Week ending 17th August 2024
# 1. Markets
Buoyed by positive global cues, the Sensex surged over 1,300 points, while the Nifty closed above the 24,500 mark on Friday, as strong U.S. economic data eased recession fears in the world’s largest economy and boosted risk appetite globally. The Sensex advanced 1,331 points to settle at 80,436, while the Nifty gained 397.4 points to end at 24,541, despite net income for Nifty companies growing by just 5.2% in the recently concluded Q1 earnings season.
Cooling inflation in the U.S. at 2.9% in July, the lowest level in the last three years, fuelled expectations of imminent Fed rate cuts, which, in turn, boosted investor confidence and supported stock market gains worldwide. Wall Street’s main indices closed higher, with all three broad indices increasing by 2-3% after July U.S. retail sales data signalled resilient consumer spending, easing fears of an imminent recession prompted by a spike in the unemployment rate in the world’s largest economy.
Driven by the base effect, easing food inflation, and softening prices of manufactured products, India’s wholesale inflation declined to a three-month low of 2.04% in July, compared to 3.36% in June. India’s retail inflation also eased to 3.54% in July, edging below the RBI’s medium-term target of 4% for the first time since August 2019. Ignoring any immediate rate cuts from the RBI, surging overseas interest in Indian bonds prompted trading in a stable range, with the 10-year G-Sec closing at 6.86% on Friday. Imminent Fed rate cuts in the U.S. softened yields, bringing them down substantially, with the 10-year yield closing at 3.88% on Friday.
# 2. RBI
2.1 P2P Lending Regulations
Last Friday, the RBI tightened norms for NBFC P2P lending platforms, which connect individual lenders with borrowers to facilitate unsecured loans. As of March 2024, there are 26 NBFC-P2P registered with the RBI. The new regulations include:
- Prohibiting the sale of insurance products that are in the form of credit enhancement or any assurance or guarantee on the recovery of loans. Any loss of principal or interest must, therefore, be borne only by lenders.
- Charging a fixed fee and not a variable fee, which should not be linked to the borrower’s repayment.
- Restricting the promotion of ‘investment products’ with features like tenure-linked assured minimum returns, liquidity options, and acting as deposit takers and lenders instead of being a platform.
- Maintaining the Rs 50 lakh cap on the aggregate exposure of a lender to all borrowers. If the amount lent exceeds Rs 10 lakh, the lender must provide a net worth certificate from a chartered accountant.
- Prohibiting cash transactions and requiring all fund transfers between lenders and borrowers to be routed through respective Escrow accounts.
- Mandating the disclosure of the share of NPLs and losses borne by lenders on principal or interest, or both.
The above steps are likely to strengthen the framework for sustained operations of P2P platforms while increasing transparency and governance.
2.2 Amendments to NBFC and HFC Regulations
The RBI has amended regulations governing NBFCs and Housing Finance Companies (HFCs):
HFCs:
- Prohibited from raising public deposits for more than five years.
- Deposit-taking HFCs must have an investment-grade rating, and if it falls below, they are barred from renewing existing deposits.
- The ceiling on the quantum of public deposits is lowered to 1.5 times net owned funds from 3 times earlier.
- The share of liquid assets to back deposits is to be increased to 15% from 13% by June 2025.
- Allowed to hedge risks arising out of their operations, such as interest rate futures, and to issue co-branded credit cards.
NBFCs:
- Required to put in place a mechanism to provide nomination facilities for depositors, irrespective of customer demand.
- Allowed premature withdrawal of deposits in case of critical illness. For tiny deposits not exceeding Rs 10,000, withdrawals can be done before the expiry of 3 months.
- In the case of “other public deposits,” not more than 50% of the principal sum of deposit or Rs 5 lakh, whichever is lower, can be prematurely paid.
- Risk weightage on exposures—fund-based and non-fund-based—to commercial real estate buildings not classified as Standard assets has been increased to 100% from 75%.
The Finance Act, 2019, amended the National Housing Bank (NHB) Act, 1987, and conferred certain powers on the RBI for regulating HFCs, leading to the transfer of mortgage lender regulations to the RBI from the NHB. Since then, the RBI has issued several regulations that treat HFCs as a category of NBFCs, gradually aligning the regulatory framework for both. These guidelines almost bring HFCs on par with NBFCs.
# 3. SEBI
3.1 Proposed Amendments for Entities with Listed NCDs
SEBI has proposed amendments to ease compliance requirements for entities with listed Non-Convertible Debentures (NCDs). The key proposals include:
- Aligning the approval and authentication process for financial results of these entities with those of equity-listed entities.
- Aligning disclosure rules for fraud and default by Key Managerial Personnel (KMPs) with those applicable to equity-listed entities.
- Streamlining the timeline for notifying stock exchanges of the record date from 7 to 3 working days.
- Requiring all disclosures by listed entities with NCDs to be filed in the XBRL (eXtensible Business Reporting Language) format, reducing duplication, as filings are currently required in both XBRL and PDF formats.
This move will ease the cost of compliance for participants in the financial sector, as announced by the government in the FY 2023-24 Budget. The proposal to streamline the timeline for notifying exchanges will provide ample time for market participants to respond.
