Week Ending June 08, 2024

# 1 Markets

Markets swayed by irrational exuberance on Monday influenced by exit polls predictions, paled into gloom on release of results on Tuesday with the prospect of coalition Govt after 10 years of stable Govt. at the Centre. Investors’ concerns partially cooled, and sanity restored with the visibility of same dispensation.  Markets swung bank with Govt formation with both Sensex and Nifty closing higher than Monday closing at 76693 and 23290. RBI expected policy stance and raising GDP forecast to 7.2% for FY25 complimented the momentum in the equity markets but muted bond markets with 10Y G. Sec remained unchanged at 7.01%.

In this melee, one historic feat was achieved by NSE India handling the highest ever world record no of transactions in a single day on June 5, 2024 – 1971 cr orders per day and 28.55 cr trades per day.

In US Stocks and bonds lost steam on the eve of the US jobs report that will help shape the outlook for the Federal Reserve’s next steps. Equities retreated from their all-time highs as traders refrained from making any big bets ahead of the data. All the three broad S&P, Dow Jones and Nasdaq indices closed in the red on Friday. US 10Y treasury yield hardened from Wednesday and closed with 20 bps higher at 4.43%

ECB went ahead with its first interest rate cut since 2019 on Thursday to 3.75%, citing progress in tackling inflation. first time easing policy after a tightening cycle without an economic crisis.

# 2 RBI

2.1 RBI policy announcements on 7^th June 2024.

1. Policy rates remain unchanged at 6.5%, as expected keeping in view inflation dynamics- withdrawal of accommodation stance continues.
2. Raised India’s FY25 real GDP forecast to 7.20 per cent from 7 per cent earlier on prospects of improving rural and urban demand conditions buoyed by monsoon forecast
3. Proposes setting up digital payments intelligence platform for real time data sharing across the system; constituted a committee headed by former CEO of NPCI Shri Hota, to examine various aspects of setting up the platform.
   1. Growing instances of digital payment frauds, highlight the need for a system-wide approach to prevent and mitigate such frauds.
   2. Felt need for a network level intelligence and real time data sharing across payments eco system. Digital Payments Intelligence Platform for network level intelligence and real-time data sharing across the digital payments’ ecosystem.
   3. The digital public infra platform would be specialised to tackle the issue of frauds in the digital payments eco system with fraud mitigation measures.
   4. Could not have come at a better time, as digital frauds have spiked over 700% as per RBI annual report released a fortnight ago. The number of frauds related to card and internet payments surged from 3,596 in FY22 to 29,082 in FY24. The value of these frauds also increased significantly from Rs 155 crore in FY22 to Rs 1,457 crore in FY24.
4. Proposes to rationalise FEMA guidelines related to export-import of goods and services.
   1. In line with changing dynamics of international trade
   2. Hopefully Authorised Dealers may get better operational flexibility and promote ease of doing business
5. Threshold of bulk deposit in banks raised to Rs. 3 cr. from Rs 2 cr.
   1. Major boost to SFBs who has a larger reliance on bulk deposits.
6. Inclusion of Recurring Payments with Auto-Replenishment Facility under the e-mandate Framework
   1. The adoption of e-mandates for recurring payment transactions has been increasing.
   2. replenishment of balances in Fastag, National Common Mobility Card (NCMC), etc. which are recurring in nature but without any fixed periodicity, in the e-mandate framework.
   3. Auto replenishment if balance goes below threshold limit would enhance convenience in travel/mobility related payments.
   4. Even under UPI Lite wallet auto replenishment is proposed which will enhance ease of making small value digital payments

Though policy stance was on expected lines, other measures indicate RBI’s push for making digital payment penetration safer and sounder.

2.2 RBI is likely to release the final framework for securitisation of stressed assets, post publication of discussion paper last year.

• likely to allow lenders to securitise stressed personal loans, MSME loans and other loans, but excluding farm credit to individuals, fraudulent accounts and wilful defaults
• Assets classified as non-performing assets (NPAs) and special mention accounts (SMAs) — SMA-1 and SMA-2 — are likely to be sold through these pools only on a cash basis, with discounts based on asset classification, the sources said.

This would be a great beginning of a junk bond market and will help deepen the market including Credit Default Swaps.

2.3 RBI on Friday amended FEMA guidelines to bring in changes in Overseas Direct Investments [ODI] regulations.  As per the revised guidelines, Overseas Portfolio Investment in a fund managed by regulated fund manager even if fund is unregulated is now fine. Also, controversy around “units of fund” has been addressed.

