Week ending 14th Sept 2024
# 1 Markets
Despite a marginal decline on Friday due to profit-taking, the Nifty and Sensex indices rose by 2% this week, driven by rate cuts in China and the EU, as well as the anticipation of a possible Fed rate cut next week. In fact, all sectoral indices ended in the green, except for the Nifty PSE.
India’s retail inflation remained below 4% for the second consecutive month, edging up to 3.65%, though food prices continue to pose a concern. However, the RBI Governor’s statement on Friday, indicating that he is in no hurry to cut rates and emphasizing the central bank’s policy priorities, dampened hopes of an immediate rate cut. Meanwhile, surging inflows continue to push bond yields lower, with the 10-year benchmark yield softening to a 30-month low, closing at 6.79% on Friday. This decline tracks the softening of U.S. bond yields and a drop in crude oil prices.
The European Central Bank (ECB) reduced its key interest rate by 25 basis points to 3.5% on Thursday, while China is set to cut rates on outstanding mortgages. In the U.S., the Consumer Price Index (CPI) cooled for the fifth straight month, reaching 2.5% in August, down from 2.9% in July and marking the lowest annual figure since February 2021. These developments significantly boosted Wall Street’s confidence in a definitive 25 basis point interest rate cut by the Federal Reserve next week. As a result, U.S. stocks advanced, with all three major indices – the Dow Jones, Nasdaq, and S&P 500 – gaining 2%, 4%, and 1.5%, respectively, for the week. Benchmark 10-year U.S. Treasury bonds rallied, pushing yields down to 3.65%.
# 2 RBI
2.1 RBI’s decision appears quixotic in Yes Bank stake sale
- In the first place, RBI, as a special case expressed comfort with any suitable buyer picking up to 51% in the bank, since the private lender’s growth has been somewhat stifled in the absence of a stable, long-term promoter.
- It has now informed Sumitomo Mitsui Banking Corp. (SMBC) that its voting rights in Yes Bank Ltd will be capped at 26% even if the Japanese bank acquires up to 51% in the private lender.
- SMBC is of the view that with cap in voting rights, it will be treated as a mere portfolio investment which is marked to market.
Yes bank needs a new owner who can buy out the stake from SBI and others, enable the bank to compete more aggressively with other private lenders, grow the book faster and put in place long-term growth strategies. In the particular case, control seems inevitable if the bank is to be turned around, especially given that there are large chunks of shares held by specific investors.
It will be an interesting precedent how the stake sale goes through and how RBI achieves its contrasting objectives permitting 51% stake with capped voting rights.
# 3 SEBI
3.1 SEBI, on September 5, 2024, notified the Foreign Venture Capital Investors (Amendment) Regulations, 2024, which will take effect on January 1, 2025.
- Key changes include updated eligibility criteria, requiring FVCIs to be from countries with agreements with SEBI or international bodies.
- There are new rules on beneficial ownership (BO) disclosures, renewal fees, and stricter deadlines for license renewal.
- The amendments reflect SEBI’s strategic focus on enhancing efficiency, due diligence, and regulatory oversight, while reducing its direct role in operational tasks.
These amendments aim to streamline the registration process for FVCIs (Foreign Venture Capital Investors) by shifting responsibilities to SEBI-registered Designated Depository Participants (DDPs), aligning FVCI procedures with those of Foreign Portfolio Investors (FPIs).
3.2 SEBI announced updates to the margin trading facility (MTF) rules on Wednesday.
- Securities funded through cash collateral will now be allowed as part of the maintenance margin for MTF, offering relief from the need for additional collateral.
- when brokers collect cash collateral from clients for margin trading and forward it to the Clearing Corporation (CC) to meet the settlement obligations, this cash collateral can now be considered as part of the maintenance margin.
- if cash collateral provided by clients is used to acquire funded stocks, these stocks must be from Group 1 securities
Relaxations provided is expected to boost margin trading
3.3 The Ministry of Corporate Affairs (MCA) has introduced vide its notification dated 9th Sept 2024, important regulatory changes for companies involved in mergers and amalgamations, particularly in cases involving foreign entities. According to the new rules, any merger between a foreign holding company incorporated outside India and its wholly owned subsidiary (WOS) incorporated in India will now require only approval from the Reserve Bank of India (RBI)
- This will be helpful for reverse flipping – companies which want to redomicile into India or move their business to India, acquisition of foreign companies by Indian companies.
- It adds a layer of compliance for sure by way of a prior approval. But as per clarification from MCA, these mergers would be considered under deemed approval and hence likely to be only procedural with 60 day time cap.
- RBI approval is required because RBI wants to investigate if the original company set up overseas violated FEMA or not.
- Even now, one need to comply with ODI regulations but only outflow of cash or capitalisation of receivables is recognised.
Exchange of shares is ambiguous as cross border merger is not recognised under Companies act. This proposed move facilitates and streamlines the concept. Another good thing is NCLT approval is done away with now, which was real pain and time-consuming effort. This could not have come at a better time as more startups like Razorpay, Flipkart and Pinelabs have lined up for reverse flipping.
3.4 Govt also amended FEMA last fortnight – Amended Rules has now specifically recognised and enabled FDI in White Label ATM operations [WLAO] sector under 100% under automatic route subject to certain conditions. These conditions states that the non-bank entity setting up White-label ATMs (WLAs) should have minimum net worth of INR 100 crores as per latest audited balance sheet and same be maintained at all times. FDI in the WLAO will be subject to the specific criteria and guidelines issued by the RBI under the Payment and Settlement Systems Act, 2007.
