Week ending 16th March 2024

# 1 Markets

Equity market went on tailspin last week with alternate dates of rise and fall reacting to Fed announcements and SEBI actions on small and mid-cap funds complimented by warning statements by SEBI chair. Both Nifty and Sensex shed 454 points on Friday and closed lower at 22023 and 72643 respectively. US Markets behaved differently with Dow Jones ending positively while Nasdaq and S&P closing lower on weekly basis while all the markets closed substantially lower on Friday reacting to faster than expected PPI data at 0.6% in February, rising US Treasury yields.

Sell off continued on higher inflation nos. and the rate cuts expectations getting postponed beyond June. US10Y hardened by 25 bps and ended at 4.30%. Indian bond markets continued to be cheered by FPI inflows and inclusion in Bond Indexes with 10Y G. Sec trading around narrow range of 7.05-7.04%. The 10-year benchmark bond yield closed at 7.02%, on Wednesday its lowest level since June 14, 2023. Overseas players have poured almost $10 billion into the Fully Accessible Route [FAR] bonds with markets seeking increase in the cap of 6% by overseas players in Govt. bonds.

The concern is on the continued inverted yield curve with short term rates trading higher reflecting on the transient liquidity factor at play. Which way the yield will move next week, is a moot point – as Friday announcement of large auction of Rs. 50206 cr.by State Govts. on Friday is likely to pull down prices while wholesale inflation released on Thursday at 0.86% vs 3.85% a year ago would work the other way.

# 2 Digital Competition Act

In a report released on Tuesday, Govt. has suggested a new antitrust law called Digital Competition Act to pre-emptively tackle potential abuse of dominance involving large digital companies.

What is the Digital Competition Act?

  • The Digital Competition Act is a proposed legislation aimed at those involved in core digital services, to prevent potential abuse of dominance and other antitrust issues.
  • It prescribes an ex-ante framework, which means regulations are put in place proactively to pre-emptively address anti-competitive behaviour.

Where it is applicable?

  • Applicable to “systemically significant digital enterprises” defined as firms with domestic revenue of over ₹4,000 crore or global revenue of over $30 billion, and with over 10 million end-users or 10,000 business users in India.
  • Nine ‘core’ services have been identified, including search engines, social networks, browsers and e-commerce aggregators.
  • The bill does not allow for bundling of services, self-preferencing, restricting third-party apps or data cross-sharing, among other mandates.

Why has this been brought now?

  • The Act is being proposed in response to the rapid growth of India’s digital economy and the increasing dominance of big technology firms.
  • With over 350 million users engaging in various online transactions and the digital economy expected to reach $800 billion by 2030, there is a need for updated regulations to ensure fair competition and prevent market monopolies.
  • The existing Competition Act of 2002 is considered inadequate to address the scale of digitalization and the challenges posed by large tech companies.

What are the challenges and limitations?

  • Concerns about stifling innovation and hindering the growth of startups.
  • Unbundling services by a tech firm may lead to users having to grant permission for every single feature.
  • practicality of regulations, especially the definition of digital services, penalties for non-compliance, and the impact on user experience.
  • penalty for non-compliance with ex-ante obligations may cost up to 10% of the global turnover of the SSDE in line with under the Competition Act,

Are there any international experiences in such laws?

  • European Union’s Digital Markets Act (DMA) and the proposed American Innovation and Choice Online (AICO) Bill in the US. UK has a Digital Markets Unit (DMU) under its existing Competition Authority to oversee digital competition issues.

Hopefully, Govt may like to address concerns though it is very important to have this in India now.

# 3 SEBI

3.1 SEBI formalised through Board approval on Friday, series of decisions as per discussion paper circulated in the last few weeks on ease of doing business framework, including, option T+0 settlement for select 25 scrips, exemption of additional disclosure by FPIs, operational flexibility on IPO processes and procedures. It is hoped that some of the pain points for FPIs have been addressed albeit not fully and the IPO could be more investor friendly.

Specific to AIFs, the following modifications brought in are of relevance.

  1. Cat I and II AIFs can encumber infra investments.

AIFs can create encumbrance on the equity of its investee companies in infra space (as listed in the Harmonised Master List of infra sub sectors) to facilitate raising of debt/loan by such investee companies subject to RBI guidelines.

This is a long-standing request to facilitate leverage by infra companies funded by PE/VC.

