March Newsletter - 2019

Estimated reading time: 12 minutes 35 seconds


The Securities and Exchange Board of India (SEBI) has issued norms for valuation of money market and debt securities that are rated below investment grade, a move aimed at ensuring uniformity and consistency in valuation across the mutual fund industry. The regulator said all money market and debt securities rated below investment grade, shall be valued at the price provided by valuation agencies. Besides, the residual maturity for amortisation-based valuation would be reduced from existing 60 days to 30 days. The amortised price will be compared with the reference price which shall be the average of the security level price of such security as provided by the agency appointed by the Association of Mutual Funds in India. Till the agencies compute the valuations, such securities would be valued on the basis of indicative haircuts provided by the agencies. As per the circular released by SEBI, "AMCs (asset management companies) may deviate from the indicative haircuts and/ or the valuation price for money market and debt securities rated below investment grade provided by the valuation agencies" but the detailed rationale for deviation from the price post haircuts or the price provided by the valuation agencies should be recorded by the asset manager and also disclose instances of deviations under a separate head on the AMC's website. 

601 entities registered as FPI's (foreign portfolio investors) have been barred from buying or selling securities in the Indian markets after they failed to disclose their beneficial owners. The National Stock Exchange said that the entities in question failed to disclose the details as part of the market regulator's KYC (know-your-customer) requirements. The action can be traced to a circular released by SEBI in April 2018 which has detailed a framework to identify and verify beneficial owners of-or those that own/control-foreign portfolio investors. The exchanges had asked the FPIs that had registered with the market regulator before Sept. 21, 2018 to provide their beneficial ownership and KYC documentation by March 20, 2019 failing which they would be barred from participating in the markets. If an existing FPI fails to comply with the applicable KYC requirements by the given deadline, the concerned Custodian shall not allow such FPI to make fresh purchases till the time KYC documentary requirements, as applicable, are complied with. However, such FPI shall be allowed to continue to sell the securities already purchased by it. Such FPI shall be allowed to disinvest its holdings within a period of 180 days from the expiry of the timeline. In case the FPI remains non-compliant with this requirement even after 180 days from the said deadline, its FPI registration will no longer be valid and it would need to disinvest its holdings immediately. 


Balanced funds/Hybrid Funds are funds that allocate their total corpus towards buying both debt and equity instruments, in line with the predefined objectives of the fund. As per SEBI Catgegorisation, there are 6 types of hybrid funds. 

Balanced Funds tend to create overlap in a portfolio if separate equity and debt funds are already selected. It also creates an overlap due to its own asset allocation when the portfolio is already constructed based on asset allocation. 


Symptoms - Investor getting prone to following trends and relying on past performance when it comes to making investment decisions. 

Example - Preferring a mutual fund that has already displayed stellar performance and not wanting to invest in another fund because its recent performance was not satisfying. 

Effects - Mutual funds take advantage of investors by increasing advertisements whenever past performance is high in the fund/category to attract new investors. Research evidence demonstrates that investors do not benefit because performance typically fails to persist in the future. As per Investopedia, "Researchers on behavioral finance found that 39% of all new money committed to mutual funds went into the 10% of funds with the best performance the prior year." 

Correcting the Bias - To avoid this bias, investors should resist following the herd or jumping on the bandwagon. Asset allocation and not contrarian investing philosophy, is a better way to deal with this bias at the overall portfolio level. Inside a set of mutual funds, it is necessary to know that funds follow different styles and no particular style always wins. There is a high likelihood that if one invests in top funds based on returns, then he is selecting funds based on similar strategies or holdings. Although investors may feel better when investing with the crowd, such an investment strategy is unlikely to lead to superior long-term performance. One should realise that the trend has already generated a fair bit of return and entering afterwards implies that the purchase price is higher and generating return on a higher base is difficult. This creates a risk of negative returns if the particular trend is no longer winning. 


