Franklin Asian Equity Fund). So there could be emerging market funds wherein the fund objective describes the markets they are permitted to invest in.

Debt Funds Would Include The Following Funds Gilt Funds Gilt funds invest in Central and State Government Securities and are best suited for medium- to long-term investors who are risk-averse (example, SBI Benchmark G-Sec Fund). Government Securities have no default risk. However, they are vulnerable to interest rate risks and the NAV gets impacted with any change in interest rates. Liquid Funds

Funds/

Money

Market

These funds are meant for investors who want to park their surplus funds for a very short term such as a few days (example, Edelweiss Liquid Fund). The objective of this fund is capital preservation. The fund invests in securities with less than 91 days maturity. On redemption, the funds get credited within 24 hours making it extremely liquid. Monthly Income Plans (MIPs) As indicated by the nomenclature, MIPs are expected to be a regular income stream for investors (monthly, quarterly or half yearly dividend payouts). The fund invests in debt instruments like government bonds and corporate bonds, which offer dividends or interest payments. In addition, in most cases 15% to 25% of the corpus is invested in equities. The equity portion is expected to provide an edge over pure play debt funds by providing superior returns. Long-term Debt Funds Debt funds are best chosen based on the investment tenure. A long-term bond fund is suited for investors with a 3- to 5-year time horizon. Long-term bond funds invest in a mix It’s simplified...

43

of corporate bonds and government securities with a tenure of 7 and 10 years. Long-term bond funds are meant to give you returns in excess of bank fixed deposits. Short-term Debt Funds Short-term debt funds are suitable for investors who have an investment horizon of between 12 and 36 months. The returns are superior as compared to gilt funds and liquid funds. There are also sub-categories under this called ultra-short term funds, which invests in instruments having a maturity of 90 days to 1.5 years and are less volatile. Types Of Close Ended Schemes Capital Protection Funds Capital protection funds tend to be close-ended mutual fund schemes, which are hybrid in nature - skewed towards debt. The objective is to safeguard the capital and

simultaneously provide capital appreciation. These funds provide even the most conservative investor an opportunity to invest a small part of his/her portfolio in equity, thereby giving the investor the scope to participate in equity market upturns. Fixed Maturity Funds (FMPs) Fixed maturity funds are close-ended mutual funds having a tenure of 3 to 5 years. These funds invest in debt and money market instruments where the maturity date is either the same as that of the fund or prior to it. FMPs are for those investors who would like to invest their funds for a fixed tenure and for those who do not want to take risks, especially when the interest rate trend is uncertain. RECENT DEVELOPMENTS To make it easier for investors to select the right mutual fund, markets regulator Securities and Exchange Board of India (SEBI) has initiated a

move encouraging mutual fund companies to merge schemes with similar attributes bringing in some standardization. There is a plethora of schemes, which makes it hard for investors to decide which scheme to invest in. It is currently in the early stages with the SEBI asking mutual fund companies to chalk out a plan. This new development will make it easier for investors to make informed decisions. IN A NUTSHELL Mutual fund houses provide us with a gamut of products satisfying the entire risk return spectrum, that is, from low risk low return to high risk high return. Investors need to understand their risk profile to zero in on first the asset class that will suit their need and then the type of scheme. It gives them an exposure to alternative asset classes and, hence, it deserves serious consideration given the inherent benefits it has to offeR.

Contact: 022 39269600 E-mail: [email protected]

44



IMPORTANT JARGON FOR THE FORTNIGHT BHARAT 22 EXCHANGE-TRADED FUND ANOTHER DISINVESTMENT TOOL

A

fter launching three tranches of CPSE ETF in the last two years, the government is all set to launch another Exchange-Traded Fund (ETF) called Bharat 22 ETF. Currently, Bharat 22 ETF is open for subscription and is likely to raise `8,000 crore and help the government meet its disinvestment target of `72,500 crore for fiscal year 2018. The government has raised `11,500 crore through three tranches of CPSE ETFs. What Is An ETF? An ETF is a security that tracks an index, a commodity or a basket of assets. The ETF’s constituents are in the same proportion as that in the index that it tracks. Simply put, instead of actively investing in individual stocks like a mutual fund, an ETF passively follows the mutual fund or asset that it tracks and replicates its performance. What Are The Benefits Of An ETF? Since ETFs are a passive way of investing, the expense is lower as compared to mutual funds. This can help increase returns for investors. ETFs are highly liquid. They can be traded on the exchanges like any other security. Assets managed globally by ETFs are likely to jump from $4 trillion currently to $7 trillion by 2021. ETFs are a well accepted way of investments by long-term players. What Is Bharat 22 ETF? Bharat 22 ETF is an exchange-traded fund (ETF) that has 22 companies as its constituents. What Are The Other Details Of Bharat 22 ETF? Beyond Market 16th - 30th Nov ’17

