Week Ending May 25, 2024

Week ending 25^th May 2024

# 1 Markets

Reserve Bank of India’s larger-than-expected dividend payment to the government prompted traders to cover some of their bearish bets in equity market. Receding uncertainty over the BJP’s performance in the general elections also bolstered sentiment, with the NSE Nifty ending a whisker away from 23,000 on Thursday. After closing at record highs on Thursday, Indian benchmark indices failed to maintain their momentum and closed marginally down on Friday.

Global markets reeling under heavy profit booking including the US markets with more than 1% fall. Even post earnings Nvidia’s 9% rise could not save the markets.  All the three indices broadly rose 1% on weekly close.

Bonds have reacted positively as the higher dividend from RBI has the capacity to negate any possible impact from elections on Govt. borrowing and is expected to move below 7%.  Buoyed by signs of easing US inflation and India’s inclusion in global bond indices from next month, foreign investors have resumed purchases of fully accessible government securities this month, reversing a six-week selling streak which saw their holdings drop by close to $2 billion.

Quarterly results faded and robust economic data – Mfg. PMI went up to 50.9, Services PMI surged to 54.8 and composite up to 54.4 higher than estimates – fuelled concerns over higher for longer monetary policy in US with fading hopes of rate cut anytime soon. US 10Y hardened and closed at 4.46%.

Market cap milestone!

The combined market capitalisation of all listed stocks on BSE last Tuesday rose up to Rs 414.75 lakh crore ($5 trillion) and India joined exclusive $ 5 trillion club for the first time ever. It defied the FII pull out before the outcome of the Lok Sabha elections on June 4, achieved within just 6 months of crossing $4 trillion. Though the Warren Buffet indicator (market cap to GDP) is 1.42 reflecting over valuation, seen in the context of ownership of stocks by just 17% households in India compared to 58% in US. Long way to go!!

# 2 Banking

• As per RBI bulletin released last week,

• India is likely to grow by 7.5 per cent in Q1FY24, driven by rising aggregate demand and non-food spending in the rural economy. The Indian economy has demonstrated marked resilience in the face of geopolitical headwinds impacting the supply chain.
• Bond issuances during FY24 grew by about 15% to ₹8.6 lakh crore as against ₹7.5 lakh crore earlier. Corporates also received higher funds through external commercial borrowings in FY24 with net inflows at $9.5 billion substantially higher than the levels recorded in FY23.
• A durable alignment of the 4% inflation target may begin to appear from second half of the current fiscal. Optimism is based on statistical base effects to help pull down headline inflation in July and August of this year.
• Extreme deprivation is set to become extinct.
• As per annual data for remittances,
  • a significant rise in overseas travel spending, which reached $17 billion in FY24—an increase of more than 24.5% compared to $13.6 billion in the previous year.
  • The share of international travel in LRS spending has climbed to 53.6% in FY24, up from 37% in FY20, before the pandemic.
  • A record $31.7 billion was spent overseas under the Liberalised Remittance Scheme (LRS) in FY24, marking a nearly 17% increase over the $27.1 billion recorded in FY23.

2.2 RBI last week has written to at least four banks asking them to be cautious about their co-lending partnerships. The regulator is concerned about the poor underwriting standards of loans in some cases and potential asset quality issues in loans originating through such channels.  This is surprising as RBI has encouraged co lending in a big way and has issued comprehensive guidelines covering co lending in India.

# 3 Capital Markets

3.1 SEBI last week fined two independent directors (IDs) — a retired air vice marshal and a physical therapist — ₹10 lakh each for failing to fulfil their statutory duties as members of their companies’ audit committee, and for not safeguarding interests of shareholders.

• Company had assured them that their roles as IDs and audit committee members would not require specialised knowledge of finance. They were led to believe that audit committee meetings were routine.
• The role of the independent director has evolved over the years and may now encapsulate crisis and risk management, internal controls, standards of conduct and sustainability, along with traditional roles in strategy, finance and audit.