Real Estate Investment Trusts (REIT's) are investment vehicles that own, operate and manage a portfolio of income-generating (rental income) properties for regular frequency returns. These properties are typically commercial properties like offices, shopping centres, hotels etc. A REIT pools funds from a number of investors and invests them in rent-generating properties. SEBI requires Indian REITs to be listed on exchanges and to make an initial public offer to raise money. There is a minimum investment requirement of Rs.2 lakh and the minimum offer size of a REIT is Rs.250 crore. In India, apart from FD's there are not many regular income instruments. SEBI requires REITs to distribute a minimum 90% of their income earned, to investors, on a half-yearly basis as dividend. Similarly, 90% of sale proceeds too are to be paid out to unit holders unless the amount is reinvested in another property and 80% of the investment must be in income generating properties. 

Taxation: Any gain realized on the sale of Units held for more than 36 months will be subject to capital gains tax in India at 10% (plus applicable surcharge and cess). Further, gains realized on the sale of Units held for less than 36 months will be subject to capital gains tax in India at 15% (plus applicable surcharge and cess). Capital gains from sale of assets are to be taxed at the SPV/REIT level. Therefore, any income distributed as capital gains from a sale of assets is not taxed in the hands of the investor whereas any interest income and rental income distributed by the REIT to the investor will get taxed as an interest or rental income in the hands of the investor and TDS of 10% is applicable in the case of a resident investor. The dividend component of the income in the hands of unit holders is exempt from tax at the unitholder level and at the REIT level as well. 

Diversification in non risky assets: While FD's benefit when Interest Rates go up, REITS actually benefit when there is a drop in interest rates. A drop in borrowing costs improves the REITs' profitability and ability to acquire properties. Since REITs are dividend-yielding investments, a drop in interest rates leads to widening of spreads between treasury yields and dividend yields, making REITs more attractive as an investment option. 


India's current account deficit widened sharply to $19.1 billion, or 2.9 % of GDP, in July-September 2018-19 from $6.9 billion, or 1.1 % of GDP, in the same period of the previous fiscal year. India trade deficit fell to $14.73 billion in January of 2019 from a downwardly revised $15.67 billion a year earlier. India's Wholesale Price Inflation (WPI) rose to 2.93 % in February over the previous month due to hardening of prices of primary articles, fuel and power. Annual consumer price inflation (CPI) in Jan 2019 declined to 2.05 %, lowest since June 2017, from a downwardly revised 2.11 % in December. The reading was below market expectations of 2.48 %. 

According to World Steel Association, India's crude steel output fell about 2% to 9.180 million tonne (MT) during January 2019 compared to a production of 9.354 MT during January 2018.

Manufacturing activity in India improved at a 14-month high in February, as per the Nikkei India Manufacturing Purchasing Managers' Index (PMI). The Nikkei India Manufacturing PMI rose to 54.3 in February, up from 53.9 in January. A reading above 50 on this index indicates expansion and below that mark, contraction in business activities. 

For the second financial year running, Indian Government exceeded its divestment target, helped by its stake sale and offloading shares in public sector entities through exchange traded funds. Against a divestment target of 80000 Crore, divestment receipts for the ongoing financial year touched Rs.85,000 crore. The primary contribution of Rs.18,729 crore came from the Bharat 22 ETF, followed by Rs.17,000 crore from the public offer of CPSE ETFs and a Rs.14000 Crore stake sale in power sector financer REC Ltd. to state-run peer Power Finance Corporation Ltd., a Rs.5218 Crore Offer-for-sale of stake in Coal India Ltd. and a Rs.2,647 Crore share buyback in Indian Oil Corporation Ltd. 

India's Central Bank (The RBI) is using a new tool to enhance liquidity in the system in the form of a rupee-dollar swap deal. Under this deal, RBI would buy dollars from the Banks and issue Rupees which the receiving Bank has to repay and buy the dollars from RBI after 3 years or the determined tenure. In its first such exercise, the Central Bank on March 26th absorbed as much as $5 billion from the banks in a swap deal while injecting nearly 34,651 crores into the system. Banks would be required to park the dollar funds with RBI and buy it back from the RBI after three years at a premium of Rs. 7.76. The central bank said that the auction received bids for $16.31 billion, approximately three times the notified amount of $5 billion. Previously, RBI would use bond buying from banks to release liquidity in to the market. As more and more bonds are bought, it tightens liquidity as banks exhaust their additional bond holdings. The dollar rupee swap deal will help the Central Bank in achieving its twin objectives of improved liquidity/lower rates while also preventing a sharp appreciation in the rupee. Interest rates may likely see softening due to liquidity improving and lesser participation of RBI to increase liquidity through selling of bonds under Open Market Operations (OMO). There is a likelihood that the bonds may not be in demand due to lower bond buying by RBI to infuse liquidity and this may push the yield higher which the RBI will then have to counter by reducing rates soon. 