  1. Introducing due diligence measures with respect to investors and investments,

To ensure that the due-diligence requirements are not open ended or subject to interpretation, the specific implementation standards for verifiable due diligence to be conducted on investors and investments of AIFs shall be formulated by the pilot Industry Standards Forum for AIFs

Some kind of standardised framework is likely to emerge for due diligence on investors and investments.

  1. Liquidation Scheme is now within the same scheme.

The Board approved a proposal to allow AIFs to deal with unliquidated investments which are not sold due to lack of liquidity during the winding up process, by continuing to hold such investments in the same scheme of the AIF and entering into a Dissolution Period. One-year additional liquidation period is also given to deal with unliquidated investments whose liquidation period had expired in the past.

Big welcome change from the existing option of launching a new scheme (viz. Liquidation Scheme) which was considered  impractical  – as the Scheme demanded seeking consent from investors representing 75% value of investments, securing a bid for 25% of unliquidated portfolio and transfer the assets to a new Scheme at the bid value or Re 1/- if no bid received, distribute the proceeds to dissenting investors, and have the new scheme allocated to continuing investors in the same proportion

Fund Managers welcome this most important change as the Liquidation scheme could not be implemented by most of the AIFs.

3.2 SEBI notified Index Providers Regulations on Friday

  • Mandates registration of index providers managing “significant indices” based on securities listed in India to foster transparency in governance and administration of financial benchmarks in the securities market.
  • The global index providers, however, may not have to register with Sebi (like MSCI, Nasdaq FTSE Russel etc.) unless their indices are used as benchmarks by domestic asset managers with large corpus.
  • Benchmarks regulated by the Reserve Bank of India (RBI) are also excluded from these regulations. RBI issued a framework in December mandating index providers that compile indices based on domestic debt to register with it.

# 4 Banking

4.1 Close on the heels of clamping down on IIFL on gold loan, RBI last week, has asked banks.

  • to share with it information on frauds reported in gold loans, actions taken by them to recover the money and defaults in the portfolio,
  • to review their lending processes to check if they are in compliance with the regulator’s gold loan guidelines.

The RBI sought this information after it found that employees of two state-run banks manipulated its system to meet gold loan targets. Though information on Large Credit is available from CRILIC and CIBIL, RBI wish to understand nature of frauds which are not captured in these repositories.

4.2 RBI has told banks and other financial intermediaries to plug deficiencies in customer grievance mechanisms and ensure fair pricing of products and services.

  • Assessment of grievances received at RBI offices revealed gaps in systems and procedures in financial institutions.
  • The use of artificial intelligence (AI) capabilities for complementing customer service through personalised interaction, chatbots and virtual assistants tailored to specific products also underscores the need of appropriate safeguards otherwise this may lead to compromise of customer data.
  • Deployment of AI in prevention of frauds, identity verification, vulnerability mitigation and data protection are still at nascent stages.

4.3 As per report by IDfy, released last week,

  • Several banks in the country are not collecting user consent as mandated under the Digital Personal Data Protection (DPDP) Act, which was passed in August last year.
  • 8 out of 10 banks do not mention personally identifiable information [PII] data collected in their privacy policy – including Account no, PAN and Aadhaar.
  • 9 out of 10 banks did not have a cookie consent banner and a mere 7% of the cookies found were actually “necessary”.
  • Banks are violating the provision of data minimisation by collecting unnecessary data for the customers such as as employer’s name, work email ID, religion and caste, etc. which are unnecessary.

# 5 Its Economy!

5.1 India and the European Free Trade Association (EFTA) (bloc comprising Norway, Iceland, Liechtenstein and Switzerland) signed a deal aimed at enhancing supply chains, attracting investments, and creating new business opportunities. EFTA countries will lift duties on Indian rice exports, while India will remove duties on Swiss chocolates and watches over seven years. The agreement includes a binding commitment by EFTA to invest $100 billion in India and create one million direct jobs over the next 15 years.

Why this is significant from AIFs perspective?

EFTA deal’s highlight is its investment component.

India expects inflows from EFTA members worth billions of dollars every year. Since Liechtenstein and Switzerland are famous for wealth management, an industry with influence over global capital movement, the news has significant symbolic value.

5.2 Key takeaways from UNDP Human Development Report released last Thursday based on assessment done on average income, education and health across 193 countries.

