Weekend Reflections – Week ending 24th August 2024

Week ending 24^th August 2024

# 1 Markets

On Friday, the Sensex and Nifty closed at 81,231 and 24,823, respectively, amid mixed global cues and volatile trade. An interesting development is that mid and small-cap stocks have doubled in the last two years, reaching $1 trillion (approximately ₹84 lakh crore) each in market capitalization as of August. This 2x growth over two years raises concerns about long-term sustainability. Large caps currently have a market capitalization of $3.3 trillion, bringing the total market cap to $5.3 trillion (large + mid + small). Data analysis indicates that the upgrade-to-downgrade ratio for the June quarter plunged to 40%, apparently reflecting demand moderation. However, markets are likely to continue rallying on global cues, ignoring these fundamentals.

Fed Chair Jerome Powell stated during the annual Jackson Hole retreat on Friday that the time has come to cut the key policy rate, making clear his intention to prevent further cooling in the labour market. This statement affirmed expectations that officials will begin lowering borrowing costs next month—exactly what markets were waiting to hear, driving them higher. All three broad indices—the Dow Jones, S&P 500, and Nasdaq—were up and closed higher on Friday. With the Fed set to cut interest rates next month, U.S. treasury yields have softened, with the 10-year yield falling to 3.79% on Friday.

In India, since June 28, when Indian sovereign debt was included in a JP Morgan index, fully accessible local bonds have attracted $3.7 billion in foreign investments, with about $1.2 billion worth of flows entering the market so far this month. Markets expect a flow of about $2 billion every month for the next seven months. The bond market honeymoon continues, with 10-year yields remaining stable in a narrow range between 6.85% and 6.86%.

# 2 RBI

2.1 RBI surprised bankers last week, by granting approval to Indus Ind bank to set up a wholly owned asset management business, a first for a mainstream lender. This is seen as a complete U-turn in its stance from what it thought banks could do as it put risk at the centre of it all and insisted on Non-Operative Financial Holding Company [NOFHC].

• This will be the private lender’s first direct para-banking subsidiary business. After this licence, the bank can generate revenue as a creator and seller of mutual funds. Until now, it has only acted as a distributor.
• In the last decade, this the first instance of RBI allowing an existing bank to set up a fresh AMC business as a subsidiary excluding legacy subsidiaries of old licence holders

It remains to be seen if this sets a precedent for the rest of the sector, as this can have positive ramifications for smaller banks (to enable them harness burgeoning equity culture and demand for pooled financial assets) that have not thus far been able to set up such subsidiaries. Clarity is awaited whether the regulator would later extend such relaxations to owning other para banking businesses such as insurance, broking and wealth management, for existing bank licence holders.

2.2 As per RBI bulletin released last week,

• envisaged capex will increase significantly to Rs 2.45 lakh crore in 2024-25 from Rs 1.59 lakh crore in 2023-24, based on the projects sanctioned by banks/Fis which stood at record high at Rs. 3.9 lakh cr. during FY 24.
• Infrastructure sector continued to attract the major share of envisaged capital investment, led by ‘roads & bridges and ‘power’ sectors, reflecting the government push towards infrastructure development.
• Rising domestic demand and capacity utilisation, improved profitability of corporates, sustained credit demand, business optimism and government’s thrust on infrastructure development, is likely to increase the pipeline for project finance.

It is good to note that that healthy corporate and bank balance sheets, improved corporate profitability, sustained credit demand, rising capacity utilisation, and optimism in business provide conducive environment for private corporates to undertake investments going forward

2.3 RBI last Monday published the framework for recognition of self-regulatory organisations [SRO] in financial markets

• a minimum ₹10 crore eligibility threshold has been kept
• will need to be set up as a not-for-profit company,
• should have the ability to create infrastructure that enables it to discharge responsibilities of an SRO on a continuing basis.
• The shareholding of the SRO should be sufficiently diversified, with no entity allowed to hold 10% or more of the paid-up share capital, either singly or acting in concert.

The regulator is looking to broad-base markets by easing access, enhancing participation and protecting users to promote fair conduct. Let’s hope SROs play proactive role on orderly development of Fintechs in India as was done by MFIN or SA-DHAN in MFI space.

2.4 RBI on Thursdday announced that auto replenishment of balances in FASTag and National Common Mobility Card [NCMC], which trigger whenever the balance drops below a customer-defined threshold, will now be covered under the existing e-mandate framework.

• auto replenishment of FASTag and the (NCMC) under the e-mandate framework would help streamline recurring transactions that lack fixed periodicity. This update takes effect immediately.

The e-mandate framework was established in 2019 and was designed to safeguard customers by ensuring that they are informed of upcoming debits to their accounts. The move is certainly expected to improve customer experience.

2.5 As per ICRA report released last week,

• Non-banking finance companies (NBFCs) will likely see their gross bad loans rising by 30-50 basis points (bps) in the current financial year, from 2.8 per cent in FY24, Infra and housing loan segment will see gross bad loans ratio increasing by 10-20 bps.
• Concerns related to over-leveraging and increased share of unsecured loans also exists, posing elevated loan quality risk for the sector.
  • The share of unsecured loans — for personal and business purposes — expanded to 11 per cent of the sector’s assets under management (AUM) in March 2024, from 7 per cent in March 2021.
• Concerns also relate to funding availability, as against the robust expansion in the last two fiscals. Deposit challenges faced by banks and the push for NBFCs to diversify their borrowing profile will likely lead to NBFCs’ cost of funds increasing by 20-40 bps over FY24 levels.
• AUM growth is therefore likely ease to 13-15 per cent in FY25, from 18 per cent in FY24 to ₹ 5.6- 6 trillion for FY25.
• In summary, the elevated cost of funds, increased competitive pressure from banks, slowing growth and asset quality challenges would result in weakening profitability for the NBFCs, which is expected to decline by 25-45 bps vis-à-vis FY2024 levels

