Weekend Reflections – Week ending 22nd June 2024

Week ending 22^nd June 2024

# 1 Markets

Markets continued their buoyancy last week, but broadly directionless without much trigger, lost steam on Friday with both Sensex and Nifty closing at marginally higher for the week. Nevertheless, Indian stock markets hit a milestone on last Wednesday, executing block deals worth nearly ₹23,000 crore, the highest in a single day, largely on account of Vodafone Group’s sale of a stake in Indus Towers.

Nine months after JP Morgan announced the inclusion of Indian government debt in its emerging markets index, the incremental ownership of sovereign bonds by foreign portfolio investors has climbed more than $10 billion, with purchases topping the billion-dollar threshold so far this month. More than $200 billion in assets track the JPMorgan Emerging Market Index in which India will eventually have a weight of 10% by March 2025, suggesting total passive inflows of at least $20 billion over the 10-month period. It is not surprising, 10Y G.Sec yield continues to soften and closed at 6.97% on Friday.

Positive statistics release helped upside movements in US with all the three indices moving nearly 2% last week. Due to benign inflation data the yield on 10Y treasury continues its softening stand and closed at 4.25% on Friday. The Bank of England on Thursday kept its main interest rate at a 16-year high of 5.25% even though inflation has fallen to its target of 2%, with several policymakers warning that a premature cut could stoke another bout of price rises.

# 2 Banking/Insurance

2.1 The Reserve Bank of India had directed that all credit card payments be processed through BBPS after June 30.  This is likely to impact no of fintech’s like Cred, Phone Pe, etc. Let’s see why?

• Credit card users can pay their monthly bill either through net banking, auto-debit mandates or third-party applications like Cred, PhonePe etc., While the first two modes will continue after June 30, the third process will be stopped, unless an extension is offered. By routing through them so far, these fintech’s were earning a higher commission from banks.
• It’s true that applications like PhonePe are also listed in BBPS and extensively utilised for making utility payments phone recharge etc., But if banks get listed in BBPS directly then usage of these fintech’s would come down and even if they do, margins would be much lower.
• Just 8 of the 34 banks who issue credit cards have activated bill payments and large issuers like HDFC Bank, ICICI Bank and Axis Bank are yet to activate where these fintech’s play a large role in payments as of now as these fintech’s do auxiliary services just as reminders, reward management etc.

Data shows only 1.5% of the total volume of BBPS transactions per month is for credit card payments; the rest is for the likes of electricity bills and toll payments via Fastag. So, from an estimated 101 million credit cards, only around 7 million bills get paid via BBPS per month currently. The sheer volume gap signifies the impact likely to be created for these fintech’s.

The central bank wants all payment processes to get centralised, which will help RBI have better visibility over payment trends, manage customer grievances, track frauds, bring in more transparency and higher public accountability and also ensure a standard service quality.

2.2 Key take aways from RBI Bulletin released last Wednesday,

• • Real GDP growth in Q1 FY25 is maintaining the pace of the preceding quarter.
  • Post-pandemic years indicate a “trend upshift” in growth, moving from an average of 7% (2003-19) to 8% (2021-24).
  • The pandemic caused a structural break in GDP formation.
  • Recent indicators suggest private consumption broader based and is resuming as the main demand driver.
  • Retail inflation is gradually easing, but volatile and elevated food prices are interrupting the path of disinflation
  • Investment has maintained steady growth.
  • Revival of private investment is crucial for future growth; especially as public finances consolidate.

• RBI amends certain guidelines on priority sector lending [PSL] including definition of MSMEs and adjustments for weights in PSL achievement. A higher weight of 125% would be assigned to the incremental priority sector credit in the identified districts where credit flow is lower and lower weight of 90% where credit flow is comparatively higher.

The differential weightage would incentive banks to channelise more priority sector in under penetrated districts.

• Secondary for life insurance policy?

LIC has been resisting secondary for a long time but after a 10-year successful legal battle culminating in the Supreme Court, market believes that new market for secondary appears plausible as reported by a firm that proposes to set up.

Why secondary?

Many people surrender LIC policies before maturity. They get back less than the premiums they’ve paid incurring financial loss. The proposed alternative is to buy those policies, put them in a trust and sell Pass Through Certificates [PTCs] against them to investors.

Is it beneficial?

Both policy holders and investors are likely to get tax free pay outs. It is argued that as per Finance Act 2023, no tax would be levied if cash flows are lower than the premium or where the policy assignment value is lower than the premiums paid. However, this tax-free status would need to be evaluated in greater detail and would require alignment with current tax laws and regulations.

Challenges?

1. Setting up this market may require clear regulatory guidelines and approval from insurance regulators such as the Insurance Regulatory and Development Authority of India (IRDAI). Quite probably, IRDAI may consider including this under the proposed BIMA SUGAM application.
2. Investors need to be aware of the risks associated with investing in life insurance policies, such as policyholder longevity and policy default risks.
3. For the market to function effectively, there needs to be transparency in how policies are valued, how the trust is managed, and how payouts are distributed.

The proposal for a secondary market in life insurance policies appears innovative but premature and aims to provide better financial outcomes for policyholders and new investment opportunities. However, the successful implementation of this idea hinges on regulatory acceptance, effective market structure, and investor education.

