Week Ending June 01, 2024

  Week ending 1^st June 2024

# 1 Markets

If exit polls prove correct on Tuesday, foreign institutional investors (FIIs) may regret their decision (negative view on Indian Market) as they went net long on index futures ahead of final results to be declared on June 4. Fading hopes of rate cuts by Fed also caused some reverse flow. This caused the Sensex and Nifty to trade in Red throughout the week with marginal reversal on Friday through short covering.

As indicated in last week’s blog, due to sustained buying by foreign investors and expectation of lower borrowing by Govt. of India for FY25, thanks to transfer of highest ever surplus, 10Y went down below 7% and closed at 6.98% on Friday. As per NSDL data, FPI investment through voluntary retention route up to May 30, 2024, was $ 508 million, the highest monthly level since May 2022.

Wall Street indexes retreated last week led by major drags by tech stocks including Nvidia, Microsoft, Meta, Alphabet and Salesforce and declines in rate-sensitive sectors due to concerns around the timing and the scale of the Federal Reserve’s interest rate cuts. US Bond yields which were hardening till midweek for same reasons, softened on Thursday and Friday after data showed inflation running roughly where economists anticipated by consumer spending that was below expectations.

# 2 Banking

2.1 RBI last Tuesday launched three major initiatives.

• PRAVAAH portal (Platform for Regulatory Application, VAlidation and Authorisation) is a secure, centralized web-based platform designed for public to seek authorizations, licenses, or regulatory approvals from RBI – with online status tracking covering 60 different application forms.
  • eliminating the need for physical documentation and in-person visits to reduce paperwork and administrative overhead.
  • Tracking progress reducing uncertainty.
  • responding through portal, ensure a smoother and more efficient exchange of information.
  • time-bound approach aims to improve the efficiency of the RBI’s regulatory processes.

• RBI Retail Direct facilitating retail investment.
  • designed to offer easy access to retail investors allowing them to buy and sell government securities (G-Secs) directly from their smartphones.
  • The App simplifies transactions in the primary and secondary markets.
• Fintech Repository providing comprehensive data on the fintech sector,
  • aimed at facilitating better regulatory understanding and policy formulation.
  • related repository for only RBI regulated entities (banks and NBFCs) on their adoption of emerging technologies (like AI, ML, Cloud Computing, DLT, Quantum, etc.), called EmTech Repository is also being launched.

Above initiatives are a testament to the RBI’s commitment to leveraging technology to enhance its regulatory functions. Both repositories, managed by the Reserve Bank Innovation Hub (RBIH), are designed to support policymakers and industry participants with valuable sectoral insights.

• Key take aways from RBI Annual Report 2024 released last week.

• The Indian economy is poised for stronger growth over the next decade despite challenges from rapid AI/ML adoption and recurrent climate shocks,
• The external sector remains strong, with foreign exchange reserves providing a buffer against global economic shocks. However, geopolitical tensions, global financial market volatility, and climate shocks pose risks to growth and inflation.
• Favourable prospects for agriculture and rural activity due to a favourable monsoon.
• The fiscal outlook is positive, with reduced market borrowings and increased capital expenditure.
• Digital tax system enhancements are expected to boost direct tax revenues to 6.7% of GDP in 2024-25.
• Banks and NBFCs have maintained healthy capital and asset quality, supporting credit growth and domestic activity.
• Plans to implement several regulatory and supervisory measures in FY25 to strengthen financial intermediaries, including reviewing IRAC norms, project finance guidelines, and priority sector lending guidelines.
• Bank frauds up nearly 300% in last two years, (from 9046 in FY22 to 36075 in FY24) digital frauds up 708% but the amount involved has come down from Rs 45358 cr. to Rs.13930 cr.
• A risk-based authentication mechanism will be introduced to enhance payment security.
• RBI to allow rupee accounts to be opened outside India, step towards internationalisation of Indian currency.

Catching eye of common man, is the increase in Balance sheet size to ₹ 70.48 lakh cr. 2.5x size of Pakistan’s GDP.

2.3 RBI last week issued a circular stating it will regularise the issuances of partly paid units by AIFs to investors outside India prior to an amendment done in March through compounding.

• AIFs are pooled investment vehicles and investors are allotted units based on their contribution or beneficial interest in the portfolio. The investment managers draw down capital from investors based on the commitments when there is an investment opportunity. This is done by issue of partly paid units or fully paid units proportionate to the amount drawn. Securities and Exchange Board of India (Sebi) allowed AIFs to issue units either as partly paid or fully paid.

