fintelligence - vivro - issue 12_1...sebi (substantial acquisition of shares and takeovers)...

FINTELLIGENCE ISSUE 12 | JULY - AUGUST 2017

FOREWORD

SEBI (Substantial Acquisition of Shares and Takeovers)

Regulations, 2011 (“Takeover Regulations”) aims to

ensure that the public shareholders of a company

are mandatorily provided an opportunity to exit from

the company at the best possible terms in case of

a substantial acquisition in, or change in control of,

a listed company. However, certain non-commercial

transactions such as buy-back of shares, schemes of

arrangements, inter se transfer amongst promoters,

relatives, family arrangements like transmission /

succession / inheritance etc. which do not affect

economic values of the shareholders; are specifically

exempted in order to assist the corporates to carry

on their ordinary business smoothly, especially

when change in control in the management is not

envisaged. Our article discusses the exemptions

from the open offer available under the Takeover

Regulations 2011 and highlights few important cases

that earmark the discretion of the market regulator.

Investment patterns are influenced by demographic

variables and risk tolerance, which are crucial factors

that influence a wide range of financial decisions.

The objective of any financial investment is to get

good returns, however, there may be difference in

perceived returns and the actual returns and hence

a managed portfolio may yield better than direct

investments. Portfolio Management Service (PMS)

is one such tailor made service that allows investors

to customise portfolios, which may comprise of

stocks, fixed income, debt, cash, structured products

and other individual securities, depending on risk

appetite and returns expectation. PMS is not only

a flexible and transparent option for investors

seeking customized solutions for their wealth but

also imparts professional management of portfolios

with the objective of delivering consistent long-term

performance while controlling the risk factor.

Collateral forms the most important basis of any

lending transaction. Sufficient collateral not only

presents the borrower with higher credit worthiness

but also ensures the lender’s interests, especially

when there is a significant rise in the NPAs of the

lenders. Credit Enhancement is a method whereby

a borrower improves its credit worthiness with the

support of an additional party which may be a bank/

financial institution, insurance agency, etc. Such

mechanism helps growing companies to borrow funds

at attractive terms so as to realize their full economic,

social and political potential while ensuring reasonable

comfort to its lenders. In order to encourage SPVs

and bond financing, the Reserve Bank of India has

allowed banks to provide partial credit enhancement

upto the permissible limit of 50% of the bond issue

size. Our article focusses on the know-hows of the

credit enhancement concept while discussing various

strategies which fall under the purview.

We are happy to release our Twelfth issue of

Fintelligence, for the month of July - August, 2017. We

hope you enjoy this edition of Fintelligence. Please

write back to us on [email protected] with your

valuable feedback and comments.

VIVEK VAISHNAV ROSHAN VAISHNAV

Exemption from Open Offer Obligations 05

Do You have a PMS in your Portfolio? 10

Credit Enhancement 16

About Vivro 20

TABLE OF CONTENTS

EXEMPTION FROM OPEN OFFER OBLIGATIONS

05 EXEMPTION FROM OPEN OFFER OBLIGATIONS

Under SEBI (Substantial Acquisition of Shares and

Takeovers) Regulations, 2011 (“Takeover Regulations”),

an acquirer is under an obligation to make a mandatory

open offer for acquisition of 26% of the total equity

shares of the target company if it (a) acquires equity

shares/voting rights entitling it to exercise 25% 1 or

more of voting rights in the target company ; or (b)

it acquires additional equity shares or voting rights

entitling the acquirer to exercise more than 5% of

voting rights in a financial year if it already holds 25%

or more of the capital in the target company 2 or; (c) if

the acquirer acquires direct or indirect control over the

target company 3 .

The Takeover Regulations provide for exemption from

such open offer obligations generally as well as on case

to case basis.

A TAKE ON SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2011

1 Regulation 3(1) of the Takeover Regulations2 Regulation 3(2) of the Takeover Regulations3 Regulation 4 of the Takeover Regulations

EXEMPTION FROM OPEN OFFER OBLIGATIONS 06

General Exemptions – Regulation 10

Regulation 10 (1) provides for automatic exemption from the open offer obligations triggered under regulation 3 and

4 of the Takeover Regulations under the following circumstances:

Regulation 10(2) provides exemptions from the

obligation to make an open offer under takeover

regulation 3 on acquisition of shares of a target

company, which does not result in change of control

over such target company, which is pursuant to a

scheme of corporate debt restructuring. Such a scheme

should have been authorized by a special resolution

passed by postal ballot, subject to applicable provisions

and circulars of Reserve Bank of India.