It can now be any instrument and thus very important and welcome amendment.

# 3 SEBI

3.1 SEBI last week, has made it mandatory for the clearing corporations to directly transfer the securities into Demat accounts of the clients effective from October 14.

• Currently, the clearing corporation credits the pay-out of securities in the pool account of the broker, who then credits the same to the respective clients’ Demat accounts.
• This facility of direct transfer has already been available since February 1, 2001, on a voluntary basis and this has now been made mandatory.
• clearing corporations should provide a mechanism for trading members (TM) or clearing members (CM) to identify the unpaid securities and funded stocks under the margin trading facility.

The decision for a direct payout of securities will reduce the risk to clients’ securities, as brokers used to misuse clients’ securities for their own purpose.  As this will ensure that stockbroker segregates securities of clients this will protect clients’ securities and not vulnerable to misuse.

This will also improve operational efficiency as this mechanism will l eliminate one leg and auto pledge for funded stocks will give ease of doing MTF (margin trade financing) iterative steps will be reduced.

2.2 SEBI last week has proposed to enhance the threshold for the basic service Demat account (BSDA) to Rs 10 lakh from the current Rs 2 lakh A basic service Demat account, or BSDA, is a more basic version of a regular demat account.

• The value of securities held in the demat account should not exceed ₹10 lakh for debt and other than debt securities combined at any point of time.
• An individual needs to have only one demat account where they are the sole or first holder, and the individual needs to have only one BSDA in their name across all depositories
• BSDA accounts do not offer margin trading facility – which means investors cannot borrow funds from their brokers to trade.
• BSDA holders must trade within the limits of their own funds and thus designed for small investors who engage less frequently in stock market activities.
• At present, an individual can hold debt securities worth up to Rs 2 lakh and other than debt securities worth up to Rs 2 lakh in a single demat account to be eligible for BSDA.

The facility was introduced by Sebi in 2012 for reducing the burden of demat charges on investors with small portfolios.  Annual maintenance charge for a BSDA is nil for portfolio values upto Rs, 4 lakh and upto Rs, 10 lakh the charges to be Rs, 100. On exceeding Rs, 10 lakh BSDA to be automatically converted into a regular demat account. In addition, electronic statements to be provided free of cost and thus may help in boosting the participation of retail investors in the securities market.

2.3 SEBI has proposed a new auction method aimed at improving price discovery for exchange listed investment companies [ICs] and Investment holding companies [IHCs].

What is proposed?

• This method uses a special call auction (to be conducted annually by stock exchanges) without price bands to address the issue of these shares often trading below book value due to inefficient price discovery.
• Valuing ICs/IHCs involves assessing them as a sum of their parts, which includes both controlling and non-controlling interests across various sectors and companies with differing risk-return profiles.
• At times, the market price of these entities might even fall below the book value, despite the underlying investments holding significant market value.
• Price bands typically help control volatility and prevent market manipulation by limiting how much prices can fluctuate. Unlike continuous trading, a call auction accumulates orders over a specific period before executing them at an equilibrium price, rather than matching orders in real-time.

How this will be done?

• Applicable to ICs/IHCs that have been listed for at least a year, compliant with listing regulations, hold at least 50% of their total assets in shares of listed entities, and whose six-month volume-weighted average market price (VWAP) falls below 50% of their book value.
• The newly discovered price will be accepted only if at least five different buyers and sellers participate in the auction, which will continue on subsequent days until a price is established.

This initiative is praised for potentially benefitting public investors by providing a more accurate reflection of ICs/IHCS market value. Concerns do arise about whether having only five unique participants and eliminating price bands could lead to market manipulation and collusion. Illustratively it will be a good case to see how Tata Sons gets benefited from this process.

2.4 SEBI on last Wednesday relaxed timelines for disclosure of material changes by Foreign Portfolio Investors (FPIs).

• Material changes notified by FPIs into two groups. Type I group includes changes that require FPIs to seek fresh registration, or which affect any privileges or exemptions available to such foreign investors – (change of jurisdiction, name change, merger etc.) and Type II includes all other material changes other than Type I
• FPIs are required to report Type I changes within seven working days and provide supporting documents within 30 days and Type II changes require notification and supporting documents within 30 days.
• Designated Depository Participants (DDPs) need to examine all material changes informed by the FPIs and reassess the eligibility of the FPI, including requiring FPIs to seek fresh registration

At present, FPIs get up to seven working days to submit information to the watchdog with regard to any material change in its structure or ownership or control or investor group. The move is thus a good move from FPI  perspective.

