July Newsletter - 2020

Estimated reading time: 13 minutes 36 seconds

Financial News

SEBI's new margin rules, effective from Sept 1, 2020

Margin required to buy stocks. Prior till Sept. 1st, there was no margin collection and reporting for cash market transactions. From Sept.1st, all clients will need to have VaR+ELM margins (VaR - Value at Risk, ELM – Extreme Loss Margin) for cash/stock transactions. Therefore to take intraday positions, the maximum leverage available will be 100 divided by the (VaR+ELM)*2. This would seriously reduce the volume of trades happening on a daily basis.

The VaR+ELM margins for individual shares can be found here,

Margin required to sell your stock holdings. The same VaR+ELM will be required for placing a sell trade. However, brokers can overcome this requirement by opting for an Early Payin under which the broker can debit the total shares sold from the client Demat account and give it to the exchange by the end of the day. Under this system, a broker can allow the clients to sell without asking for any upfront margin.

Buy today sell tomorrow still possible. As the shares are bought with a 1-day perspective, the shares cannot be sold the next day as it takes T+2 days to have the shares in the Demat account. To execute a buy today sell tomorrow transaction, the trader would need to maintain VaR + ELM for both the trades. So, if the VaR + ELM for a particular stock is 20%, the client needs to maintain 40% of the buy value to buy today and sell tomorrow. Since most of the liquid stocks have a VaR + ELM less than 50%, the trader would be able to buy today and sell tomorrow for a specific amount of buy value.

Using the proceeds of a sale to buy. Under the new system, a client will not be able to use the proceeds from a sale transaction until T+2 days. For selling shares and then buying back on the same day, peak margins will be required to be maintained. Since there would be no Early Payin since you bought back the stock, it will be treated for a short margin penalty. The no buy till T+2 rule also applies if a client exits his long option positions although a day less to use that money to trade futures, short options, or buy stocks, which can now be done only on the T+1 day. Long positions can continue to be taken on the same sale date.

To summarize, every buy position in stocks needs an upfront margin of VaR+ELM. The sale position can avoid the margin requirement provided the broker has an early Payin system. While intraday buy sell and buy today sell tomorrow, all such trading options can still continue with margin provision, intraday sell then buy is difficult to happen as brokers will be charged a penalty for non-collection of upfront margin on the sale transaction because at the end of the day, there will be no shares for the Early Payin due to which the upfront margin becomes a collection due.

SEBI to continue volatility check measures till September end.

SEBI issued a statement in the last week of August to convey that the regulatory measures issued vide SEBI press release dated March 20 shall continue to be in force till September 24, 2020. The March 20 circular said that for stocks in the F&O segment meeting the criterion of 'average daily price high low' variation percentage (during the last 5 trading days) at more than or equal to 15%, the market-wide position limit (MWPL) may be revised to 50% of the existing levels.

Furthermore, the regulator also set certain conditions under which mutual funds or foreign investors can place bets on the index futures. The market regulator also mandated that short positions in index derivatives shall not exceed the holding of stocks by Mutual Funds/FPIs/Trading Members/Clients. Similarly, long positions in index derivatives shall not exceed the holding of cash, government securities, T-Bills and similar instruments by Mutual Funds/FPIs, as per the measures announced in March.

SEBI procedural guidelines for Proxy Advisors to be implemented from Jan 1st 2021 and not from Sep 1st 2020.

Proxy advisory firms advise shareholders on corporate governance-related issues and also provide recommendations regarding voting on resolutions. As per the guidelines:
  1. Proxy advisors will formulate the voting recommendation policies and disclose the updated policies to clients and also ensure that the policies to be at least annually reviewed and communicated.
  2. The voting recommendation policies shall also disclose the circumstances when not to provide a voting recommendation, as per the norms.
  3. They would also have to disclose the methodologies and processes followed in the development of their research and corresponding recommendations to its clients, as per the guidelines.
  4. The Proxy advisors have to alert clients within 24 hours of receipt of information about any factual errors or material revisions to the report. The market regulator has also made it mandatory for the proxy advisors to share their report with their clients and the company at the same time.


Do Sectoral Funds and Thematic Funds generate higher returns for the overall portfolio?

Some of the sectors that sectoral funds offer exposure to are
  1. Healthcare Funds
  2. Information Technology Funds
  3. Banking & Financial Sector Funds
  4. Infrastructure Funds.

Similarly, some of the themes that Thematic Funds supposedly offer are
  1. Consumption
  2. MNC
  3. Energy
  4. International
  5. PSU

As investors, it is very important to not relate to the name of the fund and relate the holdings in the fund to immediately give benefit to the investor based on the theme it is mentioning in the name of the fund.

