VIVEK VAISHNAV ROSHAN VAISHNAV

Transcription

1 FINTELLIGENCE ISSUE 11 MAY - JUNE 2017

2 FOREWORD

3 Securities and Exchange Board of India (SEBI) has been instrumental in promoting healthy and orderly growth of the securities market while ensuring protection of its investors. In yet another step to keep up to the intention of protecting shareholders of listed entities, SEBI has enhanced the scrutiny and disclosures in relation to listed entities engaging in schemes of arrangements, vide its circular dated March 10, Prior to 2013, the mechanism for filing a scheme of arrangement was extremely flexible, which provided great leeway to corporate entities to achieve their commercial objectives without the hassle of requiring the approval or undergoing extensive scrutiny. SEBI acknowledged circumstances where schemes of arrangements were being used to circumvent certain regulations and were not always in the interest of public shareholders. With the new circular, SEBI has sought to establish a robust framework to regulate schemes of arrangement and prevent misuse of the exemption provided under Rule 19(7) of the Securities Contracts (Regulations) Rules, Though the circular overrides the 2015 circular in its entirety and have issued revised set of regulations, it will be applicable only for schemes filed after the date of the New Circular to avoid mislead and ambiguity. When considering investment opportunities, the first challenge that almost every investor faces is a plethora of options like stocks, bonds, shares, money market securities, to the right combination of two or more of these. While, every option presents its own set of challenges and benefits, Mutual Funds offer a means to generate good inflation-adjusted returns. It allows investors to pool in their money for a diversified selection of securities, managed by a professional fund manager. Based on medium or longterm investment, mutual funds have the potential to generate a higher return, as you can invest on a diverse range of sectors and industries while ensuring requisite liquidity, safety and transparency. Whether the objective is financial gains or convenience, mutual funds offer many benefits to its investors. India is one of the fastest growing economies of the world with a positive long-term growth prospective. In order to maintain and strengthen this growth trajectory, it is important to ensure proper flow of credit in all sectors which can cater to rising demand, advancement of technologies and efficient output. Priority Sector Lending (PSL) has long been used by developed as well as developing nations as an instrument to channelize credit at preferential rates to strategic sectors of the economy. India has adopted this concept more than 40 years ago to correct the imbalances in certain strategic sectors of its economy namely, agriculture and small scale industries. Over the years, credit disbursed to these sectors through the PSL channel has increased multifold, with the norms being mandated on domestic as well as foreign banks. We have endeavoured to highlight this concept of priority lending and the policy framework in place through our article Priority Sector Lending and Inclusive Growth. We are happy to release our Eleventh issue of Fintelligence, for the month of May June, We hope you enjoy this edition of Fintelligence. Please write back to us on fintelligence@vivro.net with your valuable feedback and comments. VIVEK VAISHNAV ROSHAN VAISHNAV

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5 TABLE OF CONTENTS Revamping the Framework for Schemes of 05 Arrangements of Listed Entities The Mutual Fund World 10 Priority Sector Lending and Inclusive Growth 15 About Vivro 20

6 REVAMPING THE FRAMEWORK FOR SCHEMES OF ARRANGEMENTS OF LISTED ENTITIES Introduction In India, primarily the provisions of Sections of the Companies Act, 2013 (Sections of Companies Act, 1956) read with rules framed there under contain the elaborate provisions and procedures with respect to Scheme of Arrangement or Compromise (including Mergers, Demergers, etc.) of companies. In addition to these provisions, Listed Companies, as a part of their listing obligations, are required to comply with regulations, directions, guidelines and circulars issued by the SEBI from time to time on the said subject matter. Regulation 11 and Regulation 37 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 required listed companies to ensure that any Scheme of arrangement presented to a Court or Tribunal does not in any way violate, override or limit the provisions of securities laws or requirements of the stock exchange(s) and also requires listed companies to obtain a No-Objection Letter or Observation Letter from the Stock Exchange before the scheme is presented before a Court or Tribunal. Further, sub-regulation (1) and (4) of this Regulation 37 empowers SEBI to specify the requirements to be complied with, by listed entities while framing and submitting a Scheme of Arrangement. Pursuant to the said power, the SEBI, vide its Circular No. CIR/CFD/CMD/16/2015 dated November 30, 2015 (Earlier Circular), prescribed the broad framework governing the Scheme of Arrangement by listed entities. Subsequently with the intent to streamline and more actively regulate the Scheme of Arrangement of Listed companies, SEBI at its meeting held on January 14, 2017, decided to revise the procedural framework relating to Scheme of Arrangement of Listed Entities and pursuant to said decision, notified a revised framework vide Circular No. CFD/DIL3/CIR/2017/21 (Revised Circular) which came into force from March 10, The Revised Circular also provides guidelines for seeking exemption under rule 19(7) of Securities Contracts (Regulation) Rules, 1957 ( SCRR ). 05 REVAMPING THE FRAMEWORK FOR SCHEMES OF ARRANGEMENTS OF LISTED ENTITIES