# 3 SEBI

3.1 SEBI last Monday allowed AIFs to borrow for meeting temporary shortfalls in amounts called from subscribers for investments, ensuring operational flexibility with the following conditions

• Category I and II AIFs may borrow funds only in case of emergency and as last recourse, when the investment opportunity is imminent to be closed and the drawdown amount from investors has not been received by them before the date of investment despite best efforts.
• The amount borrowed should not exceed 20% of the investment proposed to be made in the investee company, or 10% of the investable funds of the scheme of AIF whichever is lower.
• cost of such borrowing should be charged only to investors who failed to provide the drawdown amount for making investments. The flexibility of borrowing to meet shortfall in drawdown amount should not be used as a means to provide different drawdown timelines to investors.

This borrowing is in addition to temporary borrowing allowed for working capital purposes and thus provide operational flexibility to AIFs.

3.2 SEBI in a consultation paper released on Tuesday has made significant changes for enabling rights issuance.

• suggested eliminating the need to file a draft document for a rights issue.
• allowing companies to carry out the Rights issuance without the involvement of a merchant banker. Proposed to assign the activities which are presently carried out by the Merchant Banker to the Issuer, Registrar to issue and Stock Exchanges.
• proposed offering more flexibility in the allotment process to a select group of investors in a rights issue.
• proposed streamlining the content of the Letter of Offer (LoF) by reducing current disclosures to include only purpose of the issue, pricing, record date, and entitlement ratio, among other key details.
• shortening the overall timeline for a rights issue to T+20, meaning that the rights issue could be completed within 20 days after Board approves it and listing time after the issue closes to 3 days (T+3)
  • This is particularly important given that data from the past three years indicates that, on average, a non-fast-track rights issue takes about 300 days, whereas a fast-track rights issue takes on average takes 126 days due to lack of timeline for various processes.

 

• permitting the allocation of shares in a rights issue to specific investors by enabling the promoter group to transfer their rights entitlement to a chosen group of investors. Any unsubscribed portion of a rights issue can be allocated to selected investors, provided that full upfront disclosures are made. Such selective allotment would necessitate full upfront disclosure of all relevant details regarding the renunciation.

This is a welcome move as rights issuance has been going down due to compliance issues. SEBI’s data indicates that ₹15,110 crore raised through rights issues in FY24, was significantly lower than the ₹68,972 crore raised through QIP placements and the ₹45,155 crore through preferential allotments.

Even though the existing shareholders have the first right to participate in fund-raising activity, listed entities preferred to raise funds though the preferential issue by offering it to a select few investors, including promoters. With this flexibility promoters could renounce their rights issue entitlement in favour of any selective investor.

Since, RTAs perform certain activities based on the information sought from the Stock Exchanges and Depositories such as validating the applications, merchant banking activities can be performed by Stock Exchanges and Depositories themselves

3.3 The National Stock Exchange (NSE) on Thursday prescribed additional eligibility conditions for the listing of small and medium enterprises (SMEs) in NSE Emerge. This is in addition to normal track record of 3 years, promoters residing in India, operating profit, management experience and no regulatory or disciplinary actions.

• positive free cash flow (FCF) for at least two out of three financial years preceding application as an eligibility criterion for listing on NSE Emerge is added now.
• Last year, the short-term additional surveillance measure framework was applied to SME stocks, a framework that had previously only been implemented on stocks listed on the mainboard.

This was expected as concerns about the quality of companies raising funds through this route have gone up including irrational rise in prices of SMES on listing day and manipulations in financial statements. No of listings had crossed 500 in NSE Emerge with fund mobilisation of Rs, 1030 cr.

3.4 SEBI through two circulars issued on August 22, has made some changes in regulations governing REiTs and INViTs.

• Until now, these asset classes are required to have the statement of investor complaints reviewed by its Board before submission to Stock Exchanges, within 21 days from end of each quarter, which is not in line with Listing Obligations and Disclosure Requirement [LODR] regulations.
• This is now proposed to be aligned with LODR.
• REiTs and INViTS would also be given more days to submit details of deviation in the use of proceeds to the exchanges.
• Quarterly results now have to be submitted within a period of 45 days from end of each quarter.

By dispensing with the prior review by the Board is another step towards ease of doing business and aligned LODR regulations REITs and InvITs can submit these along with their financial results.

# 4 Economy

4.1 Goldman Sachs Group Inc., in its report released on Friday has lowered India’s growth forecast by 20 basis points each for this year and the next, projecting GDP growth at 6.7% in CY2024 and 6.45% in CY2025 factoring amongst other things

• 35% year-on-year contraction in government expenditure during the April-June quarter that coincided with the weeks-long general election
• Govt’s commitment in the budget to bring down the fiscal deficit to below 4.5% of GDP
• Likely slowdown in real consumption growth driven by slowdown in household credit due to RBI’s directives to control unsecured lending.

4.2 HSBC’s flash India Purchasing Managers’ Index, compiled by S&P Global, released on last Friday

• Composite Index dipped slightly to 60.5 in July from last month’s final reading of 60.7.
• Manufacturing PMI declined to 57.9 from 58.1 in July
• Services PMI rose to 60.4 from 60.3 in July.

Despite recording over 3 years of expansion, the longest since June 2013, India’s business activity looks moderated in August as manufacturing activity eased, weighed down by a slowdown in new orders and production, even as the services sector continued to drive the economy forward.

Findings do suggest India will hold on to its title of fastest-growing major economy over coming quarters despite expectations of a slowdown in the global economy.