An overall portfolio built through non-sectoral and non-thematic funds also have decent exposure to these sectors and themes, if not all sectors, worth investing and all themes, worth investing.

Each AMC tries to launch funds in all categories even if there is not much difference across such funds.

A Sector Fund Manager will always continue to buy sector-specific stocks at all times irrespective of the sector prospects at that particular time, therefore the onus of entering and then exiting a particular sector due to the high exposure to that sector lies in the hands of the investor.

So is the situation of buying a sectoral fund. In other words, there is an aspect of timing to entry and exit in a sectoral fund which is not taken by the fund manager but by the investor and most of the times, we follow the sector recent performance which then creates a chance of return chasing and losing opportunity to book profitably.

The mental impression is especially high in the case of a thematic fund as the name of the fund immediately creates a vision of that specific theme. However, it should be kept in mind that thematic funds are mostly like other funds to a major extent because many sectors fall in the ambit of that specific theme. Besides, themes have value when they are mostly future based and likely to impact the present and the future demographics and economy. Many of these themes are better represented in International Funds.

For example a thematic fund on consumption is no different than a broad-based large-cap or a large&mid cap fund as these funds also have a collection of themes in which consumption would be a major theme.

Mutual funds, in general, have a high overlap especially since on an average a mutual fund will have 40-50 stocks. Therefore, adding sectoral and thematic fund to the portfolio increases the overlap without providing a commensurate benefit in the form of returns.

An efficient portfolio means proportionate weight to individual investments, the side effect will always be a higher weight and lower return after the investment selection. Even if the higher weight results in a higher return, the effect would disappear if we don’t time the reduction in weight to the investment theme post higher returns.

RBI’s Open Market Operations (OMO), also known as Operation Twist

Simultaneous purchase and sale of government securities under OMOs with differing maturities, popularly known as Operation Twist, involves purchasing G-Sec of a particular maturity and selling an equal amount of G-Sec of another maturity. The intent behind the Central Bank’s actions is to reduce the yield on the bonds with a maturity similar to the maturity of the bonds bought by RBI and to increase the yield on the bonds with a maturity similar to the maturity of the bonds sold by RBI under the sale part of the OMO transactions.

RBI typically does not directly buy government bonds. Since this increases the yield on the new issue, RBI enters the secondary market and buys bonds of similar maturity. The source of funds for this transaction comes from the sale of bonds with a different maturity. The RBI buying increases the demand and reduce the supply of that maturity bonds. The yield on offer reduces as price increases.

Example – Recently, the yield on long-dated bonds went up by 40-30 basis points (0.4-0.3%) over last one month. This higher yield will mean higher yield for new government securities. The Reserve Bank of India (RBI) on 31st August 2020 announced that it will conduct an additional special open market operation, involving the simultaneous purchase and sale of government securities for an aggregate amount of Rs.20,000 crores in two tranches of Rs.10,000 crore each. This buying of longer securities will stop the rise in yield for those securities and new issue in that maturity will not see higher yields which will make the interest payment costlier.


India's 1st Quarter GDP (April-June quarter GDP) contracted by 23.9% year-on-year (YoY), declining for the first time in more than 40 years. As per the National Statistical Office (NSO), gross value added (GVA) came in at -22.8%. Previously, India's economy had expanded by 3.1% in the March quarter and brought down the FY20 GDP growth to 4.2%, the weakest since the global financial crisis of 2007-08.

The quarter was marked by two months of severe lockdown in April and May, which resulted in lower discretionary spending due to mobility restrictions and homestay, loss of incomes for unorganized sector workers resulted in lower consumption figures, while migration of labour meant loss of income as well as stalling of infrastructure-related activities.

Net Exports which typically is a negative figure for India was positive this time as Exports which were down by 19.8% while on the other hand, imports were down further by 40.4%. The higher decline in imports was mainly aided by a). 62.8% decline in oil imports because of a fall in oil prices, as well as a decline in quantity, imported and b). 44.1% decline in Non-oil, non-gold and non-silver goods imports due to lower private consumer demand.

The gap between government revenue and government expenditure (known as Fiscal-Deficit) reached Rs.8.21 lakh crore, or 103% of the budgeted estimate in the first 4 months of FY21, according to Controller General of Accounts data. The over 100% breach this year is much higher compared with the deficit of 79% of the target in the year-ago period. While the revenue receipts stood at 11.3% of the target set for the current fiscal against 19.5% achieved same time last year, total expenditure came at Rs.10.54 lakh crore, 35% of the full-year budgeted target.

