October Newsletter 2019

Estimated reading time: 11 minutes 6 seconds


Symptoms – People react in different ways to the same choice depending on the way the information is presented to them. For instance, “high return fund” is most likely to appear attractive than the case when the same fund is mentioned as a “high-risk fund”.You can be sure that the bias is present if depending on whether a positive or the negative spin is given to a particular choice, the decision to the choice might differ accordingly.

Examples–In 1981, “Tversky and Kahneman” asked participants in their study to decide between two treatments for 600 people who contracted a fatal disease. Treatment A would result in 400 deaths, and treatment B had a 33% chance that no one would die but a 66% chance that everyone would die. This was done with either positive framing of Treatment A (how many people would live) or negative framing of Treatment A (how many people would die). Treatment A received the most support (72%) compared to B when framed as saving 200 lives, but dropped significantly (to 22%) compared to B when framed as losing 400 lives.

Effect–A locked-in product presents mostly the return potential as an attraction and seldom talks about the illiquidity and suitability for the investor. Framing is mostly in simple terms, the explicit mentioning of the positives and concealing the negatives. For example, rarely do close-ended mutual funds mentioned in their scheme name “XYZ close-ended fund” but as “XYZ fund”. A “high yield fund” does not reveal the high risk involved in the fund but looks attractive for an investor because of the positivity that the words, high yield indicates. Framing bias results in huge opportunity cost and irreversible loss of time available for investing in a lifetime.

How to avoid Framing Bias – Since most of the opportunities to investor things to buy will be framed positively, we must take an outside opinion or think on our own by detaching from the intention to invest or buy and just trying to be an observer.  Question the absence of negativity of the product when offered, and search for the implicit information before agreeing to go ahead with the decision.


SEBI came out with wide-ranging norms for investment by debt mutual funds. The new regulations prescribe limits for investment in unlisted, unrated and credit enhanced securities, sponsor group exposure and sector exposure.

1. Debt MFs to invest only in listed commercial papers (CPs) while existing investment in unlisted debt allowed to be held till maturity.

2. Funds can invest in listed non-convertible debentures (NCDs), provided they have a simple structure and exposure needs to be brought down to 10% of the scheme’s portfolio by 30 June 2020.

3. Unrated debt to not cross 5% of the portfolio from the current 25%.

4. Credit enhanced securities (also called structured obligations) shall not exceed 10% of the scheme portfolio and exposure to a single group through this mechanism should not exceed 5% of the portfolio.

5. A cover or collateral at least four times the value of the paper bought by the fund when there is lending against shares.

6. Sector exposure limits reduced from25% to 20% and the additional limit for housing finance companies (HFCs) from15% to 10%.

7. The exposure to a sponsor group has been limited to 10% which can be enhanced to 15% with approval from the board of trustees.

With a view to fixing greater accountability, SEBI has mandated that Auditors of listed companies will have to issue a limited review or audit report if they resign within 45 days from the end of a quarter. To address this issue, SEBIhas mandated that going forward, auditors will have to first flag these issues with the audit committee of the company following which the audit committee will then need to discuss these issues before presenting its view to the auditor and management. The listed company will then have to disclose theaudit committee’s view to the bourses the day after the audit committee meets.SEBI has mentioned that the limited review should include adequate disclaimersthat specify the reasons for the auditor’s resignation.

Update– Insolvency and Bankruptcy Code (IBC)

It has been about 3.5 years since the IBC Code was passed by parliament and about 3 years since the law became effective. Data on the resolution cases so far handed under the IBC point to less than expected recovery and resolution of the admitted cases. Despite the litigations and delayed resolution and lower recoveries on the claims, the landmark reform is still an improvement over previous provisions like “the Presidency Towns Insolvency Act, 1909” and “the Sick Industrial Companies (Special Provisions) Repeal Act, 2003”.  

