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July Newsletter - 2019

Estimated reading time: 9 minutes 52 seconds

FINANCIAL NEWS

The Supreme Court on July 23rd delivered its verdict on the stalled projects of the Amrapali Group and has cancelled the RERA registration of the Amrapali Group. They have asked National Buildings Construction Corporation (NBCC) to complete all the pending projects of the group, thus giving respite to over 42000 home buyers. The apex court pointed out that Noida, Greater Noida authorities and bank had colluded with the group to the detriment of homebuyers. The court also directed the Enforcement Directorate (ED) to investigate money laundering by officials and directors of the Amrapali Group. 

SBI said it will reduce interest rates on retail fixed deposits with tenures greater than 2 years by up to 20 basis points (bps) and 35 bps for bulk deposits above 2 years with effect from 1st August. For shorter tenure deposits of up to 179 days, the state-run bank will slash deposit rates by 50-75 bps. As on 10 July, SBI's one-year marginal cost of funds-based lending rate (MCLR) was at 8.4% after three 5 bps (0.05%) rate cuts since January. 

The Securities and Exchange Board of India (SEBI) has proposed setting up 'Chinese Walls', or communications barriers for proxy advisors between their institutional advisory business and consultancy business. Proxy advisors are advisory firms providing research to institutional investors. The market regulator has raised concerns that the advisory firms may be subject to conflicting interests if they provide companies with consultancy services and simultaneously advise the institutional shareholders in those companies. 

SEBI wants to tighten rules for broker commissions on advising investment products like portfolio management services (PMS) and alternative investment funds (AIF's) as it aims to curb miss-selling and bring in more transparency. The market regulator might ask PMS and AIFs providers to scrap upfront commissions to distributors and shift to a trail commission model, in line with the mutual fund industry. 

VG Siddharta (1959 - 2019) - India's Coffee Barron

After 2 days of search operations at the Nethravati River, the Karnataka Authorities recovered the body of Café Coffee Day CEO and Investor V.G. Siddhartha. His disappearance two days back had resulted in speculation that he was under immense financial strain. 

V.G. Siddhartha, 59, was widely recognised for having brought the coffee culture to a tealoving population. He was one of the early venture capital investors in India. Siddhartha opened his first coffee shop in 1996, 10 years before Starbucks opened its first shop in the country. His company, Cafe Coffee Day chain has more than 1,600 outlets with a direct stake of 32.75% in Coffee Day Enterprises. 

Recently, Coffee Day Enterprises Ltd faced queries over outstanding debt and scrutiny from tax authorities over unpaid dues. Siddhartha, his family and their holding companies had pledged or encumbered about 75.7% of their stake in Coffee Day toward various borrowings. 

Siddhartha invested in Mindtree in 1999 and exited his 20% stake for Rs. 3200 Crore on 18th March 2019 that resulted in L&T's acquisition of Mindtree in what was the first "hostile takeover" in the Indian IT space. Siddhartha started his career with a 2 year stint at JM Financial following his post graduation in Economics. He founded an investment firm Sivan Securities later renamed as Way2Wealth Securities. He had invested as an early investor in Indian IT service firms like Infosys Ltd and Mindtree in the 1990s, long back before Indian IT companies appeared attractive for investments domestically as well as globally. 

VG Siddhartha before leaving for Mangalore wrote a letter to employees and board of directors of CCD stating that "I have failed as an entrepreneur" and "Every financial transaction is my responsibility", "the law should hold me & only me accountable." 

KNOWLEDGE - GAMBLERS FALLACY

Symptoms - Assigning basic probability and trying to find mean reversion over a very short period of a few days/even months. For example trying to predict the next day's market move as opposite to the trend over last few days. The instinct is to believe that the trader can profit from the reversal on the recent trend if the probability assigned by the trader is that the market is unbiased to any trend and the up/down chances are roughly equal 

Examples - As each day passes, if the market has been moving up the trader takes a short position the following day thinking it is time that the shorts will get their advantage. Effect - There could be losses in the portfolio and higher churning costs if people try to predict intra day or monthly market move based on recent trend and assuming trend reversal next. 

How to avoid Gamblers Fallacy - A well diversified, researched and longer term holding period for the portfolio. If it is well diversified then the gains will overtake the losses at some time if at least 60% of the holdings deliver and this can be ascertained to a fair bit by research. In the long run, some stocks can go down by a maximum 100% while the remaining stocks can go up by more than 100% over time. Therefore, to avoid gamblers fallacy which is more related to predicting the next step based on the last few steps, one should try to have a diversified, researched, long term portfolio. In case the person wants to trade on a short term, then it is better to think that the short term trend will continue more than the fallacy bias that tries to assign probabilities similar to tossing of coins. 

Major Highlights of the Amendments to the Companies Bill

A major focus of the bill is on CSR spending. Now companies have to keep unspent money in a special account. The Companies (Amendment) Bill, 2019 highlights that companies with a profit of more than Rs 5 crore, turnover of Rs 100 crore and net worth of more than Rs 500 crore have to spend at least 2% of their 3 years annual average net profit towards CSR activities. 

The Bill gives more power to the Registrar of Companies (ROC) to take strict action against those companies which are not working as per the law. Registrar can remove the name of the company from the Register of companies if it is not carrying on the operation as per the company law. Sixteen minor offences have been recategorised as civil defaults and transferring of functions with regard to dealing with applications for change of financial year to Central government. 

