Week ending Nov 26, 2023

Indian benchmark indices broadly remained stable last week. Nifty 50, Sensex, and Nifty Bank indices oscillated in a sideways range all through the week and closed marginally higher. The S&P continued to rally last week as risk assets have surged since yields on US Treasuries started to drop in late October. The index closed 2.2% higher last week to secure the first close above 4500 since August.

This week’s focus is on Turkey which raised interest rates to 40% to tackle inflation that is running at 60%. Rates have gone up from 8.5% in June to 40% in November. Does this entice investment? Beware – while INR has come down against USD by 2% in CY2023, Turkish Lira has depreciated by appx, 50% in CY2023.

Let’s review key developments / notifications last week.

# 1 RBI

1.a. RBI vide its order dated November 24, 2023, has superseded the Abhyudaya Cooperative Bank, Board and appointed an Administrator for a period of 12 months to streamline the governance and secure proper management of the bank. The lender started operations in 1964 and on January 11, 2007, registered as a Multi-State Co-operative Bank, confined to three states– Maharashtra, Gujarat, and Karnataka. RBI indicated that the action is necessitated due to certain material concerns emanating from poor governance standards observed in the bank. Deposits are around ~Rs. 10,938 cr and advances are around ~ Rs. 6654 cr. Capital Adequacy ratio is slated to be 12.6%. NPA estimated at 12% and cost to income ratio at 80%.

No business restrictions have been placed by RBI and the bank shall continue to carry on its normal banking activities.

Why was licence then not cancelled?

  • Bank had made an operating profit in FY23 and has a sizeable proportion of the deposits in the low-cost current and savings account.
  • Bank has also consistently maintained the statutory liquidity ratio and cash reserve ratio,
  • RBI feels that with the professional team looking after the day-to-day affairs of the bank, it could recover its bad loan to clean up its balance sheet and also improve operating efficiency, deteriorated by excessive hiring to win over voters from the management’s political base.

1.b. RBI Deputy Governor has issued a warning about the presence of ‘dark patterns’ in the mis-selling of digital loans, where customers are misled into taking high-cost loans.

  • Dark patterns are those fraudulent user interface and design choices that trick individuals who need taking loans into making decisions and choose that interface, against their interests.
  • In the context of digital loans, these patterns can manifest in many ways. It can mislead people and pressurize them to take loans without fully understanding the terms and conditions. These interfaces use coercive tactics to misguide normal individuals.
  • RBI Governor has urged banks to enhance security measures to prevent cyber fraud in the technology-driven banking environment, noting the rising instances of frauds and data breaches through dark patterns.

# 2 TReDS – Increasing adoption and reduced cost to MSMEs!

As per data released last week, discounting of invoices on the Trade Receivables Discounting System (TReDS) electronic platform has reached an all-time high of Rs 2.18 lakh crore for 65,000 MSMEs across 1,600 cities. This represents a significant increase from previous years, highlighting the growing adoption of TReDS as a financing tool for MSMEs. Significant impact is reduction in cost of credit by 5-8% on short-term working capital financing. It has now taken 9 years from the time RBI had issued guidelines on TReDS to reach this stage.

What can aid further growth then?

  • Despite making mandatory for large corporates with turnover of Rs. 500 cr and above, 7800 corporates and central PSUs are yet to register on the platform.
  • Despite IRDAI permitting credit insurance and RBI issuing guidelines, insurance covered discounting of invoices by low rated / unrated MSMEs is yet to become reality.


# 3 SEBI

SEBI on Saturday made changes in regulations under REITs, Social stock exchanges and AIFs.

3 a Introduction of a framework for fractional ownership of real estate assets.

  • Allowed small and medium real estate investment trusts (REITs), with an asset value of at least Rs 50 crore as compared to Rs 500 crore for existing REITs.
  • Existing structures could migrate, provided they meet certain criteria such as net worth, minimum unit holding requirement, minimum subscription, distribution and valuation rules.
  • The avenue would facilitate investment in primarily pre-leased real estate which earn the investors a rental yield, as well as participate in potential rise in the value of such properties.

The above changes are likely to enable wider participation of subscribers including retail.

3 b. Democratising participation in social stock exchanges

  • Minimum size for public issuance of Zero Coupon Zero Principal Instruments (ZCZP).by Non-profit organisations (NPOs) on Social Stock exchanges reduced to Rs 50 lakh from Rs. 1 cr
  • Minimum application size for investor cut to Rs, 10,000 from Rs 2 lakh earlier.
  • NPOs permitted to disclose past social impact report in the fundraising document as per their existing practice subject to disclosure of key parameters such as number of beneficiaries, cost per beneficiary and administrative overhead.

