February Newsletter - 2020

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SEBI Announces Amendments To Investment Advisers Regulations

SEBI has barred the use of titles like independent "financial advisers" or "wealth advisers" by those dealing in the distribution of securities unless they are registered as investment advisers also. As per SEBI, an individual adviser cannot provide distribution services, while firms would need to segregate advisory and distribution activities at the client level. SEBI has also proposed a cap on the advisory fees. A detailed circular from SEBI has not yet come on this matter.

SEBI brings in rules to control POA abuse

Starting from June 1 st , shares of clients lying in Demat accounts held by brokers will have to be specifically marked as 'shares pledged for the purpose of margin' unlike the current practice where it was not required to have any such specific pledge or marking before consideration for the purpose of margin. Pursuant to which, the transfer of securities to the Demat account of the trading member/clearing member (TM/CM) for margin purposes shall be prohibited. Additional judgements include:

  1. The Power of Attorney given by a client in favour of a TM / CM will not mean as an equivalent to the collection of margin by the TM / CM in respect of securities held in the Demat account of the client.
  2. Going forward, depositories shall provide a separate pledge type, viz. 'margin pledge', for pledging client's securities as margin to the TM / CM. The TM / CM shall open a separate Demat account for accepting such margin pledge, which shall be tagged as 'Client Securities Margin Pledge Account.
  3. SEBI has said that the TM and CM shall ensure that the client's securities re-pledged to the CC will be available to give exposure limit to that client only and therefore, the brokers will not be able to further pledge those shares. SEBI has also clarified that any dispute between the client, TM / CM with respect to pledge, re-pledge, invocation and release of pledge shall have to be settled inter-se amongst client and TM / CM through arbitration as per the bye-laws of the depository without including the CC and depositories as held liable for the same.
  4. The TM / CM will be required to close all existing Demat accounts tagged as 'Client Margin/ Collateral' by June 30, 2020. The TM / CM will be be required to transfer all clients' securities lying in such accounts to the respective client Demat accounts. Thereafter, TM / CM are prohibited from holding any client securities in any beneficial owner accounts of TM/CM, other than specifically tagged accounts, as per SEBI.

Co-operative Banks are likely to come under the RBI regulation. The current budget session between March 2 nd to April 3 rd in the Parliament is likely to pass the bill seeking an amendment to the Banking Regulation Act that will bring multi-state cooperative banks under effective regulation of RBI. As per Bloomberg, there are 1,540 cooperative banks with a depositor base of 8.6 crore accounts having total savings of about Rs 5 Lakh Crores.

Regulatory Sandbox

SEBI approved the setting up of a regulatory sandbox to allow live testing of new products, services and business models for a limited set of customers by providing various relaxations and exemptions thereby reducing the regulatory burden as well. The proposed 'regulatory sandbox' is intended to serve as a testing ground for new business models and technologies that benefit Indian investors and markets. Under this framework, the eligible entities would be granted certain facilities and flexibilities to experiment with fintech solutions in a live environment and on real customers, no exemptions will be granted from existing principles of investor protection framework, know-your-customer (KYC) and anti-money laundering (AML) prescribed by SEBI while ensuring that there are necessary safeguards for investor protection and risk mitigation. The emergence of the first regulatory sandbox concept was in the United Kingdom in 2015. By 2018, the concept was adopted in many countries such as Australia, Malaysia and Singapore.

SEBI amends InvIT requirements

SEBI amended the investment manager eligibility norms for Infrastructure Investment Trusts and has also permitted fast-track issuance of units to existing investors in REITs and InvITs. At present, InvIT regulations require the investment manager to have at least five years of experience in fund management or advisory services or development in the infrastructure sector. Besides, the investment manager needs to have at least two employees, each with five years of experience in the infrastructure sector. As an alternative, SEBI will now allow a combined relevant experience of at least 30 years of directors, partners and employees of the investment manager, even if it is a newly created entity. SEBI also allowed InvIT's to the launch rights issue of units without the requirement of obtaining SEBI's observations, provided they satisfy the registration conditions and no regulatory action has been imposed on them in the three preceding years.