4 Four working days advance notice of proposed transaction as per Regulation 10(5)

Sr. No.

Transaction Conditions Precedent

1 Inter se Transfer between:

i. Immediate Relative – Means any spouse of a person, and includes parent, brother, sister or child of such person or of the spouse (Takeover Regulation 2(l)).

ii. Promoters – Persons named in the shareholding pattern filed by the target company in terms of the listing agreement or under Takeover Regulations for not less than three years prior to the proposed acquisition.

iii. Qualifying Parties – Subsidiaries, holding company, other subsidiaries of a company, persons holding not less than 50% of the equity shares of the company, other companies and their subsidiaries subject to control being held by the same persons exclusively.

iv. Persons Acting in Concert - for not less than three years prior to the proposed acquisition, and disclosed as such pursuant to filings under the listing agreement.

v. Shareholders of the Target Company - who have been persons acting in concert for a period of not less than three years prior to the proposed acquisition and any company in which the entire share capital is held in proportion of holdings in the target company without any differential entitlement to exercise voting rights in such company.

1. Pricing Restriction

If shares of the target company are frequently traded: Acquisition price per share – Not higher than 25% of the volume weighted average market price of 60 trading days preceding the issuance notice date4.

If shares of the target company are infrequently traded: Acquisition price per share – Not higher than 25% of the price determined taking into account valuation parameters like book value, comparable trading multiples, etc.

2. Disclosure Requirement

The transferor and the transferee shall have to comply with the applicable disclosure requirements.

2 Acquisition in the ordinary course of business by an underwriter, stock broker, merchant banker or a nominated investor in the process of market making or subscription to the unsubscribed portion, under scheme of safety net, stabilizing agent, market maker, Scheduled Commercial Bank acting as escrow agent, invocation of pledge by Bank and Public Financial Institution.

3 Acquisition at subsequent stages by an acquirer who has made a public announcement of an open offer for acquiring shares pursuant to an agreement of disinvestment, if:

• Both the acquirer and the seller are the same for all the stages of acquisition; and full disclosures of all the subsequent stages, if any, has been made in the public announcement and in the letter of offer.

4 Acquisition pursuant to a scheme:

• made under section 18 of Sick Industries Companies (Special Provisions) Act, 1985 (now as per Insolvency & Bankruptcy Code, 2016);

• of Arrangement wherein the target company goes through reconstruction directly like amalgamation, merger, demerger, pursuant to an order of a court or a competent authority under any law.

• of Arrangement wherein the target company does not go through reconstruction like amalgamation, merger, etc. directly, subject to:

i. the components of cash and its equivalents of consideration paid is less than 25% of the consideration paid under the scheme.

ii. Wherein persons directly or indirectly holding less than 33% of the voting rights in the combined entity are the same as the persons who held the entire voting rights before the implementation of the scheme.

5 Acquisition pursuant to the provisions of:

• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

• Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009;

• Acquisition by way of transmission, succession or inheritance;

• Acquisition of preference shares carrying voting rights under Section 47(2) of Companies Act, 2013

• Acquisition of equity shares pursuant to conversion of debt into equity under Strategic Debt Restructuring Scheme, subject to RBI guideline;

• Increase in voting rights arising on account of restricting the voting rights on partly paid up shares (section 106 of Companies Act, 2013) or forfeiture of shares undertaken by the target company, subject to applicable laws and regulations.


Exemptions by the Board – Regulation 11

Regulation 11 empowers the Board (“SEBI”) to provide exemption to the acquirer/ target company, for reasons recorded in writing, from open offer obligations and/or any procedural requirement or compliance, if it deems fit. The company seeking such exemptions shall have to file an application supported by an affidavit and a nonrefundable fee of Rs. 5 lacs, post which, the Board may refer the case to a panel of experts constituted and on appropriate recommendations shall pass and host the exemption order on its website.

Moreover, an increase in voting rights in a target company pursuant to buy-back of shares shall be exempted from the

obligation to make an open offer, provided such shareholder reduces his shareholding in such a way that his voting rights

falls below the threshold limit referred to under Regulation 3 (1) of the Takeover Regulations within 90 days from the

closure of the buy-back (Regulation 10 (3)).

Regulation 10(4) provides

automatic exemption

from the obligation to

make an open offer

under sub-regulation (2)

of regulation 3 for the

following acquisitions

Acquisition of shares by any shareholder of a target company, upto his entitlement and beyond, pursuant to a Rights Issue

Acquisition of shares from a venture capital fund/ Category I Alternative Investment Fund/Foreign Venture Capital investor registered with the Board, by promoters of the target company pursuant to an agreement between such parties.