7 Objectives of the Revised Framework: Based on the reading of the revised framework and from the minutes of SEBI meeting held on 14th January, 2017, the following objects can be deduced: To protect the interest of public shareholders and to improve the disclosure standards in the Scheme of Arrangement involving Listed and Unlisted entities; To promote and ensure wider and larger participation of public shareholders in the Scheme of Arrangements; To prevent the squeezing out of public shareholders of listed entities more particularly when small listed entity is merged with large unlisted entity; To actively regulate and strengthen the process of reverse mergers (an unlisted entity merging into a listed entity) with a view to prevent the misuse of the merger process in order to circumvent listing through an Initial Public Offer process. Comparison: Earlier Circular Vis-à-Vis Revised Circular Brief regulatory and procedural requirements under Earlier Circular and Revised Circular is discussed here with an intent to highlight the changes that the Revised Circular has brought either by introducing new requirement(s) or by amending the existing requirement(s): Sr. No. Particulars Earlier Circular Revised Circular 1 Designated Stock Exchange For Coordinating with SEBI, Stock Exchange having Nationwide Trading Terminal to be appointed as Designated Stock Exchange. 2 Processing Fees No such fees While filing the draft Scheme of Arrangement with SEBI, 0.1% of post scheme paid up capital with a cap of Rs. 5,00, Exemption from Compliance No exemption was available Exemption granted to Schemes solely providing Merger of Wholly owned Subsidiary with its Parent Company. 4 Pricing Restriction No Restriction Compliance with Preferential issue pricing guideline (Considering the date of board meeting as relevant date) as enshrined in SEBI (ICDR) Reg for issue of shares under scheme of arrangement if a. Shares are to be allotted to shareholders of Unlisted Entity; or b. Shares are to be allotted only to the selected group of shareholders. 5 Conditions for Scheme of Arrangement between Listed and Unlisted Entities No condition Scheme of Arrangement between listed and unlisted entities permitted only on fulfillment of following conditions a. Disclosure of Information (similar to information to be given in Abridged prospectus under SEBI (ICDR) Reg., 2009) of unlisted entities by listed entity to its shareholders and a Due Diligence Certificate of Merchant Banker certifying accuracy and adequacy of such disclosure. b. Minimum 25% shareholding of merged entity to be comprised of pre-scheme public shareholders of listed entities and QIB of unlisted entity. c. Unlisted entities can be merged with listed entity only if the latter is listed on a stock exchange having nationwide trading terminals. REVAMPING THE FRAMEWORK FOR SCHEMES OF ARRANGEMENTS OF LISTED ENTITIES 06

8 Sr. No. Particulars Earlier Circular Revised Circular 6 Valuation Report Valuation Report from an Independent Chartered Accountant (except where no change in shareholding pattern of Listed/Resultant Entity) 7 Fairness Opinion Fairness Opinion from a SEBI registered Merchant Banker (MB) on the valuation of assets /shares done by the Valuer 8 Submission of Documents Submission of following documents with Stock Exchange: a. Draft Scheme of Arrangement b. Valuation Report c. Report of Audit Committee d. Fairness Opinion of MB e. Pre and Post Shareholding Pattern of Unlisted Entity f. Audited Financials for 3 years. g. Auditor s Certificate h. Compliance with LODR Regulations. Same submissions and in addition: A. To comply with LODR Regulations, the Compliance with the conditions of Circular also needs to be certified by MD, CS & CFO. B. Due Diligence Certificate of a Merchant Banker certifying accuracy and adequacy of Disclosure of information of the unlisted entity. 9 Auditor s Certificate Auditor s Certificate certifying that accounting treatment in Scheme is in compliance with Accounting Standard/s. 10 Redressal of Complaints Report on Complaints containing details of complaints received on draft scheme to be submitted to Stock Exchange within 7 days of expiry of 21 days of filing of draft scheme with the Stock Exchange. Report on Complaints to be uploaded on the Company s and Stock Exchange s Website. 11 Explanatory Statement Explanatory Statement shall include followings: a. Observation Letter of Stock Exchange b. Pre and Post Scheme expected capital structure c. Fairness Opinion of MB 12 E-voting Facility Mandatory where Scheme of Arrangement involves: a. Additional allotment of Shares to promoter and promoter group b. Listed Entity and other entity involving promoter and promoter group or subsidiary of promoters. c. Parent and subsidiary company where parent listed company has acquired shares of subsidiary from common promoter. Same except that additionally disclosure of information about unlisted entity (same as is given in abridged prospectus) shall also be included. Mandatory for all Scheme of Arrangements 13 Majority approval of public shareholders 14 Prior Approval of SEBI for changes in Draft Scheme For cases mentioned in point (12) above No such requirement Same and additionally for following cases as well: a. Merger involving unlisted entity results in reduction of voting rights of pre-scheme public shareholders of listed entity by more than 5 % of total capital of merged entity. b. Scheme provides for transfer of whole or substantially the whole of the undertaking of listed entity for a consideration not in form of listed equity shares. Prior approval of SEBI for any changes in Scheme of arrangement after the draft is filed with SEBI (except as mandated by Tribunal/regulatory authority). 15 Post Scheme approval filing with Stock Exchange Upon sanction of scheme by High Court/NCLT, following documents shall be filed with Stock Exchange: a. Copy of Order of HC/NCLT b. Result of Shareholders Voting c. Statement of Changes in approved scheme as compared to draft scheme along with reasons d. Compliance Status with Observation Letter e. Application seeking exemption from Rule 19(2)(b) of SCRR, 1957 f. Report on Complaints. 16 Listing Timeline Within 30 days of order of HC/NCLT, steps are taken to list the specified securities and within 45 days of order of HC/NCLT, trading commences. 17 Conditions for seeking exemption under Rule 19(7) of SCRR for listing of unlisted entity postmerger - Shares sought to be listed are allotted by unlisted entity pursuant to Scheme of Arrangement - Min. 25% of post-scheme paid up capital shall be allotted to public shareholders of Transferor Company - Transferee company will not issue any shares not covered by scheme - No outstanding warrants /instruments entitled to be received equity share are pending as on the date of application. 07 REVAMPING THE FRAMEWORK FOR SCHEMES OF ARRANGEMENTS OF LISTED ENTITIES

