Weekend Reflections – Week ending 21st Dec 2024

Week ending 21st Dec 2024

# 1 Markets

Markets log worst week in 30 months pulling the Sensex by 4100 points caused by host of global factors – hawkish statement from US Fed chief, continuous FII outflows, rupee plunging to all time low and weak trade data weighted on investor sentiments. The Indian rupee hit a record low of 85/$ pressured by a strong dollar alongside a widening trade deficit and revised GDP growth forecast of 6.6%.

Fed cut interest rates, third in the row by 25 bps bringing the range to 4.25% to 4.5% but surprised markets with projection of just two rate cuts ahead as seen in “dot plot’ compared four expected earlier due to likely soft landing – prediction of inflation at 2.5%, higher GDP forecast at 2.5%, lower unemployment rate at 4.3% in 2025.  

US Markets collapsed post Fed’s hawkish stance but later marginally recovered with Dow Jones, Nasdaq and S&P closing with a loss of ~1.5% – 2.5%/ Treasury yields shot up with 10-year bonds raising by 13 bps and closing at 4.56%. On the contrary, China’s 10y yield fell to historic low of 1.71%. 

# 2 Banking

2.1 Govt on Thursday proposed a new law “Banning of unregulated lending activities (Draft) Bill. The bill proposes 

• banning all lending practices other than those authorised by the Reserve Bank of India (RBI) and the law. This includes digital lending, or any other lending activity not regulated by any law at present
• to set up an authority to maintain an online database that would list regulated lenders and facilitate reporting of illegal lenders. This does not include loans and advances given to relatives.
• Imprisonment of up to 10 years and fine up to Rs. 1 cr for violation

The draft bill appears a bit prescriptive in defining regulated lending activities. Adopting a principle-based approach may bode well for the Indian fintech sector, whose innovation momentum should not be stifled. 

2.2 Supreme Court, deciding 16-year-old appeal, last Friday set aside National Consumer Disputes Redressal Commission [NCDRC] 2008 order that barred banks from charging interest rates over and above 30% from credit card holders. 

• This in effect means that charging interest at rates in excess of 30% per annum by the banks is not an unfair trade practice, as ruled by the consumer court earlier. 

With RBI frowning on higher rates charged by MFI, it is expected that RBI will soon come out with a detailed circular capping interest rate. 

2.3 Fundraising through corporate bonds has surged to a record high of Rs 10.11 lakh crore so far in 2024, including over Rs. 6 lakh cr. (60%) by NBFCs.

• NBFCs tapped the route after RBI raised risk weights on bank loans to them increasing cost of bank loans, forcing them to turn to the bond market for better rates.

• The yields on corporate bonds have declined by around 43 bps. so far in 2024, tracking 44 bps fall in 10Y G Sec yield caused by demand from overseas investors post inclusion in JP Morgan Index. 
• Risk premiums continue to remain high for lower-rated issuers, but even these segments saw some decline in yields due to improved liquidity, risk sentiment and online bond platform providers marketing lower rated bonds. This prompted SEBI to crack down on unlisted bond platforms.

2.3 TReDS (Trade Receivables Electronic Discounting System) has seen significant growth in 2024, with more than 1 lakh bills financed with a combined value of Rs 2.08 lakh cr., This is very impressive as the solution offers mitigation against delayed payment by big corporates benefitting more than 1 lakh MSME sellers registered on the platform by reducing the working capital cycle. 

2.4 Govt. last Monday launched a Rs 1,000 crore credit guarantee scheme to help farmers easily access post-harvest loans by leveraging electronic warehouse receipts.

• The scheme aims to reduce banks’ reluctance to lend against electronic negotiable warehouse receipts (e-NWRs) issued by Warehousing Development and Regulatory Authority (WDRA) registered repositories.
• Current post-harvest lending stands at just Rs 40,000 crore out of total agricultural lending of Rs 21 lakh crore and lending against e-NWRs is a mere Rs 4,000 crore.

There is therefore significant potential for expansion, and Govt expects post-harvest lending will grow to Rs 5.5 lakh crore over the next 10 years. But unless there is reliability of accepting all kinds of warehouse receipts and enforceability banks would be wary of enhancing support. Let’s hope this works!

# 3 SEBI

3.1 SEBI last week announced 19 changes covering a wide range of areas, Mutual Funds, IPOs and merchant bankers. These changes aim to protect investors, reduce misuse of funds, and create a healthier market environment.

3.1.1. Fixing the SME IPO Framework

SEBI created a special platform for SME IPOs in 2008 to make it easier for these businesses to raise money. Today, there are 745 SME-listed companies with a combined market value of ₹2 lakh crore. SEBI is tightening rules to prevent excessive speculation of tiny companies with questionable fundamentals like what we last week – IPO of Nacdac Infrastructure (Revenue of Rs. 36.33 cr. with profit of Rs. 3.7 cr.) being oversubscribed 1,976 times.

• • Companies must EBITDA of at least ₹1 crore in two of the last three financial years. This filters out unproven or speculative ventures.