With UPI enabled ATM withdrawals, WLAO is likely to witness significant growth.
3.5 Govt last Monday notified that effective September 10, 2024,
- Deal value above ₹2,000 crore and where the target firm has “substantial business operations in India” would need regulatory clearance.
- Mergers and acquisitions involving digital firms that have one tenth of their global users or gross merchandise value in the previous one year or annual turnover in India would require clearance from the Competition Commission of India (CCI)
- as they would then be considered to have “substantial business operations” in this country.
- Transactions involving non-digital firms that have an annual gross merchandise value or turnover of more than ₹500 crore in India will need the mandatory regulatory approval, as per the new regulations.
- The CCI has also reduced the review period for M&A deals to 150 days from 210 day
The rules will apply to even those transactions that are already signed but not formally closed yet, the CCI said, removing doubt over their applicability. The deal value threshold, introduced in the amended competition law of 2023, aims to enable the CCI to capture important transactions, especially in the digital sector, which could otherwise escape its scrutiny based on the traditional asset or turnover criteria, experts have said.
# 4 Economy
4.1 As per data released by MoSPI on Thursday, The Index of Industrial Production (IIP) in India witnessed a growth of 4.8 per cent in July on an annual basis against 4.2 per cent in June,
- Overall performance on sequential basis improved mainly on account of manufacturing sector.
- Manufacturing and power sectors were significant drivers of this growth, with growth rate of 4.6 per cent and 7.9 per cent respectively. The mining sector also contributed, growing by 3.7 per cent in the same period
- The capital goods segment witnessed a growth of 12 per cent
- Consumer durables output dipped to 8.2 per cent and non-durable consumer goods contracted by 4.4 per cent.
- Infrastructure and construction related goods slowed to 4.9 per cent
This was supported well by the government capex which picked up in July. The capex of the Union and the States (25 State governments) jumped 42.8 per cent to ₹1.17 lakh crore during July 2024. The intermediate goods sector growth stood at a five-month high of 6.8 per cent in the same period.
4.2 As per Nasscom Zinnov report released last week,
- The number of global capability centres (GCCs) set up in India has increased to 1,700 in the fiscal year 2024 ending March, from 1580 last year.
- It generated $64.6 billion in export revenue, an increase of 40% from $46 billion in previous fiscal .and employing over 1.9 million people
- By 2030, the GCC market in India is estimated to grow to $99-105 billion, with the number of GCCs reaching 2,100-2,200 and headcount rising to 2.5-2.8 million
4.3 Govt. last Friday launched two digital initiatives:
- One, Jansunwai Portal, Trade Connect e-platform which provides exporters with necessary information, clarifications, concerns, find the status of complaints and a video-conferencing facility to directly speak to officials of the various departments concerned with exports.
- plans to connect over 6 lakh exporters and importers with more than 180 Indian mission officials, 600 export promotion council officials, besides the ministry and banks.
- the second portal called the Enterprise Resource Planning (ERP) portal of the Export Credit Guarantee Corporation of India (ECGC) make all services offered under ECGC online like filling forms, claims, reimbursements, grievance redressal, policy information, credit support.
These digital initiatives are likely to help resolve issues faced by exporters, bring transparency and make exports more convenient. There wouldn’t be need for running behind officials and likely to bring in transparency and make exports convenient.
4.4 Govt. on Thursday raised the monetary limits of contraventions that can be compounded by relevant officers under the Foreign Exchange Management Act (FEMA) as it sought to simplify various provisions to fast-track settlements of cases.
- Cases involving contraventions up to ₹60 lakh can be handled by an AGM of the RBI, against up to ₹ 10 lakh earlier.
- The limits for DGMs, GMs and CGMs of RBI have been raised multiple times to ₹2.5 crore, ₹5 crore and more than ₹5 crore, respectively.
- At the Directorate of Enforcement (ED) level, compounding cases of contraventions up to ₹5 lakh can be handled by a deputy director, up to ₹10 lakh by additional director, up to ₹50 lakh by special director and Rs 1 crore or more by the director
The revised limits will leave the senior officers of both the RBI and the ED with fewer but more important cases and enable hundreds of their juniors to take up the bulk of applications, exuding optimism about fast clearances of both pending and fresh cases
# 5 PE/VC
5.1 As per EY Private Credit report released last week,
- Private credit deals in India surged 22.4 per cent to an all-time high of $6 billion in the first half of 2024, compared to $4.9 billion worth of deals reported in the same period of calendar 2023.
- The share of global funds in private credit has declined to ~58%, with domestic players increasing their market presence due to local relationships and awareness of private credit as an asset class
- Family offices are increasingly participating in private credit, either through funds or direct debt exposure
- Real estate remains the most attractive sector for private credit investments, with significant deals; Infrastructure raised US697million, while healthcare saw $293 million for acquisitions
- Capital expenditure is identified as the primary driver of demand for private credit, followed by stress-related and M&A financing.
- Investment in private credit in India is projected to range between US5billion to US10 billion over the next year, with domestic family offices expected to contribute significantly
As the private credit ecosystem in India matures, there is a subtle shift towards performing credit deals in India, with funds increasingly engaging in sub-18 per cent Internal Rate of Return transactions. In the high-yield segment, mergers and acquisitions/buyout deals, and bridge-to-initial public offering transactions have gained traction within private credit funding