9 Sr. No. Particulars Earlier Circular Revised Circular 18 Post Scheme Lock-in Requirement - No Lock-in in the Scheme of Demerger of unit of listed entity into Unlisted Entity, if the paid up capital of the unlisted entity is just what is required for the purpose of incorporation. - If Post-merger unlisted entity seeking listing has paid up capital more than what is required for incorporation purpose a. 3 Years Lock-in for Promoters holding to the extent of 20% of post- merger paid up capital. b. 3 Years Lock-in of entire pre-scheme paid up capital of the unlisted entity. Entire pre-scheme paid up capital of the unlisted entity shall be Locked-in as per following if division of listed entity is hived off to an unlisted entity and post scheme, unlisted entity seeks listing: a. 3 Years Lock-in for Promoters holding to the extent of 20% of postmerger paid up capital. b. 1 Year for the remaining shares. No lock-in is required, if post scheme shareholding pattern of unlisted entity is similar to the shareholding pattern of the listed entity. Compliances under revised circular: The revised circular has put some additional compliance obligations on the part of listed entities proposing Scheme of Arrangement. The compliances with these obligations depend, mainly, upon the parties of the Scheme and on the surviving entity (Transferee Entity). Sr. No. Compliances of Revised Circular Scheme of Arrangement between/amongst Table of Compliances by a Listed Entity under the Revised Circular Two Listed Entities Listed and Unlisted Entities 1 Preferential Issue Pricing Guidelines Only if allotment to selected group Transferee - Unlisted Only if allotment to selected group Transferee - Listed Yes 2 Submission of Compliance report signed by CS,CFO & MD Yes Yes Yes 3 Valuation report from Independent CA Yes Yes Yes 4 Fairness opinion of Merchant Banker on Valuation Yes Yes Yes 5 Disclosure of Information (Format of Abridged prospectus) No Yes Yes 6 Due Diligence Certificate of Merchant Banker on accuracy and adequacy of disclosure of information 7 Min. 25% of post capital to be held pre-scheme public shareholders of listed entity and QIB of unlisted entity No Yes Yes No Yes Yes 8 Approval of Majority Public shareholders through e-voting: a. Allotment of additional shares to promoters Yes Yes Yes b. Reduction in Voting rights of Pre-public shareholders by > 5% No Yes Yes c. Scheme involves transfer of undertaking If equity shares are not allotted If listed equity shares are not allotted No 9 Prior Approval of SEBI for change in Draft scheme Yes Yes Yes 10 Application for Exemption under Rule 19(7) of SCRR, 1957 N.A. Yes No 11 Lock in requirement in case of de-merger N.A. Yes No 12 Steps to list shares in 30 days and commencement of trading in 45 days and post scheme advertisement Yes Yes Yes 13 Payment of processing fees to SEBI Yes Yes Yes REVAMPING THE FRAMEWORK FOR SCHEMES OF ARRANGEMENTS OF LISTED ENTITIES 08

10 Enhanced Role of Merchant Bankers One of the important features of the revised circular is the role of Merchant Banker in the scheme of Arrangement proposed between a listed entity and an unlisted entity. Keeping in mind the interest of public shareholders of listed entity, the revised circular provides for disclosure of information pertaining to unlisted entity (the information as are given in Abridged Prospectus under SEBI (ICDR) Regulations, 2009). Further, the Merchant Banker has been assigned the role of ascertaining adequacy and accuracy of the information so disclosed. This role casts an obligation on the Merchant Banker to carry out a due diligence process of the unlisted entity, at least to the extent of information to be disclosed in the explanatory statement to be sent to the shareholders of listed entity at the time of seeking their approval for the Scheme of Arrangement. Conclusion The Revised circular has not changed the basic procedure as prescribed in the Earlier circular but has brought some substantive changes in the current framework governing the Scheme of arrangement of listed entities. The new changes brought in by the revised circular are mainly focused on protecting the interest of public shareholders in the scheme of arrangement involving unlisted entities. This revised framework, will surely, restrict misuse of provisions to structure transactions, bring symmetry in valuation practices, improve corporate governance and disseminate greater information to public shareholders. 09 REVAMPING THE FRAMEWORK FOR SCHEMES OF ARRANGEMENTS OF LISTED ENTITIES