According to the latest quarterly data put out by the Insolvency and Bankruptcy Board of India(IBBI), for the July-September 2019 quarter, of the 2,542 cases admitted till date:

A. 186 have been closed on appeal/review

B. Only 156 have seen the approval of the resolution plan.

C. In 587 cases, liquidation has been ordered.

Of the remaining 1,497 cases currently undergoing resolution, 535 have been in the system for over 270 days (the existing timeline for resolution is 330 days).

As per The BusinessLine, cases where the resolution plan has been approved, in about 38% of the 156 resolved cases, the realisation has been less than 30% of the outstanding debt repayments. Most of the cases where the recovery rate is over 70% are small-ticket cases of claims under Rs. 100 crores. The overall recovery rate so far works out to only 37%. If the big resolutions such as Electrosteel Steels, Bhushan Steel, Binani Cements and Bhushan Power& Steel is not considered, the recovery rate falls further to 24%. Besides, many of these resolutions have not reached the banks as many of the cases have been stuck in litigations like the case of Bhushan Power& Steel.

To speed up and improve the quality of the resolution, the government has been taking the steps listed below:

Cases undergoing Corporate Insolvency Resolution Process has reached 1,500 by the end of September 2019 which has put an infrastructure demand and therefore more members have been added, new places and newer buildings for additional courts are being actively pursued. There would also be separate benches for NCLAT with the Chennai Bench coming up soon.

To expedite the resolution process, the government made amendments in July 2019 to the Insolvency and Bankruptcy Code (IBC) by revising the time limit to330 days from the 270 days limit before. If the resolution process is not completed within 330 days, then the order would be passed for liquidation. It still should be noted that of the 156 resolved cases, the average time taken for resolution stands at 374 days.

NCLAT (NationalCompany Law Appellate Tribunal) recently ruled that ineligible promoters can not reclaim control via entry to the liquidation process. In 2017, the NCLATinserted Section 29A in the Insolvency and Bankruptcy Code (IBC) to keep out defaulters from buying back stressed assets as that would lead to regaining control of their company at a fraction of what they owed to lenders. In its October 24 order in the Gujarat NRE Coke case, the NCLAT removed the ambiguity around the liquidation process, that promoter’s ineligible under Section 29A of the IBC cannot participate in the scheme of arrangement under Section 230 of the Companies Act thus clearly indicating that there can be no back-door entry for errant promoters trying to take over the company.

The Insolvency and Bankruptcy Board of India (IBBI) chairman M S Sahoo said that the government and the IBBI want to have a separate the statutory framework for ‘valuation professionals’ on the lines of statutes governing chartered accountants, lawyers, and company secretaries. On a positive note, the Central Government’s total budgetary spending grew 28% on ay/y basis in Q2, against just 2% in Q1 FY20. The quality of spending also improved sequentially as the capital expenditure spending grew 65% y/y in Q2, while the previous quarter had seen a 28% contraction due to the impact of elections.


On a positive note, theCentral Government’s total budgetary spending grew 28% on a y/y basis in Q2, against just 2% in Q1 FY20. The quality of spending also improved sequentially as the capital expenditure spending grew 65% y/y in Q2, while the previous quarter had seen a 28% contraction due to the impact of elections.   

Gross tax revenue for the first half of 2019-20 grew 1.5% to Rs.9,19,470 crores over the same period of 2018-19 compared to an 8.6% growth same time last year. The tax revenue grew at the slowest pace since 2009-10.

Non-Food (loans that are given to Food Corporation (FCI) for procurement of grains and promotion of food safety are known as Food credit) Bank Credit growth decelerated to 8.1% in September 2019 from 11.3% in September 2018. Credit to agriculture & allied activities increased by 120 percentage points in September 2019 as compared with an increase of 5.8% in September 2018. Credit growth to industry accelerated to 40 percentage points in September 2019 from2.3% in September 2018. Credit growth to the services sector decelerated sharply to 7.3% in September 2019 from 24% in September 2018. Personal loans growth accelerated to 16.6% in September 2019 from 15.1% in September 2018.

Thermoelectricity generation declined on an annual basis by 10.0% in September 2019from a decline of 3.1% in August. Buoyed by the rise in reservoir storage levels, hydroelectricity generation registered a growth of 19.1% in September 2019 compared to September 2018, from 7.1% Y/Y growth in August 2019.