While the guidelines call for a robust mechanism for performance evaluation of IDs, it also points out the need to create legal and procedural safeguards relating to their personal liability. Also needed is availability of indemnity and/or insurance that may be formalised through appropriate written agreements.

3.2 SEBI on Tuesday has revised the method for calculating the market capitalisation of listed companies under the listing obligation and disclosure requirement (LODR) rules. Revision to come into effect from Dec 31, 2024.

• Instead of using the market capitalisation of a single day which is currently March 31, listed companies will now have to use the average market capitalisation for a six- month period.
• Ranking of compliance would be based on average capitalisation from July 1 to December 31, with December 31 as the cut- off date.

3.3 SEBI on Tuesday proposed tweaking norms governing buyback of shares. Suggestions include,

• allowing conversion of ESOPs or convertible instruments if the exercise or conversion date falls within the buyback period. The current rules prohibit issuing any shares or securities until the buyback period ends.
• disclosing details of outstanding ESOPs and convertible instruments in the public announcement.
• if any promoter or member of the promoter group declares upfront, they will not participate in the buyback, their shares should not be considered in the entitlement ratio calculation.
• As against 4 working days from record date, 4 days would reckon from public announcement.

Changes aimed at facilitating ease of doing business. Change in computation helps increase the entitlement for remaining shareholders as there is no specific method for calculating entitlement ratio now.

3.4. SEBI on Tuesday came out with a framework for determining the share price level for transactions in cases where a listed company verifies a market rumour within a stipulated time period. SEBI had already come out with detailed norms for verifying rumours applicable for top 100 listed companies effective from June 1, 2024, and top 250 companies from Dec 1, 2024. In this backdrop, this framework will help consider ‘unaffected price for transactions upon confirmation of market rumour”.

• Generally, unaffected price refers to the share price of a company in case there is no market rumour. Since sharp price movements could impact the overall value of a transaction, the regulator has proposed considering a scrip’s unaffected price.
• unaffected prices shall be considered for transactions on which pricing norms specified by it or stock exchanges are applicable.

SEBI has issued guidelines for the calculation of adjusted Volume Weighted Average Price (VWAP). The variation in daily WAP from the day of material price movement till the end of the next trading day after confirmation of the rumour shall be attributed to the rumour and confirmation of the rumour. The adjusted daily WAP will be calculated by excluding the WAP variation from the daily WAP in the look-back period from the day of the material price movement onwards,

3.5 SEBI on Thursday proposed to review the framework for borrowings by large corporates.

• Proposed to raise the threshold for large corporates to ₹500 crore from the current ₹100 crore to align with threshold of high value debt listed entity.
• Proposed to remove the requirement of rating as a criterion for identifying any entity as large corporate.

In 2018, SEBI had mandated large corporates to raise at least 25% of their incremental borrowings during the financial year by issuing debt securities aimed to deepen the corporate bond market.

• Companies had represented that bond market has not yet deepened and raising funds from banks and financial institutions is a cost-effective option as compared to raising of funds from debt securities.
• In most of such cases, meeting with the requirement of 25% of incremental borrowing through debt securities has become costlier due to tightening liquidity and hikes in the benchmark rate.

SEBI should first try to deepen the bond market with more access for low rated corporates before bringing down the threshold back to Rs, 100 cr.

3.6 SEBI on Wednesday has proposed relaxation of rules on valuation of investment portfolio of alternative investment funds (AIFs).  SEBI had earlier proposed vide its circular in June 2023 changes in valuation guidelines which were not sync with features of the business model of AIFs, Basis industry representation, SEBI has now proposed relaxation. Four changes proposed from its notification in June 2023,