11 THE MUTUAL FUND WORLD A Mutual Fund is an investment vehicle that allows several investors to pool their resources in order to purchase stocks, bonds and other securities. These collective funds (referred to as Assets Under Management or AUM) are then invested by an expert fund manager appointed by a mutual fund company (called Asset Management Company or AMC). The combined underlying holding of the fund is known as the portfolio, and each investor owns a portion of this portfolio in the form of units. 1 Investors pool their money 2 Fund Manager invests pooled money in securities 4 Income is distributed amongst the shareholders 3 Income and dividends are generated THE MUTUAL FUND WORLD 10

12 The mutual fund industry in India began in 1963 with the formation of the Unit Trust of India (UTI) as an initiative of the Government of India and the Reserve Bank of India. Much later, in 1987, SBI Mutual Fund became the first non-uti mutual fund in India. Subsequently, the year 1993 heralded a new era in the mutual fund industry. This was marked by the entry of private companies in the sector. After the Securities and Exchange Board of India (SEBI) Act was passed in 1992, the SEBI Mutual Fund Regulations came into being in Since then, the Mutual fund companies have continued to grow exponentially with foreign institutions setting shop in India, through joint ventures and acquisitions. As the industry expanded, a non-profit organization, the Association of Mutual Funds in India (AMFI), was established on Its objective is to promote healthy and ethical marketing practices in the Indian mutual fund Industry. SEBI has made AMFI certification mandatory for all those engaged in selling or marketing mutual fund products. Why invest in Mutual Funds (MF)? Professionally Managed MFs are managed by professional fund managers, responsible for making wise investments according to market movements and trend analysis. Diverse Portfolio MFs allow you to invest your savings across a variety of securities and diversify your assets according to your objectives, and risk tolerance. Affordability MFs provide investors the freedom to earn on their personal savings. Investments can be as less as Rs Liquidity MFs offer relatively high liquidity. Tax Saving Certain mutual fund investments are tax efficient. For example, domestic equity mutual funds investors do not need to pay capital gains tax if they remain invested for a period of above 1 year. What are the different types of Mutual Funds? Each mutual fund scheme has its own objective that determines its assets allocation and investment strategy. These are classified according to their maturity period, or investment objective. One can also classify mutual funds as Open Ended Funds - where investors may 11 THE MUTUAL FUND WORLD

13 invest or redeem at any point in time and Close Ended Funds - where investors can invest only during the initial launch period known as the NFO (New Fund Offer) period. Mutual funds classified according to their investment objective range from Equity Funds (with substantial risk), to Money Market Funds (which are very safe). Other types include debt schemes, index funds, balanced funds, etc. EQUITY FUNDS These are funds that invest in equity stocks/shares of companies. These are considered high-risk funds, however they also tend to provide high returns. Equity funds are best suited for long term investments and offer tax efficiency if invested for more than 12 months. Large Cap Funds: Large cap funds are those funds which invest a larger proportion of their corpus in companies with large market capitalization. These are stocks of usually large and well-established companies that have a strong market presence and are generally considered as safe investments. One important fact about large caps is that information regarding these companies is readily available in newspapers and magazines. Most of the large cap companies have good disclosures and therefore there is no dearth of information for an investor looking into them. Mid cap Funds: Mid-caps lie between large cap stocks and small cap stocks. These represent mid-sized companies that are relatively more risky than large cap as investment options, yet, they are not considered as risky as small cap companies. They rank between the two extremes on all the important parameters like size, revenues, employee and client base. Small cap Funds: Small cap companies have smaller revenue and client bases, and usually include the startups or companies in the early stage of development. Small cap stocks are potentially big gainers as they are yet to be discovered within the sector and can show growth potential in large numbers once unfurled in the market. However, as these enterprises are small ventures, these should be researched properly. Multi cap Funds: Multi-cap funds can shift their portfolios across market caps. They can hold large-cap or mid-cap stocks, or a mix of both. More importantly, they can take exposure to any type of stocks at the opportune moment. Global Funds: These are funds where the investment made by the fund can be in a company in any part of the world. They are different from international/foreign funds because in global funds, investments can be made even in the investor s own country. Tax Saving Funds (ELSS): These are funds that invest primarily in equity shares. Investments made in these funds qualify for deductions under Section 80C of the Income Tax Act. They have a lock in period of 3 years and are considered high on risk, however also offer high returns in comparison to other Tax saving options like PPF or Insurance. DEBT FUNDS The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. Gilt Funds: These funds invest exclusively in government securities of medium and long term maturities issued by central and state governments. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Income Funds: They invest in corporate bonds, government bonds and money market instruments. However, they are vulnerable to the changes in interest rates and are suitable for those who have a long term investment horizon. Dynamic Bond Funds: They invest in debt securities of different maturity. These funds are actively managed and the portfolio varies dynamically according to the interest rate view of the fund managers. These funds Invest across all classes of debt and money market instruments with no cap or floor on maturity, duration or instrument type concentration. Short Term Funds: These funds invest predominantly in debt securities with a maturity of upto 3 years in THE MUTUAL FUND WORLD 12