In a 31ST Aug 2020 report, Crisil stated that more than 2,300 non-financial companies availed the moratorium announced by RBI on March 27 and around 75% of these had sub-investment grade credit ratings (BB+ or below) from Crisil prior to the pandemic. The number of mid-sized companies with a turnover of Rs.300 crore to Rs.1,500 crore opting for the moratorium is three times of those with a turnover of more than Rs.1,500 crore. One in every four companies that availed the moratorium with a rating of BBB- or higher used the option primarily to build a liquidity cushion for exigencies in the near term. Around 20% companies that opted for the moratorium are in highly impacted sectors such as gems and jewellery, hotels, auto components, automobile dealers, power utilities, independent power producers, energy traders, packaging, and capital goods. 10% of companies are from pharmaceuticals, chemicals, fast-moving-consumer goods, secondary steel and agriculture, the sectors relatively less impacted by the pandemic.


US Federal Reserve Chair Jerome Powell unveiled a new approach to be adapted towards the U.S. monetary policy. As per Mr Powell, the Fed will let inflation to continue increasing without controlling through short term interest rate adjustments. The shift in the approach would likely keep interest rates lower for a longer time. The Fed will look at inflation levels over a longer period thus ensuring policy actions depending on longer-term inflation. It also adjusted its view of maximum employment to allow labour-market gains to run more broadly.

Sales of previously owned homes in the US surged by the most on record in July as lower mortgage rates helped in reviving a residential real estate market which is providing a key source of strength for the economic recovery. Besides, business activity expanded in August at the strongest pace since early last year.

A report from Germany’s Kiel Institute for the World Economy suggests that global trade is on course to pick up more quickly from the coronavirus than after the 2008 financial crisis. On the contrary, the European Central Bank and others have warned that any recovery will be in the long run. Low inflation remains a concern, with the latest figures showing the first year-on-year decline in euro-zone consumer prices in four years.

The IHS Markit’s Purchasing Managers’ Index for the Euro area indicated growth for a second month, at 51.7 versus 51.8 in July. Month on month output expanded at the fastest pace in more than two years, and business confidence improved.


India’s telecom subscriber base in May fell to 116.36 crores from 116.94 in April. Reliance Jio Infocomm Ltd. continued to grow its subscriber base with a net addition of over 36 lakh new connections to reach 39.2 crore users, followed by Airtel and Vodafone Idea at 31.7 crores and 30.9 crores, respectively.

The Maharashtra government has decided to reduce stamp duty on real estate transactions between Sept. 1st, 2020 and March 31st, 2021 as part of measures to revive the state’s economy and developers who have been battered by the pandemic. The state government proposes to reduce stamp duty by 3% for the period 1 September to 31 December 2020, and thereafter to 2% between 1 January to 31 March 2021, from the present 5%, across Maharashtra.

The Supreme Court has granted telecom operators 10 years’ time to pay statutory dues as a result of the court's order on October 2019, based on the Government’s calculations on Adjusted Gross Revenue. The carriers, however, will have to pay 10% of the pending dues by March 31, 2021, according to an order by the apex court’s three-judge panel headed by Justice Arun Mishra. The apex court was not in favour of the government proposal to stagger the payment of dues over the next 20 years and dismissed review petitions filed by the telecom operators which asked for self-assessment of telecom dues. The top court had even threatened to hold India’s beleaguered telecom operators in contempt for not complying with its order to pay the dues within the deadline. The apex court also said that the National Company Law Tribunal will decide whether spectrum can be sold during insolvency proceedings. The apex court in its Aug. 14 hearing had inquired with the NCLT if companies that are using the spectrum of insolvent telecom firms, such as Aircel, Videocon Telecommunications Ltd. and Reliance Communications Ltd., can be asked to pay the pending dues on their behalf.

Reliance Industries Ltd., through its retail subsidiary, Reliance Retail Venture Ltd. (RRVL), announced the acquisition of Future Group Ltd.’s Grocery and Apparel Retail formats on the slump-sale basis at Rs.247 billion. As per a Motilal Oswal report, initially, all Future Group’s businesses would be transferred to Future Enterprises Ltd. (FEL). Post which, the Grocery and Apparel Retail assets will be transferred from FEL to Reliance Industries for Rs.247 billion. Thereafter, FEL would retain the FMCG and Apparel brands, the Future Generali Insurance joint venture, and select real estate assets in which Reliance Industries would take an additional 13% stake in two parts for Rs.2800 crores.

Monthly Data Tables

Mitraz Newsletter is created by Mitraz Research Team, for queries and clarifications the team can be contacted on

Click Here to read the market commentary from CIO, Satish Anand.


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