Week Ending 9th March 2024

#1 Markets

Global investors stretched record-breaking stock rallies on Friday after not-too-hot, not-too-cold US jobs data reinforced the conviction that the Fed will begin easing by mid-year. In a holiday-shortened week, Indian markets consolidated and closed above the 74K mark for the first time. FPIs continue to exit from financial services as the shift was prompted by rising U.S. 10-year yields and lower-than-expected Q3 earnings from major private sector banks, though domestic funds continue to up the stake in private sector banks which led the rally last week. AUM of MFs crossed Rs. 54.52 lakh cr. with monthly SIP inflows crossing a record high of Rs 19186 cr.

US markets rallied around Fed Chairman Jerome Powell’s testimony which indicated likely rate cuts and abolition of additional funds by top 8 banks to deal with defaults in commercial real estate thereby increasing liquidity. Dow Jones ended the week marginally lower while S&P and Nasdaq ended higher by around 1%.

10Y Sovereign bonds continue to soften on the expectation of inflows due to the likely inclusion of 34 FRA scrips aggregating $ 448 billion, in the Bloomberg index from Jan’ 25. 10Y US Treasury also witnessed a softening in expectation of Fed rate cuts. The increase in Govt spend also improved liquidity and brought down short-term rates in India. RBI has begun conducting VRR actions since last week to absorb excess liquidity.

# 2 RBI

2.1 Clampdown on securities and gold financing

RBI the preceding week clamped down on IIFL Finance on its gold loan business which formed more than one-third of its portfolio and barred on 5th March 2024, JM Financial from financing the purchase of shares and bonds and or providing loans against such securities. SEBI followed this on Thursday barring JM Financial from taking new mandates as a merchant banker for public debt issuances due to alleged rule violations. 

• The concern about gold loans comes amid a 17% rise in gold loans on a year-on-year basis and a 16.6% rally in the yellow metal’s prices. Loans against gold jewellery stood at ₹1,01,934 crore as of January 26 and gold prices have touched a high of ₹65,140 per 10 grams on March 5. Expressing concerns on possible risk, through top-up loans, Govt has issued a missive to PSU banks to review every gold loan account since January 1, 2022, assess the collateral value, analyse collection charges, and check if there has been any evergreening amid fears about risky debt given a rally in prices of the metal. 

What is the prompt?

While IIFL was reportedly using internal assayers possibly violating the Loan to Value guidelines and was disbursing in cash exceeding the limit of Rs. 21K, combined regulators’ action on JM Financial appeared more complex both in debt and equity issuances. 

• JM Financial Products Ltd. [JMFPL] an NBFC and a subsidiary of JM Financial acted as a counterparty to the trades of individual investors to whom NBFC had proved loans for subscribing to the issue. JMFPL had routed these applications of these investors as brokers. These individual investors sold the securities allotted to them on the day of listing itself bringing down retail ownership sharply. 
• JMFPL, subsequently, on the very same day, offloaded at a loss, a significant portion of the securities it had acquired from these retail investors to corporate investors.
• Unlike equity markets where all trade transactions have a single counterparty as in stock exchange, in debt markets transactions are bilateral and done over the counter and reported to the exchange after the deal is completed.
• The public issue in the SME Segment in NSE was oversubscribed through huge bids under the HNI category, followed by rejection of bids with several applications under the same PAN routed through JMFPL. Funds were NBFC was used reportedly to inflate subscriptions and provide an assured exit to investors. 
• Similar instances were seen in main board equity IPOs – like in July 2021 where people bid Rs. 8.86 lakh cr against an issue size of Rs. 18400 cr where 98% came from IPO-linked loans. These loans are funded through short-term CPs and lending at huge spreads thus exposing them to greater risk, but backed by full Power of Attorney on demat, bank account thus giving rights to even selling the shares and pocketing the gain. Reportedly, the loan limit of Rs 1 cr for IPO Finance has also been not adhered to.

Was the action excessive? 

In addition to lending, JM Financial and IIFL have underwritten many of these debt/equity deals. IIFL ranked third for India equity offerings last year, while JM ranked sixth, both ahead of global firms like Morgan Stanley and Goldman Sachs Group Inc., Such practices as explained earlier have proven to have detrimental effects on the orderly functioning of the market and harm the interest of the ordinary investors. They also distort the functioning of the price discovery mechanism in the securities market.

2.2 Credit Card business under control?

2.2.1 RBI is putting an end to the credit card menace by amending certain provisions that will come into effect from March 07, 2024. The RBI also released last Thursday, the latest FAQs related to credit Card and debit Card issuance. Some of the key changes include, 

• Banks to establish a mechanism to monitor the end use of funds for business credit cards and prohibit them from sharing customers’ data with outsourcing partners. This is in the context of the RBI clamping down on unregulated cobranded partners working with banks and, in many cases, accessing customer transaction data for their business purposes.
• “Card-issuers’ are responsible for the storage and ownership of card data when sharing it with outsourcing partners.