14 comparison to a Regular Income Fund. These funds tend to have an average maturity that is longer than Liquid and Ultra Short Term Funds but shorter than pure Income Funds. These funds are suitable for conservative investors who have low to moderate risk taking appetite and an investment horizon of 1 to 2 years. Ultra Short Term Funds: They invest in very short term debt securities with a small portion in longer term debt securities. Most ultra-short term funds do not invest in securities with a residual maturity of more than 1 year. Also referred to as Cash or Treasury Management Funds, Ultra Short Term Funds are preferred when you are willing to marginally increase your risk with an aim to earn commensurate returns. Fixed Maturity Plan (FMP s): FMPs, as the name suggests, are mutual fund schemes with a defined maturity period. These schemes normally comprise of debt instruments which mature in line with the maturity of the scheme, thereby earning through the interest component (also called coupons) of the securities in the portfolio. FMPs are normally passively managed, i.e. there is no active trading of debt instruments in the portfolio. BALANCED FUNDS The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest per cent in equity and debt instruments. NAVs of such funds are likely to be less volatile compared to pure equity funds. INDEX FUNDS These are funds that invest in instruments that represent a particular index on an exchange so as to mirror the movement and returns of the index e.g. such as the Standard & Poor s 500 Index (S&P 500). Gold Funds: They invest in various forms of gold. It can be in the form of stocks of gold mining companies or Gold ETF s. Gold funds offer the convenience of buying gold at low cost with no fear of theft or concerns of storage. You can sell these units at market linked prices at any point in time. MONEY MARKET FUNDS These are funds that invest in liquid instruments e.g. Treasury Bills, Commercial Papers etc with a maturity of less than 91 Days and have a high credit rating. They are considered safe investments for those looking to park surplus funds for a temporary period until the intended objective is achieved. Money markets are also referred to as cash markets. MODES OF INVESTMENT AND EXIT There are several methods of investing into Mutual Funds Lump sum Investments, Systematic Investment Plans, Systematic Transfer Plans. In terms of exits investors have the option to outright sell investments made, or opt for a staggered approach using a Systematic Withdrawal Plan. Lump Sum Investments are suited for those who have non-recurring income or accumulated capital. Lump sum investments are usually popular among middle aged investors who have accumulated savings over the past few years and a greater appetite to take higher risks. Systematic Investment Plan or SIP is a systematic manner for investing money in mutual funds on a predefined periodic basis, as per the options available in the scheme usually being weekly, monthly, or quarterly. SIP is an approach which inculcates a steady habit of investing, assists in planning monthly expenditure, accumulates savings over a period of time and averages purchases in high and low markets to create a smoothened efficient yield on investments. It is best suited for those with predictable recurring incomes. Systematic Transfer Plan or STP is a mechanism available in the mutual fund world to transfer investments from a holding fund (usually being a liquid scheme) to the end investment scheme on a pre-defined transfer period Daily, weekly, fortnightly, monthly, quarterly). STP is a manner in which those 13 THE MUTUAL FUND WORLD

15 with lump sum investment plans can stagger their investments systematically into mutual funds of their choosing over a predefined period of time. Fund houses offers two options which are Fixed and Variable - where fixed denotes a specific amount pre decided and Variable denotes the appreciated value. The traditional redemption route is to sell your mutual funds and redeem your gain/loss adjusted capital. Systematic Withdrawal Plan or SWP is a facility offered by mutual funds to redeem units. The plan allows investors to exit their investments in small portions at regular intervals to meet their short-term goals or regular monthly income needs. These intervals can be monthly or quarterly or annually. Retired individuals or Home makers can utilize this facility to the best of their requirement. OPTIONS OFFERED Most mutual fund schemes offer three options Growth, Dividend Payout and Dividend Reinvestment. Growth In the growth option, profits made by the scheme are invested back into it. This results in the net asset value (NAV) of the scheme rising over time. When the scheme gains, the NAV rises and in case of a loss it goes down. The growth option reinvests the gains over and over again and the returns are compounded, resulting in higher proceeds, at the time of maturity. This option is usually recommended for those who are looking to create a corpus for long-term goals. Dividend Payout - The profits earned by the mutual fund schemes are paid out on a periodic basis in the form of dividend. Dividend earned from mutual fund schemes are tax free in the hands of the investor. This option is recommended for those who are looking for distributed income from their investments. The Net Asset Value of the scheme will go down in tandem with the dividend declared, as the profits are paid out of the NAV of the scheme. Dividend Reinvestment In this option the dividend declared by the Fund is reinvested back in the scheme in the form of fresh units purchased as per the NAV applicable for that particular day. It increases the number of the units you hold for the same cost price. Conclusion The mutual fund industry of India is continuously evolving. The AUM of the Indian MF Industry has grown from ` 3.26 trillion as on 31st March 2007 to ` trillion as on 28th February, 2017, a five-fold increase in a span of less than 10 years! The Industry s AUM had crossed the milestone of `10 Trillion (`10 Lakh Crore) for the first time in May 2014 and in a short span of two years and nine months, the AUM size has crossed `17.89 lakh crore last month and is expected to cross ` 20 trillion by the end of As an asset class, mutual funds have been gaining popularity as it offers significant benefits of portfolio diversification, liquidity, tax efficiency and professional management. It is an optimum way to make investments in equity and debt instruments and an effective manner to plan investments aligned to goals and aspirations. THE MUTUAL FUND WORLD 14