Increase in voting rights in a target company of any shareholder, pursuant to buy-back of shares

Acquisition of shares in a target company by any person in exchange for shares of another target company tendered pursuant to an open offer

Acquisition of shares in a target company from state-level financial institutions/ their subsidiaries/ companies promoted by them, by promoters pursuant to an agreement between transferors and promoter

Exemplary Case Studies

REGULATIONThe Govt. of India was the proposed acquirer and wanted to infuse funds in the banks through

preferential allotment of equity shares. This proposition was approved by their respective Boards.

However, there was an increase in voting power resulting to more than 5%, thereby, attracting

provisions of Regulation 3(2) of Takeover Regulations. Both the banks on behalf of GOI sought

exemption from SEBI.

Dena Bank - C/o The Government of India (GoI) (Acquirer)

SEBI concluded that though there was a change in shareholding, attracting 3(2) of the Takeover

Regulations, there was no change in the control of the target company and no change in the equity

shares held by the target company as well as the public shareholders, subsequent to the proposed

acquisition. Hence, exemption was given with respect to making open offer. The acquirer was bound

to follow other rules and regulations applicable to them.

Indian Overseas Bank - (Target Company)

EXEMPTION FROM OPEN OFFER OBLIGATIONS 08

5 SEBI Informal Guidance CFD/PC/IG/CB/756/12 dated October 25, 2012

Diamond Power Infrastructure Limited (“Target Company”)

SEBI vide order dated March 23, 2016 exempted the Target Company from open offer on receipt

of application on behalf of the promoters under Regulation 11 of Takeover Regulations, since the

increase in the shareholding of the promoter group increased from 34.71% to 46.60% under the

restructuring scheme approved by Banks and FIs with the proposed conversion of warrants in to

equity shares. SEBI noted that Takeover Regulations specifically provides for general exemption

from the requirements of making open offer for acquisition of shares pursuant to the CDR scheme.

The exemption was granted subject to compliance requirements under Chapter V of Takeover

Regulations.

A company listed on BSE and NSE and a composite scheme of arrangement was sanctioned by the

High Court in the year 2010. The shares of the resulting companies were listed on BSE and NSE in

the year 2011. Promoter and few other promoter group companies intended to transfer their shares

to another promoter group companies. All the Transferor Companies held shares in WFL for more

than three years. One of the Transferee companies held shares for a period of more than three years

while the other Transferee company did not hold shares in WFL for a period of three years.

An interpretive guidance was sought from SEBI. SEBI opined, since the condition of three year

shareholding by the Transferees prior to acquisition would be deemed to be fulfilled in case all the

transferees collectively hold shares for a period of three years, provided the other conditions for

availing the exemption are fulfilled. The proposed inter-se transfer was exempt under Regulation

10(1) (a)(ii) of Takeover Regulations.

Weizmann Forex Ltd. (WFL5)

REGULATION

REGULATION

Commercial Engineers and Body Builders Company Limited (CEBBCO)

CEBBCO was listed on NSE and BSE on October 18, 2010 when Mr. Ajay Gupta (“AG”), one of the

promoters of the Company, intended to sell shares of CEBBCO constituting 17.61% of the paid up

share capital to Mr. Kailash Gupta (“KG”) another promoter of the Company and also father in law

of AG. AG and KG were promoters of CEBBCO since December 23, 2006 and October 3, 2005,

respectively and they clearly held long term interest in the target company. The Company had

sought exemption under Regulation 10(1) (a)(ii).

However, SEBI rejected the exemption application and clarified that in order to avail the exemption

under Takeover Regulation 10(1) (a)(ii) all the compulsory conditions should be duly fulfilled. One

of the prescribed conditions that the transferor and the transferee should have been identified as

promoters of the target company in the shareholding pattern filed under the listing agreement or the

Takeover Regulations for three years prior to the acquisition which was not fulfilled. If this condition

is not fulfilled for any reason whatsoever, inter alia including if the target company was not listed for

three years then the exemption under Regulation 10(1)(a)(ii) of Takeover Regulations could not be

availed.

Vis-à-Vis


Conclusion

The rationale for exempting inter-se transfers among qualifying parties was very well spelt out

by Takeover Regulations Advisory Committee (“TRAC”). The acquisitions arising out of inter-se

transfer of shares among qualifying parties is with the underlying principle that such transfers do

not represent a typical acquisition carrying an economic value. Generally exempted acquisitions are

considered noncommercial transactions viz., transaction pursuant to private family arrangement

intended to streamline succession and welfare of beneficiaries, internal reorganization within the

transferor’s family which does not prejudice the interest of the public shareholders of the Target

Company and does not bring any change in control or management.

