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April Newsletter - 2018

Estimated reading time: 7 minutes 45 seconds

KNOWLEDGE-MENTAL ACCOUNTING

Symptoms - People may normally feel that money saved for a new house requirement, kids marriage or education is too "sacred or important". As a result, this account may not be touched at all by the client even if doing so would provide added financial benefit. 

An example could be the portfolio that is managed for the client to meet the expenses for the kid's education in the US which is three years away. Simultaneously, the client also maintains a personal portfolio in which he would like to have an equity overdose and also wants to take more risk 

Steps to correcting the bias - Treat money as fungible despite the sources of that money being different 

FINANCIAL NEWS

SEBI approved most of the changes proposed by the Uday Kotak panel on improving corporate governance standards such as splitting the post of chairman and managing director, tighter rules for independent directors, enhanced disclosure of related-party transactions and mandatory secretarial audits for listed entities and their material subsidiaries. The regulator wants to split of the chairman and Managing Director and the appointment of at least one woman independent director by 1 Apr 2019. Besides, the regulator has approved that shareholder approval will be mandatory for making payments exceeding 2% of the consolidated turnover. 

SEBI has allowed entities to issue additional debt securities for the remaining period of maturity where the call or put option is exercised. This is subject to not breaching the overall aggregate count of outstanding ISINs (International Securities Identification Numbers). As per SEBI norms, an issuer is allowed a maximum of 17 ISINs maturing per financial year. 

In a major boost to angel funding in startups, SEBI has doubled the maximum investment limit by angel funds in venture capital undertaking to $1.5 Mn (INR 10 Cr) from the current $770.5 K (INR 5 Cr). 

SEBI has decided to reduce the additional expenses charged by mutual funds by 15 basis points aimed at increasing penetration of such products among investors to 5 basis points. 

SEBI has come out with a new mechanism to check non-compliance of listing conditions. SEBI may ask stock exchanges to impose penalties ranging Rs 1,000-5,000/day on violation of certain clauses like non-submission or delay in submission of documents related to the company's financial and shareholding details and failure to appoint a woman director on the board. If the non-compliance persists, stock exchanges can freeze the shareholding of the promoter and shareholding in other securities as well.

INTEREST RATE RISK IN BONDS

Interest rate risk is faced by a bondholder when interest rate changes and because of the change in interest rates, the bond held sees volatility in prices. When interest rate in the system goes up, the current interest rate on the original bond becomes less attractive and therefore a new bond becomes more attractive and when interest rate in the system comes down, the current interest rate on the original bond becomes more attractive and therefore demand for the original bond goes up. This explains the inverse relationship between original bond prices and the current interest rate. 

BOND MARKET DEVELOPMENTS

Department of Economic Affairs (DEA) Secretary Subhash Chandra Garg announced that the government borrowing in the first half of the fiscal will be limited to Rs.2.88 lakh crore or nearly 48%, much lower than 60% to 65% in last years. This is likely to bring down the yield on the 10-year G-Sec and keep it suppressed till any further news on oil prices and global trade risk surfaces. 

The deficit has been pegged at 3.3 percent of the GDP in 2018-19, lower than 3.5 percent in current fiscal. The gross borrowing in next fiscal would be lower by Rs.50,000 crore, and out of this 10% of the issuance would be in the form of Consumer Price Index (CPI) - linked Inflation-Indexed Bonds. 

Along with the reduced borrowing announcement, it was also decided to launch the inflation-indexed bonds (IIBs). The IIBs linked to consumer price index (CPI) will be issued in the next fiscal. The government had come with inflation-indexed bonds back in 2013, but that was linked with the WPI which does not track inflation at the retail level. CPI-linked bond issuance would be a useful portfolio inclusion for individuals both on an asset allocation basis and on a financial goal basis because inflation is a significant risk in the long run. IIB's are very popular across the world since they are designed to protect investors from inflationary forces especially in a country like India where a bulk of people lock their savings in assets such as gold. 

It has also been decided to issue Government Securities with 1-4-year maturity as demanded by primary dealers. This will broaden the yield curve statistics as previously; the data was not broad-based due to the absence of shorter securities.