16 PRIORITY SECTOR LENDING AND INCLUSIVE GROWTH Priority Sector Lending (PSL) has long been used by developed as well as developing nations as an instrument to channelize credit at preferential rates to specified sectors of the economy that may not get timely and adequate credit in the absence of such special dispensation. In India, PSL is an important role given by Reserve Bank of India (RBI) to the banks in order to synchronize the lending activities with national importance and priorities. Conventionally, the objective of PSL has been to ensure that vulnerable sections of society get access to credit and there is adequate flow of resources to those segments of the economy which have higher employment potential and help in making an impact on poverty alleviation. However, over the last four decades, the Indian economy has not only undergone a structural transformation but has also been increasingly integrated into the global economy, resulting into a shift of national priorities from lending to vulnerable sections to increase employability, create basic infrastructure and improve competitiveness of the economy, thus creating more jobs. EVOLUTION OF PSL Commercial banks nationalized; emphasis on lending to agriculture, export sector, and Small Scale Industries (SSI) Formalization of PSL on basis of report submitted by the Informal Study Group Public banks to lend one third of its outstanding credit portfolio to PSL Private banks to lend one third of its outstanding credit portfolio to PSL 15 PRIORITY SECTOR LENDING AND INCLUSIVE GROWTH Public and private banks to lend 40% of portfolio to PSL by 1985 Foreign banks to lend 15% of portfolio to PSL by 1992 For all banks with more than 20 branches: PSL to increase to 40% of adjusted net bank credit (ANBC). Direct and indirect agriculture lending set at 13.5% and 4.5% of ANBC RBI Circular on PSL based on recommendations of Internal Working Group RBI Circular regarding the PSL Certificates

17 Priority Sector Lending Lending by scheduled commercial banks to certain sectors identified as priority sectors by the Reserve Bank of India is called as Priority Sector Lending. Sectors like agriculture, farm credit, MSMEs, Export Credit, Education, Housing, social infrastructure, renewable energy, micro enterprises, advances to weaker sections, etc. are considered to be priority sectors. Such sectors are considered to be of economic and national importance and are given special dispensation in form of loans under PSL concept, as a measure to balance resources and growth in all areas of the economy. Priority Sector Lending Norms PSL by Scheduled Commercial Banks is governed by Reserve Bank of India vide its various circulars, latest being, RBI Master Circular no. FIDD.CO.Plan.BC.4/ / , dated July 1, This circular is applicable to all Scheduled Commercial Banks and Foreign Banks, but excludes Regional Rural Banks. All banks have been given an overall target of 40 per cent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher for contribution towards PSL. Such target implementation period is restricted to maximum of five years starting from April 1, 2013 to March 31, 2018 for Domestic Banks and Foreign Banks having 20 or more branches and till March 31, 2020 for Foreign Banks having less than 20 branches. The targets and sub-targets for banks under priority sector are as follows: Priority Sector Target for Scheduled Commercial Banks and Foreign Banks with 20 branches and above Foreign Banks with less than 20 branches Eligible Categories Under Priority Sector Agriculture 18 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher 7/8 percent of the Target for Small and Marginal Farmers to be achieved in a phased manner (Foreign Banks with 20 branches and above excluded from the sub-target currently. Will be included post 2018 after review in 2017) Not Applicable Farm Credit, Agriculture Infrastructure and Ancillary Activities Micro, Small and Medium Enterprises (MSMEs) 7.5 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher (The sub-target for Micro Enterprises for Foreign Banks with 20 branches and above excluded from the sub-target currently. Will be included post 2018 after review in 2017) Not Applicable Investment in Plant and Machinery for Manufacturing Enterprises, Service Enterprises (Rs 5-10 cr.), MSME factoring transactions on with recourse basis by banks, Khadi and Village Industries and Other Finance to MSMEs Export Credit Incremental export credit over corresponding date of the preceding year, up to 2 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, depending upon the sanctioned limit criteria and implementation phase defined To be allowed up to 32 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher Includes pre-shipment and post shipment export credit (excluding off-balance sheet items), as defined in Master Circular on Rupee/Foreign Currency Export Credit and Customer Service to Exporters - Upto 2 per cent of the target, subject to maximum of Rs 25 cr. per borrower for units having turnover of up to Rs 100 cr. Education No specific targets No specific targets Housing No specific targets No specific targets Includes loans to individuals for educational purposes including vocational courses upto Rs 10 lacs irrespective of the sanctioned amount Loans extended for purchase/ construction (Rs lakhs), repairs to damaged dwelling units (In range of Rs 2-5 lakhs), loans to governmental agency for slum clearance and rehabilitation (Upto Rs 10 lakhs), construction loans for weaker and low income groups and loans to National Housing Board (Upto Rs 10 lakhs) PRIORITY SECTOR LENDING AND INCLUSIVE GROWTH 16

