Weekend Reflections – Week ending 19th Oct 2024

Week ending 19^th Oct 2024

# 1 Markets

Successive market fall in continuous trading sessions last week barring Friday, was anyway waiting to happen. When the Cyclically Adjusted PE ratio stands at 43 times (which reflects long term view by averaging earnings over the last 10 years), when Nifty 50 is trading at PE ratio of about 24.7 (what is happening in the short term) higher than 10-year average of 23.4, market was obviously looking for a trigger to change course. We saw CAPE ratio for US stocks hitting high before tech bubble burst in 2000 or again in 2007 before Global financial crisis. We don’t propagate that serious market correction is underway because of similar PE or CAPE ratios during those crises, but we strongly feel that undercurrent is not exhibiting right symptoms overlaid by FII pulling out nearly $7 billion in October alone.  Markets evolve and past trends are not always a reliable guide, but certainly it tends to follow earnings and GDP growth which has to be tracked closely. With marginal reversal on Friday, Nifty and Sensex closed higher at 24854 and 81224 respectively.

While RBI continue to exercise caution, ECB lowered interest rates for the third time this year by 25 bps to 3.25% to offer support to the region’s stuttering economy. As per CCIL data, in the week ended October 11, the indicative value of aggregate holding of FPIs in FAR bonds dropped by ₹1,675.25 crore to ₹2.48 lakh crore.  The recent slowing of foreign investment in so-called fully accessible government bonds has caught RBI worried. Caused by this pull back, G. Sec yields hardened and closed at 6.8% on Friday.

Buoyed by robust economic data, both Dow Jones and Nasdaq went up by 1% while S&P 500 was flat. As higher rate cut hopes faded, yields hardened across maturities and 10Y treasury yield closed at 4.08% on Friday.

# 2 RBI

2.1 Is RBI justified in its actions on four NBFCs last week?

RBI last Thursday temporarily barred four NBFCs —Sachin Bansal’s Navi Finserv, DMI Finance, Asirvad Micro Finance Ltd (backed by Manappuram Finance), and Arohan Financial Services Ltd—from sanctioning and disbursing new loans from the close of business on October 21, 2024.  Some reasons alluded include:

• Material supervisory concerns in pricing policy – attracting regulatory scrutiny
  • While removing the ceiling on margin cap on lending and providing freedom in fixing board approved lending rates, in 2022, RBI had clearly warned that these should not be usurious, and rates would come under its supervisory scrutiny
• Failed to follow Fair Practices Code, violated rules around income assessments, disregarded repayment capacity norms for MFI borrowers.
• Concerns related to ever greening of loans, asset classification, gold loan practices and noncompliance with disclosure mandates like Key Financial Information including annualised costs to borrowers.
• Outsourcing core financial services like underwriting, KYC processes etc.

The ban hits these lenders at a critical juncture.

• Asirvad Micro Finance is gearing up for a ₹1,500 crore initial public offering (IPO) and Arohan Financial Services’ MD was appointed chairperson of the MFIN a few months back.
  • While lending rates in these MFIs are reportedly on par with other MFIs as per MFIN, credit costs have significantly gone up in MFIs as per Morgan Stanley report.
  • MFIs found to have variously violated rules on assessment of household income and consideration of existing or proposed monthly repayments related to microfinance loan.
• Navi is in pursuit of bank licence, after RBI rejected its application for a universal bank licence two years ago and DMI Finance had received MUFG Bank investment of ₹2,798 crore, in August.
  • Deviations were found with regard to income recognition and asset classification norms, leading to the evergreening of loans.

 

It is interesting to note that NBFCs (with asset size of Rs 10000 cr and above) have stepped up their purchases of short-term government securities to comply with 100% liquidity coverage norms by the end of December 2024. This will help them to survive any acute liquidity stress scenario lasting for 30 days. The central bank’s move is seen as a signal that it is closely monitoring the sector to ensure healthy lending practices and protect borrowers from unfair treatment and therefore ensures sustainable long-term growth of the sector.

 

2.2 In a move that reflects greater regulatory orthodoxy, RBI has asked companies to take the government’s approval for offering employees’ stock option plans (ESOPs) to staff based in countries sharing a land border with India.