The SEBI, through Takeover Regulations, has taken care that the regulations and regulatory

intervention should not become hindrance in restructuring exercise of corporate world. At the same

time, the regulations have equipped the regulator to prevent unhealthy corporate practices and

protect the interest of investors in various scenarios.

In today’s complex financial market, every individual

investor has their own specific financial needs that are

based on their risk appetite and financial goals. But

regardless of this, every investor wants to optimise

his return on investments. This requires management

of investments professionally to achieve specific

investment objectives, relieving investor from the day-

to-day administrative hassles of investments. Portfolio

Management Services (PMS) is an enabler to address

these issues.

Taking into account the unpredictable nature of the

share market, strong expertise and strong research

is required to make the right decision. Portfolio

management is not an easy task as it involves juggling

between the limited choices at hand with twin

requirements of adequate safety and sizable returns.

Because managing investments in equities requires

time, knowledge, right mind-set, experience and

constant monitoring of stock market, an expert called a

Portfolio Manager helps manage your investments. The

Portfolio Manager advises, manages and administers

the securities and funds on your behalf in an agreed

upon manner keeping in mind the overall objective and

limitations on the Portfolio Manager either through

regulations or through corporate policies.

Every PMS provider may have two to three PMS

schemes with different investment strategies and

would be defined for a different Risk- Return Profile.

You can decide on the suitability of the PMS scheme by

undergoing the Financial Planning Process which can

be done by your Financial Advisor.

DO YOU HAVE A PMS IN YOUR PORTOFLIO?

DO YOU HAVE A PMS IN YOUR PORTOFLIO? 10

11 DO YOU HAVE A PMS IN YOUR PORTOFLIO?

Structure of a PMS

The Agreement

Portfolio Management Services are regulated

under Securities Exchange Board of India (Portfolio

Managers) Regulations, 1993 (‘PMS Regulations’). As

per these regulations a portfolio manager means any

person who pursuant to a contract or arrangement with

a client, advises or directs or undertakes on behalf of

the client (whether as a discretionary portfolio manager

or otherwise) the management or administration of a

portfolio of securities or the funds of the client, as the

case may be.

In order to provide Portfolio Management Services

in India, an entity is required to register and get an

approval from SEBI under the PMS Regulations. The

regulations have laid down a comprehensive process

and manner in which the application is to be made and

approval is to be sought.

Certain key aspects of the registration requirements

include – the entity needs to be a body corporate

which has the necessary infrastructure to provide such

services to its clients and has a principal officer who is

professionally qualified in finance or has an experience

of at least 10 years in related activities in the securities

market including portfolio manager, stock broker or as a

fund manager. The Company is also required to have at

least 2 employees who between them have at least 5

years of experience as applicable to the principal officer.

The Company also requires a minimum networth of

INR 2 crores to fulfill the minimum capital adequacy

requirements as per the PMS Regulations. Once the

Company receives a valid certificate of registration, it

shall remain valid unless it is suspended or cancelled

by SEBI.

With the overarching principle investor protection, the

Company is under keen regulatory watch of SEBI and

is required to keep SEBI informed on several aspects

through the portfolio management process and

throughout the period the PMS is in existence. This

includes financial information, audited statements,

disciplinary actions and cases of default in a manner

defined in the PMS regulations.

The portfolio manager and client shall enter into an agreement in writing to enable the portfolio manager to

manage fund or portfolio of securities on behalf of a client. The agreement shall essentially define the inter se

relationship between parties and set out the mutual rights, liabilities and obligations relating to the management of

funds or portfolio of securities. Some aspects of the agreement include:

• The Investment objectives and the services to be provided;

• Areas of investment and restrictions, if any, imposed by the client with regard to the investment in a particular

company or industry;

• Type of instruments and proportion of exposure;

• Period of contract and tenure of portfolio investments;

• Terms of early withdrawal of funds or securities by clients and early termination;

• Risks involved in management of the portfolio;

• Amount to be invested subjected to the PMS regulations;

• Fees payable to the Portfolio Manager and other incidental fees in connection with such services to other

intermediaries / agencies;

• Manner of settling clients’ accounts including in cases of early termination;

• Custody of securities;

• Liability clauses;

• Terms of accounts and audit and furnishing reports to clients.