Cardholders should be provided with the option to modify the credit card’s billing cycle at least once. The existing provision does not specify a minimum frequency for offering this option.

• Usage of a credit card beyond the sanctioned credit limit (i.e., over-limit) requires the prior explicit consent of the cardholder, as a fraud minimisation mechanism.
• Clear guidelines with illustrations for reversal of wrong debits, cancellations, refunds, 
• Card-issuers shall not capitalize unpaid taxes/levies/charges that have been billed from October 01, 2022.
• Interest can be levied only on the amounts due and not on the total amount in case of partial payment– this was a dubious practice followed by credit card issuers for long.
• Activation of a card has to be done only through OTP in SMS whenever it is not activated within 30 days of issuance.
• If no formal consent is received for activation of unsolicited credit card issuance, the card is to be closed within 7 days.

We can only hope that people don’t fall into the credit card trap without understanding its aftereffects, anymore.

 2.2.2 RBI on Wednesday directed banks and card network firms, such as American Express, Mastercard, Rupay, and Visa, to end exclusive pacts on credit cards, potentially compelling banks to rejig customer offers. 

• This also makes the homegrown Rupay slightly more competitive in building card-based arrangements hitherto monopolised by Visa and Mastercard
• Banks provide an option to customers so they can choose from multiple card networks while having the cards issued or renewed.
•  This is a follow-up to the draft circular issued in July last year. Unlike Rupay debit cards, transactions on credit cards invoke merchant discount rate (MDR) fees that can vary from 1.5% to 3%, depending on the bank, the card variant, and the rates a merchant can negotiate. This fee is shared between the bank and the card network provider, blunting the advantage Rupay has over Visa or Mastercard. 

The new guideline will not apply to credit card issuers that have up to 1 million outstanding cards, which is a small sliver of the market. Banks with more than 1 million outstanding cards—13 banks of 34 that issue credit cards—comprise 92% of the credit card universe. Of these 13, HFDC Bank, SBI Card, ICICI Bank, and Axis Bank have nearly 70% share.

This move would help benefit RuPay cardholders in the long run except for overseas visitors who will continue to other networks for greater acceptance across the universe.

2.3 RBI Governor on Monday stated that it proposes to launch interoperability of digital payment systems for Internet banking in 2024 to enable faster fund settlements for merchants through NPCI Bharat Billpay Ltd. 

Will this benefit? Of course, Yes.

• Currently, internet banking transactions are processed through Payment Aggregators (PAs) which are not interoperable, implying that a bank is required to separately integrate with each PA of different online merchants. Given the multiple number of payment aggregators, it is difficult for each bank to integrate with every PA.

• Due to the absence of a common payment system and a set of rules for these transactions, there are delays in the actual receipt of payments by merchants and increased settlement risks. This will get eliminated with interoperability as we see in UPI payments where it is completely interoperable across players. 

# 3 SEBI

3.1 SEBI has announced a settlement scheme for entities involved in illiquid stock options (ISO) trading on BSE.

• The scheme targets entities conducting reversal trades in stock options between April 1, 2014, and September 30, 2015.
• It applies to entities facing legal proceedings initiated by authorities like adjudicating officers, Securities Appellate Tribunal (SAT), courts, or recovery officers (if appeals are pending before SAT/court).
• Participating entities can settle proceedings, avoiding further delays and expenses associated with legal processes.
• Entities failing to utilize this opportunity may face continued actions under securities laws after the scheme’s expiry.

3.2  SEBI on Friday has notified regulations to establish guidelines for Small and Medium Real Estate Investment Trusts (SM REITs) as per its approval in November 2023 and covered in our Nov 2nd week blog.

• SM REITs can gather funds from ₹50 crore by issuing units to 200 investors.
• The investment manager must have a net worth of ₹20 crore, separate trustee appointed for oversight.
• The listing process is similar to IPOs, with 95% of assets fully developed for SM REITs
• The minimum subscription amount per investor for an initial offering is ₹10 lakh.
• The investment manager must retain 5% of outstanding units for two years from the fourth year post-listing.
• SM REITs using leverage must ensure 15% co-investment by a manager, with leverage capped at 49%.
• Fractional ownership platforms have over ₹4,000 crore in assets under management
• SM REITs can raise funds from Indian and foreign investors.

The introduction of regulations is set to enhance investor trust, broadening the embrace of the growing asset category. This effort is expected to offer vital backing to real estate developers, creating an extra opportunity to capitalize on assets and inject essential liquidity into the industry. Here’s a great investment opportunity for middle-income groups to consider: fractional ownership. It’s an excellent option to explore.