Nominal Returns vs Real Returns

Nominal Returns are the gross returns which are generated from an Investment and since it is considered to be inclusive of Inflation, tends to generate a higher return when inflation is higher. Since Inflation and Interest rates tend to have higher correlation, any product that has an accrual return feature tends to become more attractive when interest rates are higher along with the assumption of low risk. However, since nominal returns include inflation, one needs to consider real returns which is post inflation returns. There is a chance that the high nominal growth rate of ~15% in 10 years between FY05-FY15 may not repeat, and in that situation, low nominal growth means careful investment selection which generates positively higher real returns post inflation. In general, real returns should consider not just inflation but taxes, illiquidity costs and fee charges.

Viwaad se Vishwas Scheme - The Details

First proposed in Union Budget 2020, the Bill was approved by the Union Cabinet on February 12. It seeks to provide taxpayers with an opportunity to settle direct tax disputes within the current financial year by waiving interest and penalty on their pending taxes. There are about 4.83 lakh direct tax appeals involving Rs 9.32 lakh crore worth of dues pending at various forums. That's equivalent of 82% of the government's direct tax revenue in FY19. Tax to be paid under the proposed amnesty law will vary depending on whether the Tax Department or the Individual has filed the appeal.

If the appeal was filed by the taxpayer:

  1. The individual will have to pay 100% of the disputed tax, and the penalty and interest will be waived until March 31, 2020. After that, 110% of the tax amount will have to be paid.
  2. In search cases (raid and seizure cases) involving recovery below Rs 5 crore, 125% of the disputed tax will have to be paid else will go up to 135% after March 31.
  3. In the case of disputed penalty or interest, the taxpayer will have to pay 25% till March 31 and 30% after that.

If the appeal was filed by the income tax department:

  1. A taxpayer will have to pay 50% of the disputed tax, and the penalty and interest will be waived until March 31, 2020. After that, the individual will have to pay 55% of the disputed tax.
  2. In search cases, 62.5% of tax will have to be paid by March 31 and 37.5% after that.
  3. Against penalty and interest, an individual will have to pay 12.5% till March 31 and 15% after that.

RBI's liquidity support through LTRO

With not much freedom available for the RBI on the monetary policy front because of the low transmission efficiency and with inflation likely to remain high on a 6-month horizon, the RBI had to adopt a different approach to create credit supply in the system. The measures announced aim to do just that by extending the liquidity support through LTROs and by providing a time-bound sector-specific CRR exemption.

CRR Exemption

Scheduled commercial banks (SCB's) can set off CRR requirement of 4.5% are allowed to deduct the equivalent of incremental credit disbursed as retail loans to MSME, Automobiles, residential housing over and above the outstanding level of credit to these segments as at the end of the fortnight ended 31st January 2020 from their net demand and time liabilities for maintenance of Cash Reserve Ratio. This exemption will be available for incremental credit extended up to the fortnight ending July 31, 2020


The RBI also announced that starting mid-February it would be conducting long-term repo operations for tenors of one and three years, to inject durable liquidity in the banking system of up to Rs 1 lakh crore, at the prevailing repo rate. This new liquidity window will provide banks access to cheaper funding from the RBI for longer tenors and will in turn help bring down rates, across different classes of borrowers.

Both these measures should help in augmenting credit flow to the productive sectors by incentivizing the banks to lend to specific segments in retail and the MSME space while making low-cost funds available to the banks for a period of 1 to 3 years.


CPI inflation for January 2020, printed at 7.59%, higher to the previous print of 7.34%. The spike in headline inflation was mainly due to the rise in Food basket with food inflation at 11.8%. Core CPI Inflation (ex-food & ex-fuel) too, climbed on to around 4.15%, with the transport and communication segment showing a 6.1% increase. This is mainly on account of the telecom tariff pass-through, the effect of which should stabilize in the coming months.

Wholesale Price Inflation (WPI) came in at 3.1% for Jan-2020 (2.6% previously) mainly due to an increase in Manufacturing, Fuel components and an adverse base effect. Food inflation showed signs of cooling off but continues to stay in double digits at 11.5% (13.2% previously).

Core WPI inflation (Non-Food Manufacturing Index) continues to be negative at -1% (-1.6% previously) reflecting the weakness in the manufacturing segment and the decline in pricing power.