General and Operating Responsibilities of the Portfolio Manager

• The portfolio manager shall act in a fiduciary capacity with regard to the client’s funds and shall keep the funds of all clients in a separate account to be maintained by it in a Scheduled Commercial Bank;

• The portfolio manager shall transact in securities within the limitation placed by the client himself with regard to dealing in securities under the provisions of the Reserve Bank of India Act, 1934 (2 of 1934);

• The portfolio manager shall not derive any direct or indirect benefit out of the client’s funds or securities;

• The portfolio manager shall not borrow funds or securities on behalf of the client;

• The portfolio manager shall not lend securities held on behalf of clients to a third person except as provided the PMS Regulations;

• The portfolio manager shall ensure proper and timely handling of complaints from his clients and take appropriate action immediately;

• The portfolio manager shall invest funds of his clients in money market instruments (including commercial paper, trade bill, treasury bills, certificate of deposit and usance bills) or derivatives or as specified in the contract. He shall not deploy the clients’ funds in bill discounting, badla financing or for the purpose of lending or placement with corporate or non-corporate bodies;

• Monies or securities accepted by the portfolio manager shall not be invested or managed except in terms of the agreement signed between parties;

• While dealing with clients’ funds, the portfolio manager shall not indulge in speculative transactions except transactions in derivatives;

• The portfolio manager shall, ordinarily purchase or sell securities separately for each client. However, in the event of aggregation of purchases or sales for economy of scale, inter se allocation shall be done on a pro rata basis and at weighted average price of the day’s transactions. The portfolio manager shall not keep any open position in respect of allocation of sales or purchases effected in a day;

• Any transaction of purchase or sale including that between the portfolio manager’s own accounts and client’s accounts or between two clients’ accounts shall be at the prevailing market price;

• The portfolio manager shall segregate each clients’ funds and portfolio of securities and keep them separately from his own funds and securities and be responsible for safekeeping of clients’ funds and securities;

• The portfolio manager shall not hold securities belonging to the portfolio account, in its own name on behalf of its clients either by virtue of contract with clients or otherwise;

• The portfolio manager may, subject to authorization by the client in writing, participate in securities lending.

OPERATING RESPONSIBILITIES

GENERAL RESPONSIBILITIES

The portfolio manager shall

not accept from the client,

funds or securities worth less

than INR 25 Lakhs;


Operations of a PMS

Typical Analysis Undertaken by a Portfolio Manager for Stock Selection

Portfolio Management Services (PMS) is a specialized

& customized service that offers a range of

specialized investment strategies to capitalize on the

opportunities in the market. Though, PMS is managed

by professional portfolio managers, it has potential

to address the personal preferences tailored into the

investment portfolio giving the freedom and flexibility

required for achieving the financial goals.

In the PMS strategy, a fund house has several model

portfolios. The fund manager remodels a clients’

existing portfolio and brings it as close as possible

to the model portfolio of the PMS strategy that the

investor subscribes to. There is no NAV for a PMS

scheme; however you will get the valuation of your

portfolio on a daily basis from the PMS provider. Each

PMS account is unique from one another. Every PMS

scheme has a model portfolio and all the investments

are done in the Portfolio Management Services on the

basis of model portfolio of the scheme.

The portfolio manager creates the portfolio of stocks

for you with the initial investment amount. Stocks

bought for you by the fund manager are stored in

your Demat account opened in your name and can

be transferred to you at any point in time in case you

decide to exit the PMS. Technology assists to provide

a transparent view of your portfolio on a 24x7 basis.

This access is appreciated by all equity enthusiasts

and gives the portfolio holder an opportunity to

question the portfolio manager on stock rationale and

investment process.

For their services, PMS providers usually

charge fund management fees which

could range between 2.5% to 3.5%.

Fundamental analysis

This analysis concentrates on the fundamental factors

affecting the company such as EPS (Earning Per Share)

of the company, the dividend Payout ratio, competition

faced by the company, market share, quality of

management etc.

Technical analysis

The past movement in the prices of shares is studied

to identify trends and patterns and then tries to predict

the future price movement. Current market price is

compared with the future predicted price to determine

the mispricing. Technical analysis concentrates on

price movements and ignores the fundamentals of the

shares.

The analysis forms the basis of a Portfolio structure, however it does not end here;

the portfolio further undergoes a three step process to keep pace with the dynamism of the Indian Markets.

The goal of portfolio construction is to generate a portfolio that provides the highest returns at a given

level of risk.

The investor/portfolio manager has to constantly monitor the portfolio to ensure that it continues to be optimal. As the economy and financial markets are highly volatile dynamic changes take place almost daily. As time passes securities which were once

attractive may cease to be so. New securities with anticipation of high returns and low risk may emerge.