SECTOR & COMPANY NEWS

Fortis Healthcare Limited (FHL) has demerged its hospitals business and combined that with Manipal Hospital Enterprises Private Limited. FHL's Board has also approved selling a majority stake in its diagnostic unit to the Bengaluru-based group. The transaction is expected to take 9-12 months to complete, after which the merged entity of Fortis and Manipal, Manipal Hospitals, will be listed on stock exchanges. Meanwhile, SEBI and Serious Fraud Investigation Office are probing an alleged misappropriation of funds and related-party transactions at Fortis Healthcare. Earlier this month, Fortis Healthcare itself enlisted law firm Luthra & Luthra to investigate an allegation that promoters Malvinder and Shivinder Singh had syphoned cash from the company. 

Central Bureau of Investigation had booked a Hyderabad-based construction and infrastructure firm Totem Infrastructure Ltd accused of defrauding an amount worth Rs.1,394 crore lent by a consortium of eight banks including Union Bank of India. The Union Bank of India had also alleged that the promoters of the company were untraceable, but the agency managed to track them down at their new place of residence and carried out searches. 

IDBI Bank Ltd reported that fraudulent loans of Rs.7720 Crore were issued from five of its branches in the states of Andhra Pradesh and Telangana. Some of the loans, which were issued during FY09-FY13 for fish farming businesses, were obtained against fake lease documents of non-existent fish ponds and by inflating the value of the collateral.

INTERNATIONAL NEWS

US President Donald Trump announced plans to impose a 25% and 10% tariff on imports of steel and aluminium, respectively. Donald Trump pushed back against a wave of criticism against steel tariffs by tweeting "trade wars are good and easy to win." 

US Federal Open Market Committee hiked rate for the sixth time since the policymaking Federal Open Market Committee began raising rates off near-zero in December 2015. The Central bankers, led by Jerome Powell in his first meeting as chairman, approved the widely expected quarter-point hike that puts the new benchmark funds rate at a target of 1.5 percent to 1.75 percent. Fed officials raised their forecast for 2018 GDP growth from 2.5 percent in December to 2.7 percent and increased the 2019 expectation from 2.1 percent to 2.4 percent. However, growth is likely to cool after, with the 2020 forecast holding at 2 percent and the longer-run measure still at 1.8 percent. 

China announced plans for reciprocal tariffs on $3 billion of imports from the US in the first response to President Donald Trump's ordering of levies on Chinese metal exports. China will also pursue legal action against the US at the World Trade Organization in response to the US planned tariffs on steel and aluminium imports.

DOMESTIC ECONOMY

The Indian economy grew at a five-quarter high of 7.2% in the October-December period reflecting good show by agriculture, manufacturing, construction and certain services. The economy is expected to grow at 6.6% in the current fiscal ending 31 March, as per the second advanced estimates of the Central Statistics Office (CSO), compared to 7.1% in 2016-17. India's third-quarter growth numbers beat all estimates with the GDP coming in at 7.2%. 

February wholesale inflation (WPI) came in at 2.48% vis-� -vis 2.84% in January-18. On a cumulative basis, WPI stands at 2.30% for FYTD18 as compared to 4.92% in the corresponding period in the previous year. Consumer Price Inflation (CPI) for Feb-18 surprised on the downside by coming in at 4.44% against 5.07% in Jan-18 as food prices saw a continued decline. Component-wise, sequential momentum in food inflation saw disinflation of -1.22% in Feb-18 compared to -0.93% in the previous month. 

India's Current Account Deficit in the Oct-Dec quarter of FY18 widened to USD 13.5 Bn compared to USD 7.2 Bn in the previous quarter (Q2 FY18) on the back of a widening trade deficit. CAD stood at USD 7.9 Bn in the same period a year ago (Q3 FY17). Q3 FY18 saw imports growing at a faster rate than exports, mainly owing to a rise in oil prices. The capital account witnessed an expansion coming in at USD 22.1 Bn as compared to inflows of USD 16.4 Bn in the previous quarter. 

India's merchandise exports are expected to touch $300 billion in the current fiscal year ending this month compared with $275.8 billion, mainly driven by a rise in commodity prices and strong demand in the U.S. and Europe. In the first 11 months of the fiscal upto Feb-18, merchandise exports rose 11% to $273.7 billion from a year earlier while imports climbed 21% to $416.9 billion. 

As per the available data from World Bank and International Monetary Fund (IMF), India's share in world's GDP has increased from 2.6% in 2014 to 3.1% in 2017.


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