• Valuation of only listed securities to be carried out as per MF norms while unlisted to be done as per International PE and VC valuation guidelines [IPEV]
  • For unlisted, valuer needs to delve into and estimate valuation based on cash flows pertinent to underwriting thesis, (like DCF, IRR etc.) not covered under MF guidelines, which goes by rule-based framework – like net worth, EPS etc. This also varies depending on lifecycle of companies i.e seed stage, early, late growth stage etc.
  • MFs hold most of the assets under “Available for Sale” (shorter duration) compared to AIFs which holds till maturity (longer duration)
• Change in valuation methodology as per above would not construe as material change as long as it is disclosed to investors. Thus, exit option need not be provided to investors as directed earlier.
• Only the deputed/authorized person(s) of registered valuer entity, who undertake(s) the valuation of investment portfolio of AIFs shall have a membership of ICAI or ICSI or ICMAI or CFA Institute instead of entire team.
• Reporting of cash flows and valuation of investments to performance benchmarking agencies to be done within 7 months from end of FY as against 6 months stipulated earlier.

SEBI should try to understand the industry and its operational features clearly before stipulating guidelines henceforth.

# 4 Economy

4.1 As per Goldman Sachs report released last Wednesday,

• Indian households’ net financial savings likely rose to 6% in FY24 from 5.1% in the previous year, given the faster increase in household deposit growth.
• This (increase in net financial savings) is mainly driven by estimate of higher gross financial savings of 12.5% of GDP (vs 11.0% of GDP in FY2023) as deposit growth at 11% is estimated to be higher than the 9.4% growth in FY23.
• Rise in household liabilities to 6.6% of GDP in FY24 from 5.9% in the previous year was one of the primary factors for the decline in net financial savings as they jumped 1.7 times from the previous year.
• The research noted that increasing financial literacy, digitalisation, formalisation and performance of equity markets were reasons for the trend of financialization of household savings, which could help fund the capex cycle without affecting the current account deficit.

4.2 As per CRISIL report released last week,

• Household savings likely revived in FY24 after falling to their lowest level in FY23 as reflected in
  • Growth of bank deposits at 13.5% in FY 24 vs 9.6% in previous year
  • Net inflows in MFs rose to Rs 2 lakh cr in FY 24 vs Rs. 1.55 lakh cr. in FY 23
  • a rise in residential sales and a slowdown in private consumption

4.2 As per ICRA report released last week,

• The Indian economy likely grew at a four-quarter low of 6.7 per cent in Q4FY24, with particular weakness in the agricultural sector amid weak trends in the rabi output, barring wheat, and concerns related to yields.
• The growth in overall GVA is estimated to ease to 5.7% in Q4 FY2024 from 6.5% in the previous quarter, driven by the industrial (to +7.9% from +10.4%) and services (to +6.2% from +7.0%) sectors.
• The gap between the GDP and the GVA growth is predicted to moderate to 100 basis points (bps) in Q4 FY2024 from 185 bps in the previous quarter. This is because of the expected lower expansion in the net indirect taxes in Q4.
• Industrial GVA growth to be 7.9% in Q424 from 10.4% in Q324. This is led by all four sub-sectors, including manufacturing (to +8.0% from +11.6%), electricity (to +7.5% from +9.0%), construction (to +8.5% from +9.5%), and mining and quarrying (to +5.5% from +7.5%).

4.3 As per HSBC Flash India Composite Output Index released on Thursday,

• India’s private sector activity picked up in May, recording the third strongest increase since July 2010 and contributing to optimism about the future,
• There is sharpest upturn in employment in nearly 18 years.
• The HSBC Flash India Composite Output Index rose to 61.7 in May compared with 61.5 in the previous month, as export demand strengthened further, and the services sector accelerated.
• The latest data showed strength in new export orders for both sectors, which rose at the fastest pace since the series started in September 2014.
• While manufacturing sector activity eased slightly to 58.4 compared with 58.8 in the previous month and was slowest since February, it was still higher than the long-term average.

# 5 PE/VC

India’s private equity (PE) market is booming.

• PE equity investments in Q4 FY24 surged to 310 transactions totalling around $5.2 billion, as per a report by Mazars in India.
• The quarter also saw a sharp increase in PE exits, with 50 exits, a 354.5% rise from Q1 FY23’s 11 exits.