• Caps on “General Corporate Purpose” (GCP) spending at 15% of the funds raised or ₹10 crore, whichever is lower. Moreover, IPO money can’t be used to repay loans of the company’s promoters or related parties. This ensures funds are used to grow the business, not for personal gains.

• Promoters and shareholders selling their stakes during the IPO can now only sell up to 50% of their holdings, and this can’t exceed 20% of the total issue size. This prevents promoters from cashing out entirely, leaving the business vulnerable.

• Before an IPO goes live, the draft prospectus (DRHP) will now be open to public feedback for 21 days. This allows investors to raise concerns early, preventing scams.
• SMEs can stay on the SME platform even after raising additional funds, provided they meet governance standards. This removes unnecessary barriers for small companies.

3.1.2. Tighter Rules for Merchant Bankers

Merchant bankers who help companies raise money through IPOs sometimes pose conflicts of interest like the one recently accused of guaranteeing payments. To clean things up, SEBI is enforcing stricter guidelines:

• Merchant bankers (except banks and financial institutions) must focus only on IPO management, underwriting, or mergers and acquisitions. Non-core activities like lending or mutual funds must be spun off into separate companies within two years. This ensures their attention is on the tasks they’re supposed to handle.

• If a merchant banker owns more than 0.1% of a company, it cannot lead-manage that company’s IPO. This avoids conflicts of interest. 
• Merchant bankers are now split into two categories:
  • Category 1: Needs ₹50 crore net worth and can handle all types of issues, including large equity IPOs.
  • Category 2: Needs ₹10 crore net worth but cannot manage main board equity IPOs.
• Merchant bankers cannot underwrite more than 20 times their liquid net worth, reducing their exposure to excessive risks.

3.1.3. Simplifying Rules for REITs and InvITs

SEBI’s proposed changes aim to give REITs and InvIT more flexibility and make them safer for investors.

• • Sponsors (the main backers of these funds) must lock in some units to show commitment. Now, they can transfer these locked units within their own group, allowing for better internal management while maintaining their commitment.

• These funds are permitted to use derivatives to hedge against interest rate risks. This protects their cash flows and makes them more stable.

• REITs/InvITs can now invest in unlisted companies, but only if those companies provide essential services like property management that directly benefit the fund.

3.1.4. Stricter Oversight on Mutual Funds and NFOs

SEBI is reigning on MFs on their NFOs due to distributors pushing for higher commissions or raising more than they could deploy:

• Asset Management Companies (AMCs) must now deploy funds raised through NFOs within 30 days. If they fail, investors can withdraw without paying exit loads. This prevents idle funds and ensures AMCs only raise what they can use.

• During NFOs, distributors often earn higher commissions, leading to mis-selling. SEBI now mandates that for scheme switches, distributors earn only the lower commission of the two schemes. This aligns incentives with investor interests.
• reduced the timeline for uploading draft Scheme Information Documents [SID] to just 8 working days, down from 21 days. AMCs can file final offer documents after this period.

3.1.5 Other changes

• • Companies will need to disclose more details on related-party transactions and the use of funds, ensuring greater transparency for investors.
  • Sebi has relaxed eligibility norms for startups listing on the innovators growth platform (IGP). Startups now need only 25% of pre-issue capital to be held by qualified investors, making it easier for them to list and raise funds

• AIFs will now need to provide detailed quarterly disclosures on their investments, valuations, and performance, helping investors track their money more effectively

• Stricter surveillance mechanisms for trading platforms introduced for real-time monitoring of suspicious trades. Stronger penalties for entities found violating market norms.

These updates aim to make IPOs safer, tighten oversight on intermediaries, provide flexibility to REITs/InvITs and protect mutual fund investors from being misled. By introducing these changes, SEBI is ensuring that the markets are not only fairer but also more efficient and transparent.

3.2 SEBI has introduced a “Past Risk and Return Verification Agency” [PaRRVA] In a bid to clamp down on individuals and entities making lofty return claims

• PaRRVA will be tasked to verify the risk-return metrics of services offered by investment advisors, research analysts (RAs), algorithmic trading platforms, and other such entities.
• Any claims such as “best performing”, “safety during volatility”, “top ranked”, or those on high returns, it would be mandatory to seek verification of the same.
• a credit rating agency will act as the verification agency while a stock exchange will serve as the data centre.

3.3 SEBI on Tuesday proposed a new platform called Mutual Fund Investment Tracing and Retrieval Assistant (MITRA). 

• MITRA will help investors to track inactive or unclaimed mutual fund folios – Folio is considered in active when no transaction is initiated in the last 10 years, but balance is available. 
• MITRA will enable investors to identify the overlooked investments, or any other investment made by someone else for which they are a rightful legal claimant.

The platform will be developed by two RTAs and will provide a searchable database along with encouraging investors to do KYC as per current norms.

3.4 SEBI has also notified MF Lite regulations 

• new MF Lite regulations ease entry for fund houses focusing on passive schemes by reducing compliance and net worth criteria (₹35 crore, reducible to ₹25 crore with sustained profitability). 
• Applicants need a strong financial track record and sufficient liquid net worth for stability. This move aims to boost market penetration, liquidity, and innovation.