Foreign portfolio investors (FPIs) are in a bind after a recent notification by the Reserve Bank of India (RBI) as there is no clarity on the amount of fee (fixed or % capital drawn) to be paid for this compounding to help them legitimising partly paid units.  Thankfully, RBI has not nullified such issues done prior to March. Unless RBI clarifies the fee payable, the problem continues to persist.

2.4 RBI on Thursday released its final guidelines for financial technology firms to create a self-regulatory organization (SRO)

• aimed at enforcing regulatory standards and fostering transparency in the sector and help address their needs and challenges.
• Like MFIN or Sa-Dhan in MFI space, this is expected to relay sector specific insights, address concerns and collaboratively work towards development.
• The shareholding to be sufficiently diversified including fin techs domiciled outside India, with no entity holding > 10% and the minimum net worth to be ₹ 2 cr.
• To track business practices and track exceptions and build tools for surveillance of sector.

The guidelines come at a time when the fintech industry in India is growing at a break-neck pace due to surging demand for digital payments and borrowings, raising concerns relating to customer protection, data privacy, cyber security and internal governance.

2.5 RBI last Wednesday barred Edelweiss ARC from acquiring financial assets and security receipts. The RBI cited material concerns arising out of the conduct of the group entities acting in concert. Concerns in general on ARCs voiced by RBI include:

• ARCs violating norms as they are allowed themselves to be used as a “conduit to evergreen distressed assets.
• ARCs doing mostly one-time settlements and rescheduling of debt actions which banks also can do.
• ARCs have warehoused the stressed assets for a fee, (not in consonance with the ARC framework) while the lenders continued to remain responsible for collection and custody of security.
• Questionable process followed for disposal of assets, not being placed before Independent advisory committee, contrary to regulatory restrictions.
• Assets sold to group entities without following arm’s length principle.

Its time the whole business model of ARCs in India undergoes transformation in line with international best practices.

2.6 As per CRISIL report released last week,

• Bank credit growth rate is expected to moderate as high base effect, slower rate of economic growth, and higher capital requirements could temper demand,
• The overall bank credit growth rate is expected to decline by 200 basis points to 14% from 16%.
• Corporate credit, the largest segment, will be supported by capacity expansion, while retail credit will grow the fastest,
• Growth in both MSME and Agri sector is expected to moderate from 19% in FY24 to approximately 13% in FY25 due to high base effect.

# 3 SEBI

3.1 SEBI vide its notification last Monday released framework for issue of subordinate units in privately placed InvITs amending the Infrastructure Investment Trust regulations.

• Subordinate units can only be issued to a sponsor, its associates and sponsor group.
• subordinate units shall not carry any voting rights or distribution rights.
• Can be issued only after acquisition of an infrastructure project as part of consideration for acquisition to the sponsor, associates or sponsor group.
• To be issued in demat form with ISIN distinct from that of ordinary units.
• To be listed in stock exchange only after their reclassification into ordinary units.
• Can also be issued without the issue of ordinary units.
• Require approval of unit holders, if issued after issue of ordinary units and pricing similar to ordinary units.
• Amount shall not exceed 10% of acquisition price of the infra project.

The issuance of subordinate units is primarily intended to bridge the valuation gaps that may arise as a result of the difference in the valuation of an asset assessed by the Sponsor (in its capacity of the asset seller) and the InvIT (in capacity of the asset buyer). It is known that most of the infra projects in private sector are developed in lands or properties belonging to the sponsor and this is a welcome move to promote the use of InvIT. Great protection to retail investors as InvIT would not raise funds through public issues if any subordinate units have been issued and are outstanding.

3.2 SEBI last Monday asked social enterprises, which have registered or mobilised funds through social stock exchange (SSE), to submit an ‘annual impact report’ for the financial year 2023-24 to such bourse by October-end. As covered in blog last year, the social enterprises will have to engage in a social activity out of 16 broad activities listed by the regulator. Modification from submitting the report within 90 days from end of FY.

• The annual impact report to SSE captures the qualitative and quantitative aspects of the social impact generated by the social enterprise.
• In case a Not-for-Profit Organization (NPO) is only registered without listing any security, such report is required to cover the NPO’s significant activities, intervention, and programmes, among others.

Social Impact report would take a longer time than 90 days and SEBI has rightly recognised the operational challenges and has modified.

3.3 SEBI last Wednesday has simplified guidelines for warehouse inspections by clearing corporations.

• Accredited storage facilities with no stock for six months need only one inspection annually by an independent agency. If a facility has no stocks for the entire year, no independent inspections are required. However, before accepting new deposits, in-house inspections are mandatory if there were no inspections in the previous year.
• Established norms for acceptable collateral and exposure for clearing corporations (CCs) to strengthen their risk management framework. This includes specifications for acceptable liquid assets and applicable haircuts for initial margins, mark-to-market losses, value at risk margins, extreme loss margins, and base minimum capital.
• This aims to streamline processes and promote ease of business while ensuring compliance.