• ESOPs give non-residents stakes in Indian companies.
• Indian companies grant ESOPs to employees of foreign arms.
• FDI rule was changed in March 2020 via Press Note 3 as per which FDI from China, Hongkong needs govt. go ahead.
  • PN3 states that “an entity of a country, which shares land border with India, or where the beneficial owner of an investment into India is situated in, or is a citizen of, any such country, can invest only under the government route.”

 

ESOPs is one way of retaining talent and is very often resorted to by companies and this fear of indirect control through ESOPs appear far-fetched. We have to wait and see as to how this is played out.

 

# 3 SEBI

3.1 As per circular issued by SEBI last Wednesday,

• it will establish a framework for a liquidity window facility for corporate bonds via a voluntary ‘put option’ exercisable on pre-specified dates or intervals that investors could use to sell bonds back to issuers.
• Entities issuing debt securities which are proposed to be listed may at their discretion provide the liquidity window facility at the time of issuance of such instruments.
• The proposed liquidity window facility can be extended only for prospective debt sales through public issuances or on a private placement basis for securities that are to be listed,

Why we feel this is a welcome move

• India’s corporate bond market faces unique hurdles—thin trading volumes, a lack of buyers, and minimal retail participation. The proposed framework bypasses the traditional barriers by ensuring liquidity through the issuer, even in a low-volume market.
• Proposed put-option mechanism addresses retail investors’ fears of their inability to sell before maturity and thus giving them confidence to exit their positions without waiting for maturity or incurring heavy losses.
• With participation growing, liquidity may deepen and may help achieve broader goal of financial inclusion, offering an accessible and reliable investment option to a wider audience.

By creating a reliable exit route, SEBI is setting the stage for deeper retail participation and a stronger, more inclusive bond market.

3.2 Corporate affairs Ministry is proposing to introduce a “voluntary” group insolvency framework as part of Insolvency & Bankruptcy Code [IBC] to facilitate a joint resolution of stressed entities of a domestic corporate group, given the interconnected nature of their operations.

• The mechanism could empower the committees of creditors of various bankrupt companies of a group to decide if they need to join hands to speed up resolution and maximise gains or pursue the processes separately
• It will apply only to a group’s bankrupt companies and won’t extend to its solvent entities.

Why is it needed?  

• The IBC currently does not have a group insolvency mechanism and the resolution of individual entities of a group are pursued separately by their respective creditors. They can use their commercial wisdom and see what benefits them more – going for the resolution of companies separately or collectively.
• A voluntary group insolvency framework will reduce the complexity of the resolution process when two or more entities of the same group are under insolvency and may help maximise asset value, boot recovery and reduce resolution costs.
• A proper group insolvency framework was necessitated after the interconnected nature of group companies delayed resolution in a few cases, such as Videocon, Lanco Jaypee and Aircel.

We are not sure whether the framework would provide for “the doctrine of substantial consolidation,” which involves the merger of a group’s assets and liabilities into a common pool for resolution. However, one “cannot rule out certain complexities” in this type of resolution framework as well, including “potential conflict of interest” among creditors in certain cases. Despite limitations, this is a welcome move for Corporate India.

3.3 SEBI last Monday introduced a framework to

• Monitor shareholding limits, public shareholding requirements, fit & proper criteria for Market Infra institutions [MIIs] which includes stock exchanges, clearing corporations and depositories.
• Report MII shareholding patterns quarterly on their websites as per SEBI Listing obligations [LODR]
• Monitor breaches of the threshold limit of 5 per cent or 15 per cent, combined holding of 49% of all person’s resident outside India as applicable under SECC Regulations, 2018 and D&P Regulations 2018, respectively
• Monitor the threshold limit of 45% of holdings by Trading Members in the stock exchanges.

SEBI also directed clearing corporations to maintain at least 51 per cent ownership by stock exchanges, with no exchange holding over 15 per cent in multiple CCs.

 

# 4 Economy

4.1 S&P as per its report titled ‘Look forward Emerging Markets: A decisive decade’ released last week, has stated

• India is poised to be the fastest-growing major economy over the next three years and the third largest globally by 2030. By 2035, India will be cemented as the world’s third-largest economy, with Indonesia and Brazil ranking eighth and ninth, respectively.
• India’s growing consumer spending on goods, set to increase by 7% in the next five years from $1.29 trillion in 2024 compared to inflation-adjusted growth of 4.8% in the previous five years.
• India, has also taken measures to improve its weak fiscal flexibility by boosting capital expenditure, further supporting long-term growth.
• India’s 2024 entry into JP Morgan’s Government Emerging Market Bond Index could provide additional government funding and unlock significant resources in domestic capital markets.