Bharat 22 ETF will track the performance of S&P BSE BHARAT 22 index, a special index made for the purpose by the Bombay Stock Exchange (BSE). The ETF will be managed by ICICI Prudential AMC. The portfolio of ETF will be rebalanced annually in March. Which Are The 22 Companies? Apart from the three private companies Larsen & Tubro (L&T), Axis Bank and ITC (stakes held by the government under the Specified Undertaking of the Unit Trust of India (SUUTI)), the index constitutes leading Maharatnas and Navratanas such as Coal India, GAIL, Power Grid Corporation of India Ltd (PGCIL), National Thermal Power Corporation (NTPC), Indian Oil Corporation Ltd, Oil & Natural Gas Corporation (ONGC), Bharat Petroleum, and National Aluminium Company (NALCO). It also includes three Public Sector Banks such as SBI, Bank of Baroda and Indian Bank. Other constituents include Bharat Electronics Ltd, Engineers India, NBCC, NHPC, NLC India, Power Finance Corporation, Rural Electrification Corporation and SJVN Ltd. What Is So Unique About The Bharat 22 ETF? As against 10 companies in CPSE ETF, the new ETF has as many as 22 companies. It has a unique blend of shares of key state-owned companies, Public Sector Banks (PSBs) and also government-owned shares in blue-chip private companies. The ETF offers a great diversification thereby minimizing risk. The 22 companies represent 6 core sectors of the economy - Finance, Industry, Energy, Utilities, Fast Moving Consumer Goods (FMCG) and Basic Materials. No individual stock in the index - and thereby B22 ETF will be more than 15% of the index and no sector more It’s simplified...

45

than 20%. How Will The ETF Operate? The money raised from investors in B22 ETF will be transferred to the government and an equivalent value of shares of these 22 companies will be transferred to the fund. There on, the ETF can be bought or sold on the exchanges. There can also be more tranches in the future. Why This Route Of Disinvestment? Earlier, the government used to disinvest through follow-on public offers or other routes like offer for sale (OFS). But these routes had a downside. They were subject to vagaries of volatile secondary markets. Investors would short sell on news of government’s intention of disinvestment and later buy it during the disinvestment offer. This led to lower realisation for the government and a risk of breaching the fiscal deficit target. Life Insurance Corporation (LIC) had to bail out many of these companies. How Does The ETF Route Help? The government has tasted blood after the successful launch of the Central Public Sector Enterprises (CPSE) exchange-traded fund (ETF) in May ’14 and two subsequent follow-on offers in February and March ’17 worth roughly `11,500 crore. Through the ETF route the government can disinvest in small chunks rather than in big lots and also realize a better price. The ETF mechanism is a win-win for all: the government and smaller shareholders. In the Budget speech of 2017-18, the Finance Minister Arun Jaitley had promised to use ETF as a vehicle for further disinvestment of shares while setting the disinvestment target at `72,500 crore for fiscal year 2018. Bharat 22 ETF has been set up as one of its vehicles to achieve the target. How Would Shareholders Benefit? Its diversified nature is its unique selling proposition. Investing in Bharat-22 ETF is like participating in the Indian growth story. The government is undertaking a number of key economic reforms, which will benefit the underlying stocks of Bharat 22 ETF. Take for example: 46


Finance Sector Insolvency and Bankruptcy Code 2016, digital and cashless economy, listing of insurance companies, bank recapitalization and Goods and Services Tax (GST). Commerce Liberalization of Foreign Director Investment (FDI) in the Indian economy. Oil Direct benefit transfer of LPG subsidies, introduction of daily fuel pricing and consolidation of government-run oil companies in India. Energy Revival package for electricity distribution companies of India (DISCOMs). What Are The Shareholders?

Other

Upfront

Benefits

For

The ETF will be issued with a 3% discount to the shareholders. This is an additional attraction point. Expense ratio of just 0.0095% for three years from listing of units is also a major pull. What Is Response We Have Already Seen? Anchor institutional investors showed great demand for the product receiving subscription worth `12,000 crore against `2,000 crore reserved for the category. Even retail investors are likely to show a similar response. Bharat 22 will be listed on the stock exchanges around end of November. The ETF aims to bring `8,000 crore to the Indian government. What Will Be The Tax Treatment? Investors will be taxed in a way similar to investments in equity or equity mutual funds. Capital gains held till a year will be counted as short-term capital gains and will be taxed at 15% with additional surcharge and cess. Long-term capital gains (LTCG), that is, gains if the investment is held for more than one year are considered to be tax-free. Is There Any Lock-In Period? Yes. There is a lock-in period of 30 days from the date of allotment for anchor investors. There is no lock-in period for others, including retail investors, retirement funds, qualified institutional buyers (QIBs) and non-institutional investors (NIIs). It’s simplified...

your goals, our expertise

path. We help simplify the path for you through in-depth research backed by decades of valuable experience in the industry.

Disclaimer: Insurance is a subject matter of solicitation. Mutual fund investments, investments in commodities and securities are subject to market risks. Please read the scheme-related document carefully before investing.

Nirmal Bang Securities Pvt. Ltd.

www.nirm a lb a ng.c o m RNI Reg. No. MAHENG/2009/28962 DISCLAIMER In the preparation of the content of this magazine, Nirmal Bang Securities Private Limited has used information that is publicl y available, including information developed in-house. Such information has not been independently verified and we make no representation or warranty as to its accuracy, completeness or correctness. Any opinions or estimates herein reflect the judgement of Nirmal Bang Securities Private Limited at the date of this publication/ communication and are subject to change at any point without notice. This is not a solicitation or any offer to buy or sell. This publication/ communication is for information purposes only and is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. For data reference to any third party in this mat erial no such party will assume any liability for the same. Further, all opinion included in this magazine are as of date and are subject to change without any notice. All recipients of this magazine should seek appropriate professional advice and carefully read the offer document and before dealing and/ or transacting in any of the products referred to in this material make their own investigation. Nirmal Bang Securities Private Limited, its directors, officers, employees and other personnel shall not be liable for any loss (financial or otherwise), damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary and consequential, as also any loss of profit in any way arising from the use of this material in any manner whatsoever. The recipient alone shall be fully responsible/ are liable for any decision taken on the basis of this material. This magazine is prepared for private circulation only. Nirmal Bang Securities Private Limited, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Securities Private Limited or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document.