Shifting of powers for conversion from public to private companies from National Company Law Tribunal (NCLT) to the central government, as well as more clarity with respect to certain powers of the National Financial Reporting Authority (NFRA). 

The Bill states that issuance of unlisted shares may be prescribed to follow demat form. 

The National Financial Reporting Authority can debar a member or firm from practising as a Chartered Accountant for six months to 10 years in case of proven misconduct. 

DOMESTIC ECONOMY

WPI (Wholesale Price Index) in India rose by 2.02% y/y in June 2019, easing from a 2.45% gain in May. This is below market expectations of 2.35%. The CPI inflation rate, in fact, rose to an eight-month high of 3.18% in the month. Core CPI inflation eases to 4.09% in June 2019. The retail inflation based on the Consumer Price Index (CPI) stood at 3.05% in May and 4.92% in June 2018. 

Foreign direct investments (FDI) into India grew at 3% to $6.95 billion in April'19. 

The Commerce and Industry Minister Piyush Goyal said that during FY19, the country recorded the highest-ever total FDI inflow of USD 64.38 billion, which is 6 % higher as compared to FY18. 

Due to the irregular rainfall that had delayed the sowing of crops, farmers have planted 23.4 million hectares with summer crops, 27% less as compared to the same time a year ago, according to the Ministry of Agriculture & Farmers' Welfare. 

India's fiscal deficit (expenditure minus revenues) crossed 60% of the full-year target by June end. The gap between the government's revenue and expenditure rose to Rs 4.32 lakh crore at the end of June, 61.4% of the budget estimate of Rs 7.03 lakh crore for 2019-20. The fiscal deficit, however, was narrower than in June last year when it stood at 68.7% 

India's core infrastructure sector which comprises output of coal, crude oil, cement and electricity, fertilisers, natural gas, cement reported a 4 year low of 0.2% growth on a y/y basis in June. The index of eight core industries grew 0.2 percent, data released by the trade ministry showed. That's the slowest pace of expansion since April 2015, when output contracted 0.5%. The overall output contraction was due to a fall in crude oil, natural gas, petroleum refinery products and cement production. 

Water levels in India's main reservoirs were at 24% of their storage capacity, against 32% at the same time last year as per the latest government data. The average for the past 10 years has been 28%. India's edible oil imports are likely to rise by 7.3% in 2019/20 to a record high as weak monsoon rains curtail yields of summer-sown oilseeds such as soybeans and groundnut. 

INTERNATIONAL NEWS

The BOK (South Korea's Central Bank) cut its base rate by 25 basis points (bps) to 1.50% from 1.75% and has reduced this year's growth forecast to 2.2%, the lowest in a decade, from 2.5%. On a similar note, Indonesia's central bank also cut its benchmark interest rate for the first time in nearly two years, lowering the 7-day reverse repo rate by 25 bps to 5.75%. 

Singapore's non-oil exports fell by 17.3% in June, marking their biggest decline in six years, as the city-state struggles against tepid global demand and the SinoU.S. trade war. The decline was the 4th y/y decline in a row after reporting a revised 16.3% decline the month before. 

U.S. Treasury yields have been falling since New York Federal Reserve President John Williams hinted at a rate cut later this month. The bets of a rate cut by the Fed over its July 30-31 meeting stood at 100%, of which 45% expect a 50-basis-point rate cut, according to the CME FedWatch Tool. 

Euro zone industrial production rose more than expected in May countering declines in the past two months and beat economists' expectations that expected declines due to the prolonged trade wars. As per the EU statistics agency Eurostat, the euro zone factory output increased by 0.9% in May on a M/M basis, above market consensus expectations of a 0.2% rise. 

June data for U.S. job growth showed that there was a strong rebound however the wage growth continues to be sticky and moderate. German exports rebounded more strongly than expected in May as exports grew by 1.1% on a M/M basis as per data from the Federal Statistics Office. Imports fell 0.5% on the month in May which increased the surplus in the trade balance to 18.7 billion euros ($20.99 billion) from 16.9 billion in April.

SECTORAL & COMPANY NEWS

India's most valued education-technology company Byju's has raised $150 million in its latest round of funding led by Qatar Investment Authority (QIA) which also saw investments from Owl Ventures, a Silicon Valley-based venture capital fund. 

The newly elected Andhra Pradesh government has set up a high-level negotiation committee to review the power tariffs agreed upon with various renewable energy power projects in both the wind and solar sectors. 

Invesco Oppenheimer Developing Markets Fund will acquire up to 11% stake in Zee from its promoters for Rs 4,224 crore, according to a stock exchange filing. 

Yes Bank Ltd.'s credit rating has been cut for the second time in 2019 by ICRA Ltd. The downgrade has resulted in blocking off the bank's move to boost its tier-1 equity capital ratio, that fell to the lowest level allowed by RBI, through a $1.2 billion share sale. 

iPhone-maker Apple under the impact of the ongoing US China trade war on its business, wants to hedge its bets by shifting around 10-15% of its manufacturing to India. The phonemaker however wants the Indian government to ensure a stable policy regime with sector-specific incentives to help it establish an export hub in the next 5- 10 years.


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