3.3 The National Stock Exchange (NSE) vide its’ circular dated May 24, 2024, has announced a significant change in its trading parameters.

• Effective June 10, 2024, the NSE will introduce a one paisa tick size for all stocks priced below ₹250 per share. The current ticket size is five paise.
• A tick size represents the minimum price difference between two consecutive bids and offer prices.
• The new tick size will apply to all securities, except ETFs.
• The tick size for stock futures will now be linked to the underlying price in the cash market segment. This change will be reviewed on a monthly basis, using the closing price on the last trading day of the month to determine the tick size for the following month.

This measure reflects the intense competition between the NSE and the Bombay Stock Exchange (BSE) for market dominance. This adjustment is aimed at enhancing trading efficiency and accuracy in price quotations and marks a strategic move towards improving price discovery.

# 4 IRDAI

4.1 Historic circular by IRDAI last week on Health Insurance. Key take aways:

1. Approval for Cashless facility: Insurance companies will have to ensure 100% Cashless Treatment (Claim Settlement) Reimbursement only in exceptional circumstances and the same should be done within 1 hours of receipt of the request.
2. Final authorization for Discharge from the hospital: Insurance companies will have to grant final authorisation within 3 hours Patients/Family shall not be made to wait. In case of any delay, Insurer has to bear the cost and not the policyholder.
3. In the event of death of policyholder during the treatment, claim will be processed immediately, and insurance company shall get the mortal remains released immediately from the hospital.
4. Grace Period for Premium Payment 15 Days for Monthly Instalments 30 Days for Quarterly/Half Yearly/Yearly So if you manage to renew within this timeframe, you’ll be protected.
5. You’ve an option to cancel the policy within 30 days from under date of issuance if not satisfied with product or terms and conditions.
6. For claim settlements, the policyholder shall not be required to submit any documents rather insurers and TPAs should collect the required documents from the hospitals.
7. Wider choice for the policyholders to be provided by the insurers by making available products/add-ons/riders by offering diverse insurance products catering to all ages, regions, occupational categories, medical conditions/ treatments, all types of Hospitals and health care providers, aimed at providing suitability and affordability.

It is to be noted that the master circular on health insurance products repeals 55 circulars issued earlier and a great step on empowerment of policyholders. Extremely helpful against mis selling which has happened during the last five years.

Cashless claims will create a layer of tech around Insurance journeys. IRDA asked companies to build necessary systems. Our view is that initially Insurance companies will have to spend some % of GWP to build these and it might help them in top-line in long-run as they can charge premium for better service.

# 5 Economy

5.1 S &P Global on Wednesday sparked hopes for a sovereign ratings upgrade for India, raising its country outlook to positive from stable after 14 years. Ten years before in 2014,  the agency upped the nation’s outlook to ‘stable,’ from ‘negative’.

• India’s sound economic fundamentals, robust growth momentum and government spending caused rating upgrade.
• While rating stands unchanged at ‘BBB-/A-3” cautious fiscal and monetary policy could lead to improvement in rating over next two years.
• Continued policy stability, deepening economic reforms, and high infrastructure investment will sustain long-term growth prospects.
• Solid consumer and public investment dynamics to propel India’s real GDP growth to 6.8% in FY25, 6.9% in FY26 and 7% in FY27.

The rating methodology employed by S&P and other international credit rating agencies seems unable to keep pace with the dynamic and pervasive transformation of the Indian economy. This rigidity is evident when juxtaposed against India’s emergence as a premier destination for foreign investment and one of the leading recipients of both foreign direct investment and foreign portfolio investment in equities.

5.2 Govt’s data released on Friday showed that,

• India’s Gross Domestic Product (GDP) for the fourth quarter of the current financial year grew by 7.8 per cent year-on-year vs 8.4% in previous quarter.
• The country’s real GDP growth for FY24 is now estimated to be 8.2 per cent, compared to 7 per cent in FY23. Nominal GDP growth rate is estimated at 9.6% in FY24 compared to 14.2% in FY 23

It may be noted that other rating agencies including Fitch and Barclays have revised India’s GDP growth projection for FY24 to 7.8 per cent due to strong domestic demand and persistent growth in business and consumer confidence levels.

The Economist Intelligence Unit’s (EIU) Global Outlook report has forecast India to be the fastest growing major economy in 2024-2028, with its growth expected to outpace China’s. The report suggests that as India’s economic heft expands, there would be a crossover in the mid-2040s with BRICS nations taking over the G7 in terms of nominal gross domestic product (GDP).