Portfolio evaluation is the process, which is concerned with assessing

the performance of the portfolio over a selected period of time in terms of

return & risk. The evaluation provides the necessary feedback for better designing

of portfolio the next time around.

PORTFOLIO SELECTION PORTFOLIO REVISION PORTFOLIO EVALUATION

1 2 3


TYPES OF PMS

Lock in Period

There are essentially two types of

portfolio management services,

and the difference between them

lies in the level of control the

investor has on his investments

in both kinds of services. The two

types of portfolio management

services are Discretionary PMS

and Non-Discretionary PMS.

There is no lock in period for an investment in a PMS

as per the PMS Regulations; however PMS providers

may decide to have a lock in order to avoid impulsive

redemptions at the times when the markets take a

downswing or maintain it as a policy.

Post three years of completion the investment is exit load free. Equity investments are meant to be held for a long term to attain best realization of profits.

Competiton to PMS

The closest competition to a PMS is Equity Mutual Funds (MFs). In MFs, the product basket is much larger; providing you with more choices. While both products are essentially long-term in nature, equity MFs do not offer the advantage of customization

and concentrated portfolios. In other words, if you want to invest in or avoid specific stocks or sectors you can’t do that with an equity MF, because there are restrictions on total sector exposures for funds. PMS not only offers a focused portfolio but also the novelty of one-on-one interaction with the portfolio manager to understand the strategy and philosophy behind the investment. MFs work well where you want to invest in line with an established scheme objective; PMS works well in considering the risk appetite of an individual for managing tailored portfolios. MFs offer the liberty for new entrants to start with an amount as small as Rs. 500/- while PMS can be considered only if one has funds or securities of Rs. 25 Lakhs.

The aptitude of tracking the equity markets and clarity on one’s risk taking capacity is crucial in order to decide the best fitted avenue from the two. While you may get lured by the performance of the PMS or MFs, quantitative and qualitative aspects should be assessed well to have the right solution on-boarded into your portfolio.

PMS maintain an exit load of 3% if the

redemption is conducted within a year of

investment, 2% if within two years and

1% if within three years of the investment.

In India, most portfolio management service providers provide Discretionary Portfolio Management Services.

Discretionary PMS services are those where the investor has no control over where he makes his investment. The portfolio is managed by the portfolio manager and his decision over making the investment is final. In a discretionary product, the fund manager’s discretion in managing the portfolio plays a key role. The investor’s account is run on the basis of a power of attorney and there is no further need to obtain the investor’s consent for intermediate transactions. However, since the stocks are in the investor’s name, they have full access.

Discretionary PMS

Non-Discretionary PMS account is managed by the portfolio manager but the control over investment rests with the investor. He is provided with investment options by the portfolio manager and investor decides where to invest and when to sell the portfolio.

Non-Discretionary PMS


Conclusion PMS has become a known name and is forming a crucial part of an investor’s portfolio. The assets under management (AUM) of portfolio management services (PMS) have seen an uptick with the market’s rise. The AUM for discretionary PMS rose to Rs 67,300 crore as on end-April, 2017 from Rs 45,584 crore a year before, shows data from the SEBI. The PMS structure and investing philosophy may not suit the risk appetite of the average investor. PMS is mainly for seasoned HNIs who understand direct equity and its risks well.

Each PMS transaction is considered an independent trade and capital gains will be applied on each depending upon whether the relevant stock was held long-term or short-term. At present, 15.66% tax is applied for short-term capital gains and no tax is applied on long-term capital gains. Securities transaction tax (STT) is applicable. The PMS provider

sends an audited statement at the end of the Financial Year providing details of STCG and LTCG, which can further be provided to your Chartered Accountant for tax filing purpose. You will have the onus of declaring and filing the returns on income generated in the PMS.

Taxation

CREDIT ENHANCEMENT - AN OVERVIEW 16

CREDIT ENHANCEMENT -AN OVERVIEW

Credit Enhancement is a method whereby a borrower

or a bond issuer attempts to improve its debt or credit

worthiness. Through credit enhancement, the lender

is provided with reassurance that the borrower will

honor its repayment through an additional collateral,

insurance, or a third party guarantee.

The concept of credit enhancement has been widely

prevalent in the developed countries for over five

decades and is ideally suited for companies where

the underlying potential of the industry in question

is strong but the balance sheet, the profit and loss

account and current cash-flows are weak, thus

restricting the ability of the enterprise to raise the funds

needed to transform the company from the current

financial difficulties, into a strong enterprise.