2.5 SEBI on Thursday came out with a framework on “financial disincentives” for stock exchange and other Market Infrastructure Institutions (Clearing corporations and depositors) or their lapses in detecting abnormal for suspicious trading activities to safeguard the interests of retail investors.

• Amount of penalty linked to revenue of MII during the previous FY and the no of lapses.
• includes monitoring the day-to-day activities in the market, reporting abnormal or suspicious activities
• monitoring the conduct of market intermediaries through the generation and processing of alerts seeking trading rationale and carrying out snap analysis.
• would not be applicable in instances wherein it has a market-wide impact or caused losses to large no of investors

# 3 Economy

3.1 Rating agency Fitch reaffirmed India’s stable outlook on Wednesday, following closely S&P’s similar affirmation last week. Rating continues to remain at BBB-.

• Key factors cited include a credible fiscal strategy, higher medium-term investment, and robust economic growth. Fitch also highlighted India’s sound economic fundamentals, strong growth momentum, and significant government spending while maintaining its sovereign credit rating for India.
• Weak public finances, characterized by high deficits, debt, and interest/revenue ratios, remain the largest constraints on India’s rating. Additionally, lagging structural metrics, such as World Bank governance indicators and GDP per capita, also weigh on the rating.
• The agency anticipates investment will continue to drive growth, supported by the government’s capital expenditure and a gradual acceleration in private investment. However, household consumption is expected to moderate in the near term due to reduced savings buffers.

3.2 The HSBC India Services Purchasing Managers’ Index (PMI), compiled by S&P Global, fell to 60.2 in May from 60.8 in April and 61.2 in March and remained lower than February’s 60.6.

• The reading, however, remained above the 50 mark which separates expansion from contraction, for 34 months. Index had hit a six-month peak of 61.8 in January. While both input costs and output charges rose, new orders from international markets expanded at the steepest pace while job creation rising to a 21-month high.
  On the cost front, companies faced rising labour and material pressures, especially with rising food costs. India has seen high double-digit inflation in vegetable prices over the last few months.
• In terms of overall activity, aggregate output across both the manufacturing and service sectors fell in April, albeit at a slightly slower pace, indicating sustained health in these sectors.

3.3 Business momentum in India’s manufacturing sector continued to wane for the second consecutive month in May. The seasonally adjusted HSBC India Manufacturing Purchasing Managers’ Index (PMI) fell from 58.8 in April to 57.5 in May.

• New orders rose at the slowest pace in three months in May.
• Elevated competition and election-related disruptions also played spoilsport.
• Plus, production costs rose – mainly freight, raw materials and employee expenses as hiring picked up.
• Consequently, the PMI sub-index measuring input costs rose to 54.4. In response, manufacturers raised selling prices in May, with output price PMI at 52.8.

3.4 As per data released by MCA last week,

• The services industry dominated new business registrations in April, accounting for 72% of the 15,973 new registrations. This marks a steady rise, with 65% of the 1.7 million active companies now in services, up from 61% in March 2015. Throughout FY24, services consistently made up 70-72% of new business registrations, except in April 2023.
• Key growth areas within the services sector include community, personal, and social services, business services, trading, real estate, transport, and communications.

To further innovation, the Commerce and Industry Ministry plans to propose a policy for deep tech startups in the upcoming Budget. This policy aims to support research, intellectual property creation, funding, and infrastructure. This augurs well for PE firms with significant investment opportunities.

3.5 As per Capgemini’s World Wealth Report 2024

• The number of high net-worth individuals (HNWI) in India increased by 12.2% in 2023 vs 2022, bringing the total number of HNWI population to 3.589 million.
• The financial wealth of India’s HNWIs increased by 12.4% in 2023 to $1,445.7 billion while it was $ 1,286.7 billion in 2022.

# 4 PE/VC

4.1 As per IVCA EY report

• April 2024 recorded 4% lower PE/VC investments at US$4.4 billion than March 2024 and 35% lower than April 2023.
• of deals in April 2024 was higher by 56% y-0-y.
• While Real Estate and Infra asset class declined Buy out investments were highest at $2.1 bn accounting for 47% of total in April 2024.
• Financial services, focus sector for TVS Capital Funds, continue as the top sector in April 2024, recording US$1.8 billion.