18 Priority Sector Target for Scheduled Commercial Banks and Foreign Banks with 20 branches and above Foreign Banks with less than 20 branches Eligible Categories Under Priority Sector Social Infrastructure No specific targets No specific targets Loans for building social infrastructure like schools, health care, drinking water, etc. and bank credit to Micro Finance Institutions for on-lending (Upto Rs 5 cr. per borrower) Renewable Energy No specific targets No specific targets For purposes like solar based power generators, biomass based power generators, wind mills, micro hydel plants, street lighting systems, remote village electrification (Upto Rs 15 cr.) whereas individual household limit will be Rs 10 lakhs. Others No specific targets No specific targets Loans to individual borrowers (Upto Rs 0.50 lakh) having not more than 1 lakh and 1.60 lakh in rural and non-rural areas respectively, distressed persons (Upto Rs 1 lakh) and State Sponsored Organizations for SCs/STs for specific purposes Micro Enterprises 7/ 7.5 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, to be achieved in a phased manner by March Not Applicable The sub-target for Micro Enterprises for foreign banks with 20 branches and above would be made applicable post 2018 after a review in Advances to Weaker Sections 10 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. Foreign Banks with 20 or more branches have been allowed implementation period of five years starting from April 1, 2013 and ending on March 31, Not Applicable Loans to Small and Marginal Farmers, Artisans, village and cottage industries, Beneficiaries of Government Sponsored Schemes, SCs, STs, Self Help Groups, Distressed farmers indebted to noninstitutional lenders, women, person with disabilities, minority communities, etc. are eligible to be classified as Weaker Sections. Meeting the PSL Targets Besides meeting the target by direct lending to the above stated priority sectors, investments by banks in securitised assets and assignments/ outright purchases of any loan asset, representing loans to various priority sectors, except Others category, is also eligible for classification under respective categories of priority sector (direct or indirect) depending on the underlying assets, provided such advances and pool of assets, so purchased or securitised, were eligible to be classified as priority sector advances before their securitisation/purchase and fulfill the RBI guidelines on securitisation and outright purchase/ assignment respectively. However, since July, 2011, investments in securitised assets originated by NBFCs and purchase/assignment undertaken by NBFC, wherein the underlying assets are loans against gold jewellery, are not eligible for priority sector status. The banks may opt for Inter Bank Participation Certificates (IBPCs) on a risk sharing basis, provided the underlying assets are eligible to be categorized under priority sector and the banks fulfill the Reserve Bank of India guidelines on IBPCs. Bank Credit to MFIs for on-lending to individuals and to members of SHGs/ JLGs will also be categorized as priority sector advances, subject to the prescribed conditions by RBI. RBI, vide its circular no. FIDD.CO.Plan. BC.23/ / dated April 7, 2016 has issued guidelines pertaining to Priority Sector Lending Certificates (PSLC), a mechanism to enable banks to achieve the PSL target and sub-targets by purchase of these instruments in the event of shortfall. This also incentivizes banks with surplus achievements to sell the same, thereby, enhancing lending to the categories under priority sector. Under the PSLC mechanism, the 17 PRIORITY SECTOR LENDING AND INCLUSIVE GROWTH

19 seller sells fulfillment of priority sector obligation and the buyer buys the obligation with no transfer of risk or loan assets. The duration of the PSLCs will depend on the date of issue with all PSLCs being valid till March 31st and expiring on April 1st. A bank can purchase and issue PSLCs as per its requirements. The net position of PSLCs sold and purchased has to be included while reporting the quarterly and annual priority sector returns. However, with regard to ascertaining the underlying assets, as on March 31st, the bank must have met the priority sector target by way of the sum of outstanding priority sector portfolio and net of PSLCs issued and purchased. There are only four eligible categories of PSLCs i.e. PSLC General, PSLC Small and Marginal Farmer, PSLC Agriculture & PSLC Micro Enterprises. Monitoring and Non Achievement of PSL Targets In order to ensure continuous flow of credit to priority sectors, the RBI requires the data on such advances to be furnished on quarterly and annual intervals by banks, as per the revised reporting formats. While computing priority sector target achievement from financial year onwards, shortfall / excess lending for each quarter will be monitored separately. Scheduled Commercial Banks having any shortfall in lending to priority sector shall be allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD and other Funds with NABARD like NHB/SIDBI/ MUDRA Ltd., as decided by the Reserve Bank and the interest rates for such contribution shall be decided by RBI from time to time. Non-achievement of priority sector targets and sub-targets will be taken into account while granting regulatory clearances/approvals for various purposes. PSL in Emerging Economies COUNTRY SECTORS/ACTIVITIES UNDER FOCUS IMPLEMENTING AGENCY US Small businesses, students/education, Low income groups in rural areas/ for creation of electricity, waste disposal facilities, Low income groups, elderly and handicapped/ housing (involves credit guarantee in lending to some of these sectors) US Government Departments (either independently, or in collaboration with private investment companies) Denmark EU Ireland Micro enterprises, Small and Medium Enterprises (involves sectoral targets, credit guarantee) Private banking institutions Brazil Industry including SME sector/long-term investment credit, Rural housing, Agriculture, Micro credit (involves credit guarantee, interest subsidy and sectoral targets for some of these sectors) Public banking institutions (either directly or through local commercial banks) People s Republic of China Agriculture, Micro and Small Enterprises (involves sectoral growth targets, credit guarantee, interest rate subsidy) Public banking institutions Russian Federation Agriculture and agro-based industries, Rural infrastructure (involves interest subsidies) Public banking institutions PRIORITY SECTOR LENDING AND INCLUSIVE GROWTH 18