The aim is to promote ease of entry, encourage new players, cut compliance requirements, increase penetration, facilitate investment diversification, increase market liquidity, and foster innovation. We will have to wait and see how this takes shape

3.5 SEBI last week introduced Specialised Investment Funds (SIFs) as a new investment option bridging the gap between mutual funds and Portfolio Management Services (PMS). SIFs cater to investors seeking advanced strategies without the high entry barriers of PMS or Alternate Investment Funds (AIFs) with following key features 

• Lower entry point (₹10 lakhs) compared to PMS (₹50 lakhs).
• Managed by mutual funds, SIFs focus on specific themes like renewable energy, offering strategic and risk-managed investments.
• SEBI mandates caps on exposure to single assets or sectors (e.g., 20% in debt securities, 10% in a single stock) to mitigate risks.
• Structured as open-ended, closed-ended, or interval funds (liquidity at scheduled intervals) to suit various investment goals.
• SIFs follow a fixed expense ratio system (e.g., starting at 2.25% annually), unlike PMS, where costs depend on individual portfolios and profits.

SIFs are a progressive step in India’s investment landscape offering an innovative blend of strategy, accessibility and transparency. While globally such products have yielded dividends with higher returns, challenges include – dependence on skilled fund managers, with significant risks in volatile markets and higher operational costs of advanced strategies affecting returns. 

# 4 Economy

4.1 As per HSBC Flash report compiled by S&P Global, released last week,

• Composite Output Index touched 4 months high of 60.7 from November’s reading of 58.6. 
• India Manufacturing PMI rose to 57.4 from a two-month low of 56.5 in November.
• India Services PMI Business Activity Index climbed to 60.8 from 58.4

The release is comforting as it ended the year on a positive note with a rise in new business intakes.

4.2 As per official data released on Monday

• trade deficit widened to a record high in November, at $37.8 billion from $ 27.1 billion in October ($21.31 bn last year)
• Goods exports shrank 4.9% year-on-year to a two-year low of $32.1 billion while imports increased 27% year-on-year to a record $69.95 billion
• Services exports grew to $35.67 billion, outpacing merchandise exports in November. Clocking CAGR of 10.5% between FY19 and FY24.

Deficit led by a sharp 4x increase in gold imports at $14.86 bn from $3.44 bn in Nov 2023; an unusual error inflated India’s trade deficit to $37.84 billion in November due to a double-counting of 50 tons of gold imports highlighting the need for accurate and reliable data, especially during times of economic uncertainty. The decline in goods exports could suggest challenges in India’s manufacturing sector, particularly since exports are becoming increasingly imported components and raw materials.

# 5 PE VC

51. As per Venture Intelligence report, 

• $10.9 billion was raised by Indian startups till December 13 compared to $9.6 billion the year before. 
• While early-stage deals remained at around $1.6 billion, growth-stage deals crossed $5 billion compared to $4.9 billion in 2023 while late-stage deals exceeded $ 4 bn vs $ 3 bn last year.

• VCs double returns from 44 public market exits to $4 billion up from 32 in 2022 and just 13 in 2021 – represent a 180 % increase from $1.5 billion in 2022.  

• Private equity (PE) funds also made significant gains, earning $13.3 billion from public market share sales this year — matching their 2022 total

5.2 Key takeaways Preqin’s Alternatives in 2025 report published last week

• Despite a weak fundraising and exit environment up to the third quarter of 2024, rate cuts will likely be a tailwind for the asset class, promoting an improvement in performance and exits. Monetary easing may have a positive impact on valuations, deal making and exits. 

• As central banks begin monetary easing, private debt will likely benefit from increased deal flow and more capital deployment. There would be increased deal flow and more capital deployment. 
• Real estate investors are altering their allocations in terms of strategy and risk exposure to cater to the lower-interest-rate market cycle. Some strategies, such as core and value-added, will likely see greater recovery in performance and regain investors’ attention.
• Investor commitments to the asset class have waned since 2023 as part of a rebalancing, following a surge of inflows in 2022 and continue to present the greatest challenge to return generation in the next 12 months.

5.3 Key takeaways from Avendus Capital report on Alternatives:

1. The Indian alternatives market is poised to reach USD 2 trillion by 2034, (5x increase from current $400 bn) 
2. No. of HNIs to grow from 8.75 lakh to 25 lakh in FY 34 and total wealth to grow from $1.75 bn to $ 5.435 bn. with notable increase in allocation towards alternative investments. 
3. Alternative Investment Funds (AIFs) are experiencing stickiness in earnings, scale, and profitability, which contribute to higher valuations. 
4. Alternatives have consistently outperformed traditional asset management firms in generating alpha, showcasing their growing prominence in the investment landscape.
5. Strong structural tailwinds are driving the future growth of the Indian alternatives market, including increasing investor appetite for differentiated products and the evolving regulatory landscape.