2.4 The insolvency regulator IRBI has proposed in a discussion paper that the resolution plan submitted by an investor won’t extinguish the creditors’ right to proceed against loan guarantors to the stressed firm and enforce realisation of guarantees governed through various agreements.

• The move suggested will make it difficult for personal guarantors of defaulting firms to escape liabilities.
• The above proposition is based on Supreme Court ruling earlier this year that the approval of a resolution plan of a bankrupt firm does not automatically release its guarantors from their liability.

IRBI’s proposal is re assertion of a settled law that the liability of the guarantor and a principal debtor is co extensive and not in alternative. Thus, proceedings in resolution process can be independent and cannot hinder proceeding against the guarantor.

# 3 SEBI

3.1 SEBI has for the first-time published AIF Commitments in greater detail with break up amongst different categories, after persistent follow up from the industry.  Interesting data points from the publication of data as of March 31, 2024, are summarised here:

1. While Commitments made under Cat II AIF (like TVS Capital Funds) constitutes 90% of total commitments raised by all AIFs, Funds raised, and Investments made under Cat II is lower at 71% and 67% respectively of total funds raised and investments made. This exhibits challenges in deployment by Cat II AIFs.
   6. for Cat I deployment is higher at 8% compared to 6.7% of total commitments
   7. Cat III however has significant higher deployment with 24% compared to 12.78% of total commitments raised.
2. Domestic pool continues to dominate Cat I and III space while overseas flows constitute major share of Cat II AIFs
   1. Domestic pool in Cat I and III constitute 68% and 92% respectively, for Cat II AIFs domestic pool constitute 48% – implying significant scope for enhancing flow from domestic pool to Cat II AIFs.

Need to channelise more domestic pool towards this asset class.

• Purpose of AIFs stand reasonably accomplished as
  1. 92% of investments made by Cat II AIFs were in unlisted space as against minimum limit of 51%.

1. Amongst Cat II AIFs, separate categorisation of Credit Funds, Debt Funds is not made available; however from the generalised data its clear that majority of investments were made in equity/equity listed instruments
   1. Representation could be taken up with RBI for defining permissible instruments to be included as equity/equity listed instruments instead of equity shares as exempted from application of the revised investment restrictions on AIFs by banks.
2. In terms of investments made
   1. Financial services continue to constitute no 2 preceded by Real Estate (though separate categories were listed as Banks, NBFCs and Financial services)

3.2 SEBI last provided another KYC related relief last week and has allowed redemption even if KYC status is ‘On Hold’ under one specific condition.

• If KYC was held up due to non-validation of email id and one of conditions like proof of identity (PoI) or proof of address (PoA) is validated, then AMCs/RTAs will have to honour the redemption request even if the KYC status of the PAN is ‘on hold. However, the validation of mobile numbers is compulsory here.
• Switch outs are not allowed, as Switch in has to be processed

# 4 Economy

4.1 The Consumer Affairs Ministry has released draft guidelines to curb unsolicited business communications, such as spam calls and texts, from businesses, including banks and insurance firms. These guidelines, under the Consumer Protection Act, 2019, mandate penalties for violations and require telecom operators to identify the calling entity and purpose. The guidelines classify any communication without recipient consent as unsolicited, and both companies and their agents using unregistered numbers will be held accountable. Public comments on the draft are invited until 21 July.

Hopefully, we are likely to get relief from nuisance calls soon.

4.2 HSBC’s flash India Composite Purchasing Managers’ Index, compiled by S&P Global, rose to 60.9 in June from last month’s final reading of 60.5. That marked nearly three years above the 50-level separating growth from contraction on a monthly basis.

• The manufacturing index showed bigger gains to 58.5 from 57.5 in May
• services industry’s reading rose slightly to 60.4 this month from 60.2, adding to the continued expansion in India even as the global economy slows.

That was backed by a strong expansion in both manufacturing output and orders as well as business gains among services firms. New export orders expanded for a 22nd consecutive month in June and remained robust, though the pace eased slightly after record growth last month.

4.3 Fitch Ratings in its Global Economic Outlook released last Monday has raised India’s growth forecast for FY25 to 7.2% from 7% earlier, on the back of elevated consumer confidence that is expected to drive spending and increased investments but cautioned that the ongoing heatwave was a risk to both growth and inflation. The report added that investments would continue to rise but more slowly than in recent quarters while consumer spending will recover with elevated consumer confidence.

# 5 PE / VC

As per report by Tracxn released last week,

• Indian tech startups raised $4.1 billion in the first half of 2024, marking a marginal 4% increase compared to the $3.96 billion raised in the second half of 2023 and 13% down compared to H1 2023.
  • Seed stage funding rose to $455 million, a 6.5% increase from H2 2023 but 17.3% lower than H1 2023.
  • Early-stage startups saw stable funding at $1.3 billion, the same as in H2 2023 but 28% less than in H1 2023.
  • Late-stage funding increased to $2.4 billion, up 3.8% from H2 2023, but saw a 1.3% decline compared to H1 2023.

On a lighter vein

NVIDIA captured eye of investors for a wrong reason – not because it is most valued company with its market cap exceeding $3trillion. As per market reports, it is learnt that all their engineers opt to retire immediately as their stock options are worth $10-$20 M now. First time, we are seeing company suffering from success!! Strange world.