3.c. AIFs.

  • Any fresh investment made by an AIF, beyond September 2024, to be held in dematerialised form. Existing investments exempted including schemes of an AIF whose tenure ends within one year.
  • The mandate for appointment of custodian, currently applicable to schemes of Category III AIFs and to schemes of Category I and II AIFs with corpus more than Rs. 500 cr. stands extended to all AIFs.

3.d. Restrictions in SME exchange

  • Amid growing small investor interest in shares of small and medium enterprises (SMEs), stock exchanges have announced implementation of graded surveillance measures (GSM) to bring down speculative activity and irrational returns seen in the segment.
  • The GSM framework is imposed based on certain red flags in the financials of the companies.
  • To safeguard the interest of investors, many brokers prohibit trading or purchase of shares of companies placed under GSM.

The BSE SME IPO index has surged over 13 per cent this month and jumped nearly 84 per cent this year. The return in the last three years has been over 3,000 per cent. In comparison, the Benchmark Sensex has moved up 8.5 per cent this year and close to 50 per cent in three years.

# 4 World Cup Lost – Cricket Business Won!

  • The ICC Men’s Cricket World Cup 2023, hosted by India, made a substantial economic impact, infusing around USD 2.6 billion (INR 22,000 crore) into India’s economy. Stocks associated with the tournament have seen strong performance, and the event has boosted tax collections for the government.
  • If BCCI (Board of Control for Cricket in India) was a listed company, chances are that it would have become decacorn.
  • BCCI would have been a part of the Nifty 50 Index with a market capitalisation of around Rs. 1.3 lakh crore (based on a price/sales ratio of 30x for FY22). But if we value it at FY24 revenues, which is estimated at around Rs. 6,800 cr. (25% growth annually including earnings from the World Cup), then BCCI could be valued at Rs. 2.04 lakh crore or as big as Mahindra & Mahindra.
  • In March 2022, BCCI reported revenues of Rs. 4,360 cr., with IPL contributing 51% and media rights accounting for 28% of this income. Over the past decade, BCCI’s revenues have grown by 18% annually, with media rights showing an impressive 26% annual growth.

# 5 Goldman Sachs – Asset Management Outlook 2024

Key two take aways for Family offices while making allocation to private equity as per the above report released last week.

What does complex investment environment mean for asset owners governance models?

  • Tactical asset allocation required & need for Outsourcing Chief Investment Officer model.
  • Nimble implementation of investment views and management of private asset classes

Is the private equity model still viable in a higher rate environment?

  • History of private equity shows that managers have been able to generate value in different market environments including periods of elevated interest rates.
  • Value creation play books have evolved over the past 40 years as the market environment changed.
  • With greater component of value creation coming from Manager Skill, and less from overall market direction, performance dispersion may increase and illuminate manager’s capabilities.

(https://www.gsam.com/content/gsam/us/en/advisors/market-insights/market-strategy/outlook/2024/asset-management-outlook-2024.html )

# 6 Fintech in India –Nov 2023

Key takeaways from the 360-page report by FT Partners released last week.

  • In 2022, Indian FinTech companies raised nearly $6 billion, accounting for about 7% of global FinTech financing, 3rd behind the US & UK.
  • Total FinTech financing volumes in the country increased from under $2 billion in 2018 to over $8 billion in 2021, over 2,000 fintech’s in India.
  • India has achieved its financial inclusion target of 80% in just six years.
  • As mobile (84%) and internet penetration (54%) increase across the country, adoption of digital payments and mobile banking will grow.
  • Consumer lending is a massive market, at $378 bn. as of 2020, expected to reach $700 bn. by 2025.
  • The wealth-tech market is expected to reach $237 bn. by 2030, with total household wealth projected to grow at a 6.1% CAGR to $18.4 tn. in 2025.

# 7 Important ruling – Creditors rights

Close on the heels of Supreme Court ruling, a few days back, allowing creditors to initiate IBC against personal guarantors, Kerala High Court last Tuesday has ruled that simply submitting an application under IBC for personal insolvency does not trigger a moratorium immediately, plugging a loophole that defaulters use to ringfence personal assets when their businesses founder.

  • The moratorium, or temporary halt to debt collection, begins only when the application is officially numbered by the National Company Law Tribunal (NCLT).
  • This ruling helps creditors protect their rights and prevents defaulters from shielding their assets.
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