India has emerged as the fifth-largest world economy in 2019, overtaking the UK and France, as per a report by US-based think tank World Population Review. India's economy is the fifth-largest in the world with a gross domestic product (GDP) of $2.94 trillion, overtaking the UK and France in 2019 to take the fifth spot.

Foreign Commercial Debt more than doubled in two years as India's domestic lenders turned cautious after a liquidity crisis and India's central bank eased rules for using overseas borrowings. As on December 2019 end, the total external commercial borrowings through both the approval and automatic route, increased 61.45% on a year-on-year basis and 117% from December 2017 to $50.15 billion according to the Reserve Bank of India's data.

Moody's Investors Service on Monday slashed India's growth forecast to 5.4 % for 2020 from 6.6 % projected earlier on slower than expected economic recovery. In its update on Global Macro Outlook, Moody's said India's economy has decelerated rapidly over the last two years and expects the economic recovery to begin in the current quarter.

India's electricity demand rose 3.52 % on a Y/Y basis in January to 105.29 billion units from 101.71 billion units a year earlier. This was the first increase in the last 6 months.

Defence exports by India in the last two years have seen exponential growth from Rs 1,521.91 crore in FY17 to Rs 10,745.77 crore in FY19.


The Department of Telecommunications has approved the long-pending merger of Bharti Infratel with Indus Towers. The merger will likely help Vodafone Idea in fundraising by selling its stake in the entity. The combination of Bharti Infratel and Indus Towers will create a tower company with over 163,000 towers, operating across all 22 telecom service areas. The combined entity will be the largest tower company in the world after China Tower. Indus Towers is a three-way joint venture between Bharti Infratel, UK-based Vodafone Group and Vodafone Idea, with the first two holding 42% each and Vodafone Idea 11.15%.

Blackstone Group Inc. has proceeded with the acquisition of Coffee Day Enterprises Ltd.'s technology park as it is set to pay the first tranche of Rs. 150 crores ($21 million) as soon as

Wednesday, people familiar with the matter said. The fund will pay another Rs. 2,000 crores in the next two weeks for Global Village Tech Park, said the people, who asked not to be identified as the information is private. The remainder, which is Rs. 550 crore, will be paid within a year, the people said. The deal values the technology park at Rs. 2,700 crores.

GMR Infrastructure on Wednesday said it has received Rs. 5,248 crores from Groupe ADP as part of a deal wherein the French major is buying 49% stake in the domestic group's airport business. On February 21, it was announced that Groupe ADP would acquire 49% stake in GMR Airports Ltd (GAL) for Rs. 10,780 crores. The deal would help the group to reduce its debt burden.


The Japanese economy contracted 1.6 % in Oct-Dec quarter of 2019 in the previous quarter. This follows a downwardly revised 0.1% growth in the July-Sep quarter. The market had expected a 0.9% contraction only.

Eurozone economic growth slowed down on a quarterly basis in the last three months of 2019. As per the EU's statistics office Eurostat, GDP in the 19 countries sharing the euro expanded 0.1% quarter-on-quarter in the Oct-Dec period and a 0.9% year-on-year growth which was a downward revision from the previously estimated 1.0% growth.

German December industrial output suffered its biggest fall since the recession year of 2009. Industrial production declined by 3.5% compared to November 2019 much below expectations of a 0.2% fall. The fall was the biggest drop since January 2009 and came after an upwardly revised 1.2% increase in November on October.

The US reported its first death from the coronavirus attack on 29 th February. Till 28 th February, the global death toll increased to more than 2900 while confirmed cases increased to more than 85,000. Outside China, South Korea and Italy reported maximum cases of the virus disease. The death toll in South Korea reached 17 out of total cases of 3150 while the toll in Italy has reached 29 out of the total 1128 cases.

As per Caixin, China's manufacturing PMI (purchasing managers index) sank to 40.3 in February (less than 50 is recessionary), down from January's 51.1 and the lowest reading since the survey began in 2004 and much below 45.7 that analysts polled by Reuters had expected.

Economists expect a sharp rebound as the virus gets contained in the future.


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