3.2 Another step in Ease of Doing business!

The Ministry of Corporate Affairs on Friday increased the asset and turnover thresholds for mergers and acquisitions of firms that would require the approval of the antitrust regulator, the Competition Commission of India, sparing small deals from mandatory scrutiny and reducing the compliance burden.

• For those with overseas operations, regulatory clearance would be needed if the combined assets are over $1.25 billion (with at least₹ 1,250 cr in India), against $1 billion (with ₹1,000 cr in India) earlier.
• For two foreign groups with India operations, the thresholds of combined assets and turnover have been raised to $5 five billion (with at least ₹1,250 cr. in India) and $15 billion (₹3,750 cr in India), respectively, up 25% each from the earlier limits.
• Two domestic groups involved in an M&A deal will have to seek CCI approval if their combined assets and turnover are over ₹10,000 cr. and ₹30,000 cr., respectively, compared with the earlier thresholds of ₹8,000 cr. and ₹24,000 cr.
• On the acquisition front, If the target of acquisition has assets of less than ₹450 cr. or an annual turnover of under ₹ 1,250 cr., the deal would be exempted from the CCI approval. The earlier limits for assets and turnover were ₹350 cr. and ₹1,000 cr, respectively. 

This relief is for two years. The increase of thresholds is done periodically to account for changes in the wholesale price index and the exchange rate. The last revisions were made in 2016.

# 4 Economy

4.1 CRISIL in its report released on Wednesday published that the Indian economy would grow 6.8% in FY25, retaining the fastest-growing large economy tag on the back of a gradual pick-up in private sector capex. 

• However, higher interest rates, the normalising impact of net taxes, and lower fiscal impulses will temper growth from 7.6% in FY24, it noted.
• It noted that while manufacturing, supported by emerging sectors, integration to global value chains, and the government’s PLI scheme push, are expected to account for a larger share of 20% of GDP, services will remain the dominant growth driver.
• PLI capex is expected to peak by FY26, according to Crisil.
• India will likely grow 6.7% for the rest of the decade moving closer to the $7 trillion mark by FY31 positioning it as an upper middle-income [UMI] country within the next 7 years. World Bank classifies UMI economies as those with a per capita income of $4256 to $ 13205 and India’s per capita income stands at around $2000.

This needs to be seen in the context of the economic growth target China set for 2024, one of its lowest in decades, according to China’s annual work report. 

4.2 India’s service sector growth slowed in February but remained robust. According to The HSBC India Services Business Activity Index fell to 60.6, from 61.8, indicating expansion. Despite the decline, service activity reached its second-highest level in five months. However, milder growth clouded the business outlook. 

4.3 Global rating agency Moody’s on Monday raised India’s GDP growth projection for the 2024 calendar year to 6.8 per cent, up from 6.1 per cent earlier. The increase in estimate was attributed to India’s robust economic performance in 2023 and diminishing global economic challenges. Moody’s attributed strong growth in Q3FY24 to the government’s capital spending and vigorous manufacturing activity. The report also added that the Indian economy is likely to remain the fastest growing among G-20 economies.

# Startup – New Scheme by Govt

Govt. has announced a new scheme that will fund research and development by startups with funding up to ₹25 crore for innovations required by the armed forces. Named Acing Development of Innovative Technologies with iDEX (ADITI), the scheme will promote innovations in critical and strategic defence technologies and a total of 30 deep tech challenges will be taken up in the next two years.

• Under the new scheme, startups and innovators would be presented with challenges in technology faced by the armed forces and would be asked to come up with solutions. Proposals that meet technical requirements would be eligible for a grant in aid of up to ₹25 crore to develop the required systems within a defined period.

# Churchill – Private Capital Themes – Four for 2024

Churchill, an investment specialist affiliate of Nuveen, provides customized financing solutions to middle-market private equity firms and their portfolio companies across the capital structure. 

The four themes identified for 2024 in the private capital sector are:

1. New Normal Rates: This theme discusses how lower interest rates may create a more favourable financing environment for private equity sponsors, leading to improved equity returns and accelerated deployment of capital.
2. Winners and Losers: This theme emphasizes the importance of identifying attributes that differentiate winners from losers in a rapidly changing environment. Why TVS Capital?
3. Stay Alive to Thrive: This theme emphasises maintaining diversified portfolios across asset classes to thrive amidst uncertainty and market challenges.
4. Next Gen Private Capital: This theme discusses the shift towards next-generation financing technologies offered by private capital platforms presenting new opportunities for deal-making and fundraising.

(source: https://www.churchillam.com/search-insights)