Credit enhancement reduces the credit risk associated

with the debt, thereby increasing the overall credit

rating while providing the reasonable and required

security to the lender and lowering interest rates. From

a borrower’s perspective, Credit Enhancement is used

to obtain better terms for an outstanding debt. There

are several internal and external ways of enhancing the

credit worthiness of the debt so as to uphold superior

solvency ratios.

Introduction

17 CREDIT ENHANCEMENT - AN OVERVIEW

Internal Credit Mechanisms

BORROWER

Applies for a loan

Processes the loan

Provides the lender

with an additional

comfort in form of

a Bank Guarantee/

Stand By Letter of

Credit/Insurance, etc.

Provides the

borrower with an

additional cushion

so as to negotiate

better terms with the

lender in lieu of some

commercial/financial

understanding.

CREDITENHANCEMENT

PROCESS

CREDITENHANCEMENT

PROVIDER

PARENT/ HOLDINGCOMPANY

BANK/FINANCIAL

INSTITUTION

INSURANCECOMPANY

OTHER INTERNAL/EXTRENAL

MECHANISMS

LENDER

Though not a direct credit enhancement technique, overcollateralization is a way of secured financing to the borrower. In such a mechanism, the lender extends the loan amount that is less than the actual value of the property. It provides credit comfort to the lender by lowering the creditor’s exposure to default risk. This concept normally works on the principle of loan to value ratio. If the loan is defaulted, the value of the property will be still worth more than the amount that is in default. The bank can sell the collateral and recover the amount in default.

OverCollaterization

Debt service reserves are cash assets that are designated by a borrower to ensure full and timely service of interest and principal payments to the lenders on short term or long term basis. DSRA works as an additional measure to protect the interests of lenders and is often seen as an important part of the project finance term sheets. It acts as a shield against the unexpected volatility or delay in the cash flow to service the debt. Cash buffer equal to a given number of months projected debt service obligations are parked in such account. This mechanism is more often used in infrastructure or project based sectors wherein operational difficulties can affect the revenue and thereby servicing of debt obligations.

Debt Service Reserve Accounts (DSRA)

CREDIT ENHANCEMENT - AN OVERVIEW 18

The rating of certain instruments and issuers may be

enhanced using a support structure mechanism. This

enable the rated instrument to achieve a rating that

is higher than the issuer‘s stand-alone rating. Such

credit enhancements can take many forms such as

a guarantee from another company or setting aside

specific cash flows exclusively for debt repayment.

Structured Obligation (SO) ratings are ratings that are

based on a ‘credit enhancement’ mechanism and/or

a structured payment mechanism. A suffix in the form

of ‘(SO)’ indicates that the obligation being rated is a

“structured obligation” that is different and distinct from

the “general obligations” of the issuer. The structured

obligations use similar long term rating scale such as

AAA (SO), AA (SO), etc.

Credit Enhancement and Ratings

External Credit Mechanisms

A Standby Letter of Credit/Letter of Credit is a document from a bank that guarantees payment in case of any default. This guarantor may be a bank/ financial institution or a parent/ holding company which issues corporate guarantees in favour of the borrowing company. Such instruments may provide the loan/ bond issuance with necessary credit enhancement.

Standby Letter of Credit (SBLC)/ Letter of Credit (LC)

Net interest payments remaining from the underlying assets of an asset-backed security, after all payables and expenses are known as Excess Spreads. This type of extra interest can be deposited into a separate account in order to provide extra assurances on loan/ bond issuances. Such additional cash cushion by the borrower/ bond issuer serves as liquidity comfort to the lender/ investor as well as enhances credit rating of the loan/instrument. Such mechanism may help the borrowers gain better terms on their borrowing/issuances.

ExcessServicingSpreadAccounts

Cash Collateral Account is an account normally opened by the borrower. Such cash deposits serve as an additional comfort to the lenders. It helps companies negotiate better terms on their borrowing. In case of any unforeseen problems, the lender may draw from such cash reserve to service any defaults. This mechanism of credit enhancement is often used in India.

Cash Collateral Account

Senior and subordinate structure entitles lenders to have priority right on the cashflows of the borrower than other subordinate lenders. Such additional comfort/ preference to lenders is an indirect way of credit enhancement, which enables the borrower to negotiate better lending terms from such senior lenders.

Senior/ Subordinate Structure

An insurance backed guarantee aims to protect the default risk a loan carries by insuring the lender with a protection in case of an unlikely or unforeseen situations. Such guarantees offered by insurance agencies offer a win-win combination for all as it secures the lender as well as helps borrower bargain better terms and conditions.