We may have to keep in mind that investors will continue looking for improved market access and settlement procedures. RBI and ESMA continue to lock horns on access for settlement in G. Secs through CCIL.  Another challenge to overcome, would be population, as India would host world’s largest population by 2035.

4.2 As per data released by MoSPI on Friday

• India’s retail inflation surged to a nine-month high of 5.49 per cent due to high food prices
• In August, CPI inflation came in at 3.65 per cent, marginally higher than 3.6 per cent the previous month.
• The previous high was recorded in December 2023 at 5.69 per cent

In retrospect, we agree with RBI prognosis in maintaining policy rate unchanged 10 days back. RBI does appear always, right?

4.3 The Centre’s direct tax-to-GDP ratio in FY24 came in at 6.64%

• This is highest level in the millennium in FY24, if not the highest ever
• This was 6.11% in FY23 and 5.97% in FY21.
• Direct taxes accounted for 56.7% of the Centre’s total tax revenues in FY24, compared with just 46.8% in FY21, the pandemic year.
• An interesting feature is the sharp decline in share of corporate tax in direct tax receipts while personal income tax collections have risen at a much faster rate.

The increase is largely due to simplification of taxes and procedures, improved taxpayer services, and higher tax compliance. Also, introduction of Annual Information System (AIS), third party data, updated returns have helped in increasing personal income tax collections. Let’s give credit to Govt!

4.4 As per estimates by BCG released with ET,

• The Indian payments industry is likely to grow in value terms by 10% to $49 trillion by 2028, from $30 trillion seen at the end of 2023
• transaction volumes likely to grow by 25% by 2028 to reach 434 billion from 144 billion at the end of 2023
• Revenues of the Indian payments industry is expected to grow at 11% to reach $70 billion by 2028 from $41 billion at the end of 2023.
• Credit cards and fund transfers continue to form the biggest chunk at $47 trillion at the end of 2028 from $29 trillion at the end of 2023.
• Two other segments that are seen shrinking are cheque-based payments and prepaid cards.

4.5 As per data released last Wednesday

• India’s merchandise exports grew in September after two months of contraction, on the back of a rise in the shipments of engineering, chemical, plastic, pharma and electronic goods and readymade garments. and readymade garments.
• Trade deficit narrowed to a five-month low but widened from a year earlier
• Merchandise exports grew 0.5% to $34.58 billion in September from $ 34.41 billion a year ago, while trade deficit widened to $20.78 billion from $20.08 billion.
• Goods imports increased 1.6% to $55.36 billion compared with $54.49 billion in the year-ago

# 5 PE VC

5.1 As per Nasscom report titled “India’s Generative AI Startup Landscape 2024”, released last Wednesday.

• India’s total number of generative AI (GenAI) startups surged 3.6 times, from over 66 in the first half of calendar year 2023 to more than 240 by the first half of 2024,
• Despite being in an early stage, India’s GenAI startups have attracted over $750 million in cumulative funding since 2023.
  • Growth driven by the launch of 17 native GenAI language models (a 4.6X increase in GenAI services) and significant rise in offering GenAI assistants, which comprise nearly 80% of the newly added startups over the past year.
• 75% of startups in the first half of calendar year (CY) 2024 were generating revenue – a significant jump from 22% in the first half of CY2023.

India now ranks 6th globally in the share of GenAI startup ecosystems among major economies and Bengaluru remains the leading GenAI startup hub in India, housing 43% of all startups.

5.2 As per Tracxn,

• Funding to Indian fintech rises 66% but number of rounds decline by 25%
• On a quarter-on-quarter basis, funding to the fintech sector more than doubled from $293 million in Q2CY24 to $778 million in Q3CY24
• On y-o-y basis growth recorded is 66% from $ 471 million in Q3CY23
• The sector saw 46 rounds in Q3CY24, a 25 per cent decline from 62 rounds in Q3CY23.

The resurgence in funding for the Indian fintech industry signifies a pivotal moment in our journey towards becoming a global fintech hub. With rising digital adoption and supportive government policies, we are positioned for sustained growth.