3.2 New Liquidity Window Facility for Debt Securities
SEBI, through its draft circular released on Friday, has proposed a new liquidity window facility for investors in debt securities through the stock exchange mechanism. This move aims to enhance liquidity in the corporate bond market, particularly for retail investors. Key points include:
- Allowing issuers (both public issue and private placement basis) to provide put options to investors, enabling them to sell their securities back to the issuer before maturity (applicable only to prospective issuances).
- Issuers must provide the liquidity window only after the expiry of one year from the date of issuance.
- Issuers determine the eligibility of investors, but retail investors must be included.
- The window limit should be no less than 10% or 15% of the final issue size.
- The window should be kept open for 3 working days on a monthly/quarterly basis.
- Investors must be notified of the window’s availability through SMS or WhatsApp.
This is a positive move, as the liquidity window facility seeks to mitigate the issue by providing a regulated mechanism for issuers to offer put options on debt securities at pre-specified dates or intervals.
# 4. Economy
4.1 Corporate Earnings
After four years of high double-digit growth in profits, corporate earnings of Indian companies hit a speed bump in the April-June quarter of 2024 (Q1FY25), leading to the risk of a downward revision in India Inc’s profit estimates for FY25 and volatility in the equity market. Moderate revenue growth and profit expansion retreated to single digits for the first time in six quarters. Market analysis of approximately 1,500 listed companies that reported their financial results by Friday showed a 9% year-on-year increase in their combined revenue and a more modest 5% rise in net profit.
4.2 Industrial Production
As per data released by the Ministry of Statistics and Programme Implementation last Monday:
- India’s industrial production (IIP) slowed to a five-month low of 4.2% in June from 6.2% in the previous month (4% last year), while overall IIP growth in the first quarter of FY25 was 5.2%, higher than the 4.7% registered a year ago.
- The growth of manufacturing, which comprises two-thirds of the index, almost halved to a seven-month low of 2.6% in June from 5% in May.
- Electricity and mining grew 8.6% and 10.3% year-on-year, respectively, in June.
- Capital goods grew at a meagre 2.4% year-on-year (the lowest since February 2024) in June 2024.
- Growth in infrastructure goods declined to a seven-month low of 4.4% year-on-year in June 2024.
- Consumer durables grew 8.6% year-on-year due to a favourable base effect, while consumer non-durable goods contracted by 1.4%.
The slower growth in capital goods signals muted investment activity, and lower infrastructure growth perhaps indicates a drop in government capital expenditure. The contraction in non-durables suggests that stress in rural demand has not yet bottomed out and clearly indicates that consumption demand is still led by upper-income households.
4.3 Trade Data
4.3 As per data released by Commerce Dept., last Wednesday,
- India’s exports fall 1.48% in July, to $33.98 billion due to muted global demand and geopolitical challenges.
- Imports into the country rose 7.46 per cent to $57.48 billion during the month, leading to a trade deficit of $23.5 billion compared to $ 19 billion last year.
- The drag was caused by lower exports of petroleum products.
- Non-petroleum and non-gems and jewellery exports, an indication of a clearer parameter of exports’ health, grew 5.7 per cent at $26.92 billion.
- The main drivers of the growth were engineering goods (3.66 per cent), electronic goods (37.31 per cent), drugs and pharmaceuticals (8.36 per cent), and textiles (11.84 per cent).
4.4 As per S&P report “India Corporate and Infra ratings” released last week,
- Credit quality and financial profile of Indian rated companies are expected to improve further on the back of declining leverage and broad-based earnings growth
- Leverage will decline marginally even though average capital expenditure is up 30 per cent on pre-pandemic levels. The absolute debt reduced more in non-infrastructure sectors. Not much debt reduction was witnessed in infrastructure entities due to higher capex, including energy transition initiatives.
- Aggregate EBITDA is set to grow at 10 per cent in 2024, driven by telecoms, airports, commodities, and chemicals
- Companies have greater headroom over downside rating triggers, which will cushion earnings disappointments or increased capital expenditure or mergers and acquisitions. The exceptions to this trend include companies in sectors such as renewables.
The biggest downside risks would likely come from unforeseen sector-specific regulatory or government policy changes. For example, mining taxes as per recent Supreme Court verdict or reduced infrastructure spend are hard to predict but could have large effects.
4.5 As per report released by World Intellectual Property Organisation [WIPO] released last week,
- Excluding the informal sector, intangible investment constituted over 10% of India’s GDP in 2019. This is comparable to the EU-22 average and higher than Japan’s 9%. India has thus recorded fastest growth in intangible investments from 2011-2020 among major global economies exceeding countries like US, France, Germany and the UK.
- Thus, in 2020, India ranked 14th in absolute levels of intangible investments among 26 advanced economies, positioned between Denmark and ahead of Finland and Portugal
- The primary drivers of India’s growth in intangible assets are software and data, new financial products, and increased investment in domestic brands. These factors collectively contribute to India’s robust performance in the global intangible investment landscape.
This growth underscores India’s expanding role in global innovation and intellectual property. The data, first time it’s made available, indicates India’s intangible investment intensity is higher than expected for its development level
# 5 PE/VC
As per IVCA/EY report, released last Wednesday
- Investments in Indian entities by venture capital (VC) and private equity (PE) funds declined sharply to $2.7 billion in July this year.
- Bets were 42% lower than $4.6 billion in June, and 35% down from $4.1 billion in July last year, the report said.
- The number of deals, however, rose to 81 from 68 in the year-ago period.