  • India jumped one position on the Human Development Index [HDI] from 135 in 2021 to 134 on the back of improvements across all HDI indicators including life expectancy, education, and gross national income (GNI) per capita, with increase in HDI value from 0.633 to 0.644.
  • While India’s life expectancy rose to 67.7 years in 2022 from 67.2 years, expected years of schooling reached 12.6 and mean years of schooling increased to 6.57,
  • The country’s per capita Gross National Income [GNI] increased to $6,951 in 2022 from $6,542 in 2021.
  • Reduced gender equity with a Gender Inequality Index [GII] value of 0.437 – measured across reproductive health, empowerment and labour market.
  • However largest gender gaps seen in the labour force participation rate, a 47.8% difference between women (28.3%) and men (76.1%).

5.3 Fitch on Thursday said-

  • India’s economy will likely grow by 7% in FY25 on the back of strong domestic demand and investment growth.
  • Growth in the short term will outpace the economy’s estimated potential, and that the pace of growth of activity will then moderate towards trend.
  • Inflation to steadily decrease to 4% by calendar year-end on the assumption that recent food price volatility will subside.
  • Strong business survey data for January and February represent an upside risk to these estimates,”

5.4 As per Govt data released on Tuesday,

  • Industrial growth eased to 3.8% in January compared with 4.2% in the previous month.
  • Mining expanded 5.9% in January compared with 5.2% in the previous month, whereas electricity production increased 5.6% from 1.2% earlier.
  • Manufacturing growth eased to 3.2% from 4.5% in December.
  • Consumer durables grew 10.9% in January, lifted by a base effect of 8.2% contraction in January last year, whereas non-durables registered a contraction of 0.3% from 2.4% growth in the previous month.

Disturbing trends in the context of retail inflation not easing down

# 6 PE / VC Eco system

6.1 IVCA/E&Y: India Trend Book 2024 released last week. Key takeaways:

  • 11% year-on-year decline in 2023 in PE/VC investments; no of deals fell by 33% in general and 42% in Startups.
  • Infrastructure emerged as the leading sector, attracting US$11.6 billion in PE/VC investments while healthcare sector recorded high of $5 billion in investments.
  • Real assets backed infrastructure record a robust 23% year-on-year increase.
  • PE/VC exits surged with a remarkable 36% growth to reach US$24.8 billion.
  • Open market exits comprised 52% of total exits, reaching a historic high of US$12.8 billion.
  • There were 30 PE-backed IPOs in 2023, marking the second-best year for such exits.
  • Challenges in Startup Investments:
    1. Startup investments in India declined by more than 50% due to a sharp fall in the number of deals.
    2. The unicorn rush slowed down significantly, with only two unicorns minted in 2023.
    3. Governance issues and valuation markdowns impacted investor sentiment.
    4. Artificial Intelligence (AI) emerged as an attractive space, with India ranked No.1 globally in AI skill adoption and talent concentration.

6.2 Bain & CoIndia Venture Capital Report 2024 – key takeaways from report released last week.

  • VC funding in India decreased from 25.7billionto9.6 billion over 2022-23. India remained the second-largest destination for VC and growth funding in Asia-Pacific.
  • Exits surged by almost 1.7x to reach $6.6 billion in 2023.non-IPO public market sales were the majority exit route.
  • Global factors extended the funding winter, including persistent inflation and potential growth headwinds.
  • Deal volume decreased from 1,611 to 880 deals, with an average deal size decline.
  • Tech-first sectors remained dominant, attracting nearly 60% of funding.
  • Private equity and growth equity firms doubled their share in deployment in 2023.
  • Domestic VCs drove more than 90% of fund raises and launched thematic funds focused on emergent themes.

6.3 CII-Mckinsey Report

As per report released last Thursday,

  • Indian startups are likely to create 50 million new jobs (4-5 million direct, 9-10 million Gig, and remaining indirect) and add $1 trillion to the economy by 2029-30 (FY30), with 300 unicorns till 2035. Between FY16 and FY23, startups contributed 10-15 per cent to India’s gross domestic product (GDP) growth.
  • Retail and e-commerce is likely to have the highest gross merchandise value (GMV) of $380-400 billion by 2030, followed by $140-150 billion in manufacturing and $65-75 billion in the fintech sector.

GMV of exports was likely to jump 20-23x to $140-150 billion in 2030 from $6-10 billion in 2022-23.

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