Insurance backed guarantee

Surety bonds are a type of external credit enhancement mechanism which is more prevalent in western countries and yet awaiting acceptance in India. It guarantees to pay if the asset-backed security does not meet its obligations and works like an insurance policy that is designed to cover against losses. These surety bonds are generally issued by banks and other financial institutions and can significantly lower the risk of asset backed securities and make them more attractive to investors.

SuretyBonds

19 CREDIT ENHANCEMENT - AN OVERVIEW

Promoting the Credit Enhancement Concept

Credit Enhancement is more often used in developed economies, as cited above, wherein the securities market is well developed and various types of securities like Asset backed securities, Mortgage backed securities, Collateralized debt obligations, collateralized bond obligations are issued and traded in large numbers. However, in India this concept is still at a nascent stage. Securitization and Corporate bond market are two areas wherein credit enhancement is widely used; however, both these areas are still underdeveloped in India. Until recently, Reserve Bank of India (RBI) guidelines also did not permit banks to issue guarantees in support of bonds.

With a view to encourage corporates/SPVs to avail bond financing for infra projects which shall in turn provide a much needed thrust to the corporate bond market, RBI has introduced a new scheme of Partial Credit Enhancement (PCE) to corporate bonds. This scheme has been essentially designed for the large financial requirements of the infrastructure sector and the risks associated with it.

Infrastructure projects face constant funding constraints due to their Asset Liability Management considerations. Besides, alternative sources such as insurance and pension funds are required to limit their investments to higher credit ratings. In response to these constraints, the RBI had proposed to provide PCE to various projects as non- funded subordinated facility in the form of an irrevocable line of credit which is to be drawn in case of shortfall in cash flows at the time of servicing the bonds. This facility is to be provided by the banks. The proposed enhancement facility will improve the credit rating of the bond issues. A BBB rated bond would be elevated to an A+ or AA- category based on the enhancement, which would then make it investment worthy for institutions.

The total PCE to be provided by the banks for a given bond issue was capped at a permissible limit of 20% of the total bond issue size based on the RBI circular on September 24, 2015. Based on the feedback from the banks, this limit was then enhanced, on August 25 2016, to 50% of the bond issue size subject to PCE from a single bank not exceeding 20% of the bond issue size and the extant exposure limits.

Conclusion

Easy access to credit generally assists small and medium enterprises to realise their full

economic, market and social potential and in turn has a considerable effect on a country’s

economic growth in the long run. Ensuring uncomplicated access to credit for such credit

deprived sectors and segments of corporates requires a well-functioning market, competition,

the availability of credit products and a good delivery system.

By reducing the risk to banks that lend to such sectors, Credit Enhancement aims to increase

lenders’ interest in such segments and to initiate a learning process through which banks

develop the expertise to make such lending profitable. The scheme’s favourable credit terms

and conditions (without collateral and third-party guarantees) encourage entrepreneurs to

increase their investments and enhance their performance, while promoting the growth of

entrepreneurship. A useful use of credit enhancement provides a win-win situation for all the

parties involved in the transaction.

ABOUTVIVRO

About VivroVivro 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 TeamVivro 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 PropositionVivro 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

Capital Market ServicesOur 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 FinanceVivro 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 AdvisoryOur 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 ManagementVivro 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

Mumbai607-608 Marathon Icon, Veer Santaji Lane, Opp. Peninsula Corporate Park, Off Ganpatrao Kadam Marg, Lower Parel, Mumbai- 400013.E: [email protected]: +91 22 6666 8040

Vadodara2, Maruti Flats, 31, Haribhakti Colony,Race Course Circle, Baroda - 390007E: [email protected]: +91 265 235 7339

ChennaiAppaswamy Manor, Old No.9/New No.16, IInd Floor 4th Cross Street, CIT Colony, Mylapore Chennai - 600 004E: [email protected]: +91 44 2498 6774

AhmedabadVivro House 11, Shashi Colony, Opposite Suvidha Shopping Center, Paldi, Ahmedabad – 380007Gujarat, India.E: [email protected]: +91 79 4040 4242

OFFICES

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CORPORATE OFFICE

The information contained herein is of general nature prepared by Vivro Financial Services Private Limited (‘VFSPL’, ’Vivro) on a particular subject or subjects and is not an exhaustive treatment of such subject(s). It is not intended to address the circumstances of any particular individual or entity. This material contains information sourced from third party sites (external sites). Vivro is not responsible for any loss whatsoever caused due to reliance placed on information sourced from such external sites. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2017 Vivro Financial Services Private Limited

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