20 Conclusion With a view to achieve sustainable and scalable financial inclusion, multiple strategies are being used such as appropriate relaxations in guidelines, introduction of new financial instruments and other supporting measures. Priority Sector Lending is one such important role given to banks by RBI. PSL includes only those sectors as part of the priority sector, that impact large sections of the population, the weaker sections and the sectors which are employment-intensive such as agriculture, and Micro and Small enterprises. Hence, significant steps towards the contribution to priority sectors aim to provide inclusive growth to the economy of the country. However, such regulatory binding on all banks to extend priority sector loans, often with diluted credit standards, may result in gross shortfalls or a lot of bad loans or both. Given the Basel III norms, wherein banks are forced to aim at higher internal profitability to cover risks, such PSL loans may just act contrary to the objective. It will be interesting to watch how the Government would be confronting this to strike a trade-off between profitability and inclusive growth. 19 PRIORITY SECTOR LENDING AND INCLUSIVE GROWTH

21 ABOUT VIVRO About Vivro Vivro is a Financial Services Group engaged in the business of providing Investment Banking, Corporate Finance, Corporate & Financial Advisory and Wealth Management Services. Vivro Financial Services Private Limited is a Merchant Banker registered with the Securities Exchange Board of India (SEBI). Our Team Vivro is founded by experienced professionals who have been engaged in Capital Market and Corporate Finance services for the last three decades. Our company is supported by a team of more than 90 enthusiastic and motivated people from different backgrounds with varied educational accomplishments and expertise. The talent pool of our company comprises of Chartered Accountants, Company Secretaries, MBAs, Lawyers as well as Ex-Bankers who have held senior positions at various banks and financial institutions. This mix of people infuses elements of creativity and professionalism in our workplace, which adds tremendous value to the services that we offer. With a strong team in place, Vivro is able to deliver value added solutions, tailor-made to suit the requirements of our clients. Our Value Proposition Vivro has emerged as a knowledgeable and reliable partner for businesses both in India and Abroad. Vivro has catered to several companies over the years and it enjoys tremendous confidence from clients, investors, lenders, brokers and financial institutions. Our advisory services and our ability to access the right capital for the right investment opportunity have resulted in significant stakeholder value creation. Vivro has a disciplined and demonstrated process specifically tailored for each client and transaction to maximize value. ABOUT VIVRO 20

22 Capital Market Services Our Capital Markets team assists private companies to raise capital from capital markets through Initial Public Offers of Equity & Debt, Placements, while they assist public limited companies in a host of capital market transactions ranging from Rights Issue, Qualified Institutional Placements, Institutional Placement Program, Takeovers and Open Offers, Buybacks, Delistings, etc. Corporate Finance Vivro syndicates and structures debt finance from banks and financial institutions through several instruments such as: Term Loans/ Project Loans Working Capital Finance/ Corporate Loans/Letter of Credits/Bank Guarantees/External Commercial Borrowings Factoring/Commercial Paper Inter Corporate Deposits, Structured Finance, Infrastructure Financing, etc. Corporate Advisory Our corporate advisory services include: Private Equity and Venture Capital placement and advisory Mergers and Acquisitions: Buy/ Sell advisory as well as Schemes of Arrangement for Corporate Reorganization Valuation Services and Fairness Opinions ESOP Structuring and Valuation Business and Expansion Plans and Strategies Corporate Governance Reporting Succession Planning Entry into India Services Wealth Management Vivro Wealth Advisors Private Limited, a wholly owned subsidiary of Vivro Financial Services Private Limited provides Wealth Management solutions to its retail and corporate clients. Our Wealth Advisory journey begins with understanding the needs of our clients, which forms the basis of our investment solutions across asset classes. We deliver solutions which are aligned to our client s goals, priorities, aspirations and risk tolerance. We follow the maxim What is right for the client is right for us while delivering the Financial Plan. We also offer our Treasury Management solutions to corporates through which we assist in planning and making investments in a variety of financial instruments such as fixed income funds, equity funds, commodity funds etc. 21 ABOUT VIVRO

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