BSE has initiated talks with various States and government agencies involved in the execution of Minimum Support Price (MSP) for procuring agriculture commodity through its commodity platform. The Managing Director and CEO, AshishkumarChauhan believe that the exchange has one of the best IT platform and all other allied infrastructure such as quality testing of commodity, warehousing facility and transferring money to the farmers' bank account directly without any intervention of middlemen.

The U.S. won a case filed in March 2018 against India at the World trade organization alleging improper use of export subsidies valued at more than $7billion. As per the US Trade Representative, the WTO’s dispute-resolution panel agreed that “India gives prohibited subsidies to producers of steel products, pharmaceuticals, chemicals, information technology products, textiles, and apparel, to the detriment of American workers and manufacturers.” The SupremeCourt ordered several telecom carriers including the defunct ones, to pay the government as much as Rs.92,000 ($13 billion) accounting for past dues. TheSupreme Court will decide on the timeline for payments.


The Supreme Court ordered several telecom carriers including the defunct ones, to pay the government as much as Rs.92,000 crores ($13 billion) accounting for past dues. The Supreme Court will decide on the timeline for payments.

The government has in-principle approved the merger of Bharat Sanchar Nigam Ltd.and Mahanagar Telephone Nigam Ltd. The key highlights of the revival plan:

1. MTNL will become a subsidiary of BSNL until the merger is completed.

2. 4G spectrum allotment will be funded by the government through the capital infusion of Rs.20,140 crores while Goods and Service Tax payout worth Rs.3,674 crores on the spectrum will be waived.

3. Government infusion of Rs.14,115 crores through equity in BSNL and Rs.6,295 crores in MTNL through non-cumulative preference shares.

4. MTNL requires Rs.1,100 crores as capital expenditure for 4G infrastructure, while BSNL needs around Rs.11,000 crores for the same for which the two public sector telecom operators will raise Rs.15,000 crores through the issuance of government-guaranteed bonds.

6. BSNL and MTNL will monetize their assets to raise resources for retiring debt, servicing bonds, network upgradations, and to expand and meet their operating fund requirements under a target of Rs.37,500 crores over three years.

7. The two firms will also offer voluntary retirement to employees aged 50 years and above at a cost of around Rs.30,000 crores to be borne by the government through budgetary support in a phased manner.

According to Jones Lang Lassalle India report, residential towers worth Rs.4.62 lakh crore with 4.54 lakh homes have been stalled in the top seven cities with the NewDelhi-National Capital Region and Mumbai accounting for almost 90% of the inventory. As per Mr Ajay Piramal, chairman at Piramal Enterprises Ltd., the top 10% of India’s developers are not in trouble and their asset quality has not deteriorated.


The Federal Open Market Committee cut its fed funds rate to a range of 1.5% to1.75% from a previous range of 1.75% to 2.00%. During the meeting, the Fed indicated that they may put a halt on immediate future rate cuts after having reduced its target rate three times since July.

The European Union leaders had agreed to the United Kingdom’s request for anextension on Brexit to 31st January. The UK Prime Minister meanwhile wants to get a general election done on December 12, which as per him will help in breaking the deadlock over the desired Brexit plan based on his expectation that he will get a majority in the parliament. However, for that, a two-thirds majority of members of Parliament (MPs) must vote before in favour of an election.

US Q3 Gross Domestic Product increased at a 1.9% annualized rate beating Bloomberg survey forecasts that polled in for a 1.6% growth. Yet, compared toQ2 GDP of 2%, the Q3 growth is down and is the lowest since the end of 2018.

Q3 Output in the eurozone increased 0.2% q/q, matching Q2 output and beating the 0.1% consensus estimate. Italy and France both topped expectations, and Spain maintained a relatively solid expansion.

China's economic growth slowed to its weakest pace in almost three decades as Q3 GDP grew 6.0%y/y, down further from the second quarter's 6.2% growth.



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