Fitch Ratings Friday cut India's economic growth forecast for the next financial year starting April 1, to 6.8 % from its previous estimate of 7 %, on weaker than expected momentum in the economy. 


The US Federal Reserve decided to hold interest rates steady and indicated that no more rate hikes will be coming this year. The Fed's signal on interest rates clearly shows its concerns on slowing economic growth in US and elsewhere. Immediately after, the Fed said it would start slow its balance sheet reduction by reducing the monthly redemptions of treasury securities from current $30 billion to $15 billion and halt the drawdown altogether at the end of September. 

Annual inflation rate in the United States slowed for the third straight month to 1.6 % in January of 2019 from 1.9 % in December. It is the lowest rate since June of 2017, compared to market expectations of 1.5 %, mainly due to a sharp fall in energy prices. US core consumer prices, excluding volatile items such as food and energy, increased 2.2 % from a year earlier in January 2019, the same pace as in December and slightly beating market expectations of 2.1 %. 

After nine successive years of growth till 2018, German manufacturing contracted further in March 2019 compounding fears of a slowdown in the biggest economy of Europe. In addition to trade hostilities due to disputes between US and China and US with EU, manufacturing is also facing the risk of Britain leaving the European Union without an agreement on the terms of its departure. IHS Markit's flash composite Purchasing Managers' Index (PMI) measuring activity in services and manufacturing, fell to 51.5, it lowest reading since June 2013. 

With just over two weeks to go from the original date of March 29, 2019 for the U.K. to formally leave the European Union, an exit deal between UK and EU countries has still not been worked out and it remains unclear how, when or even if Brexit will take place, with the parliament and the nation deeply split. 


PFC acquired the government stake of 52.63% in REC along with transfer of management control after inking a share purchase agreement to acquire 103.94 crore equity shares of REC at a cost of ~14,500 Crore. 

The Tata Group, Singapore's sovereign wealth fund GIC and SSG Capital Management have agreed to invest around Rs 8,000 crore in GMR Infrastructure Limited's airports' business. The investment will consist of an equity infusion of Rs 1,000 crore in GMR Airports Ltd. and the remaining Rs 7,000 crore will be used towards purchase of equity shares in the listed entity. GMR said that it plans to de-merge its airports business (currently contributing to 60% of the group revenue) into a separate entity from its overall energy, highways, urban infrastructure and transportation businesses. GMR Airports is developing the Goa Airport under the build operate transfer model at a cost of Rs 1,880 crore. It has also won the bid to develop Nagpur airport. After the completion of the deal, GMR Infrastructure would hold a 54% stake in its airport business, while Tata Group, GIC and SSG would hold 20%, 15% and 10% stake, respectively. 

Saudi Arabia is looking at building storage facilities and invest in refineries in India and making India a regional hub for supply of crude oil as per Saudi Foreign Minister Adel bin Ahmed Al-Jubeir. 

The Centre has approved over 5.6 lakh houses under the Pradhan Mantri Awas Yojana for "urban poors", taking the total number of houses being funded by the government to more than 79 lakh. 

Civil Aviation Minister Suresh Prabhu released the passenger charter in February 27th specifying the rights of air travellers. Some of the rights are:

1. The charter states that if a domestic flight is expected to be delayed by more than six hours, then the airline would offer an option of "alternate flight" to the passenger within that time, or it will refund the full price of the ticket.

2. It also said that if a passenger is informed of flight cancellation less than two weeks before departure, the airline must offer an alternate flight to passenger or refund the ticket completely.

3. At the time of booking, the airline must clearly "indicate" the amount of refund money that will be given to passenger in case of cancellation, the charter states.

4. If any passenger is denied boarding due to over booking of a flight, the passenger would not be liable to hold airline for compensation if he or she is given an alternate flight within one hour of original flight's departure.

5. The charter says airlines cannot charge an extra fee for ticket cancellation or amendment within 24 hours of booking if the travel date is at least a week away.

6. Passengers must be offered free hotel stay if night flights are delayed by more than six hours.


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