Stocks
Nifty, Sensex lifted by UK rate cut hopes – Thursday closing report
We had mentioned in Wednesday’s closing report that Nifty, Sensex might struggle to head higher. The major indices of the Indian stock markets rallied to close with gains of about 0.50% over Wednesday’s close. The trends of the major indices in the course of Thursday’s trading are given in the table below:
 
 
 
Disappointing macro-economic data and mixed global cues subdued the equity markets on Thursday. Consequently, both the indices traded on a flat note. Healthy buying was witnessed in banking, consumer durables and capital goods sectors, whereas stocks of information technology (IT) faced selling pressure. The NSE Nifty market breadth was skewed in favour of the bulls -- with 39 advances and 12 declines. The BSE market breadth was tilted in favour of the bulls -- with 1,533 advances and 1,016 declines.
 
Initially on Thursday, the equity indices opened on a flat note, triggered by mixed global cues and lower crude oil prices. However, disappointing macro-economic data released during the day weighed heavy on investors' sentiments. The official data disclosed an annual wholesale inflation to a 20-month high of 1.62% for June from 0.79% in May due to a rise in food prices. Investors were also seen cautious ahead of the upcoming quarterly earnings season. IT (information technology) major Infosys is expected to be the first bluechip firm to come out with its results on July 15.
British oil firm Cairn Energy Plc, battling payment of dues in the retrospective taxation case with the Indian government, has in turn slapped a notice demanding a compensation of $5.6 billion for not giving it a "fair and equitable treatment". Cairn Energy filed the compensation notice with the international arbitration panel, saying the Indian government failed to give a fair and equitable treatment to investments in the country. The company said it suffered a loss in the valuation of its 9.8% holding of Cairn India owing to the retrospective taxation case that the income tax department initiated against it in 2014. The compensation notice comes against the backdrop of the retrospective tax demand of Rs29,000 crore from the Indian tax department that Cairn has received, on alleged capital gains the company made in a 2006 reorganisation of its India business. The course of the case will be eagerly watched by potential FDI investors for evaluating ease of doing business in India.
 
Ballooning food prices pushed up India's annual wholesale inflation to a 20-month high of 1.62% for June from 0.79% in May, according to official data released on Thursday. This kept inflation in the positive domain for the third month after 17 months in the negative. Inflation is a very important factor in RBI’s decision making on interest rates in the banking sector. This in turn affects the growth in values of major stock market indices in India. It is too early to anticipate RBI policy right now on interest rates.
 
India's Road Transport, Highways and Shipping Minister Nitin Gadkari during his visit to the world's financial capital has been pitching the investment potential in India's infrastructure as it embarks on its ambitious "Move in India" programme and opens its roads and ports to foreign cooperation. In a series of meetings with business leaders and investment professionals, organised here on Tuesday and Wednesday by the Indo-American Chamber of Commerce and the Business Council for International Understanding, J.P. Morgan and Goldman Sachs, Gadkari said he hoped that the multi-billion transportation plans could add two percentage points to India's 7.6% GDP growth by creating a world-class infrastructure. He invited US investors to participate in the highways development programme that envisages a total investment of $150 billion over the next five years. A range of projects exists to suit each investor's risk and return expectations, he said. Government policy is important for attracting FDI in this sector and could affect investor sentiments in the stock markets.
 
US stocks closed mixed on Wednesday, with the Dow Jones Industrial Average and the S&P 500 eclipsing Tuesday's closing records, as investors digested the newly-released Federal Reserve's Beige Book. According to the Fed Beige Book released in the afternoon, reports from the 12 Federal Reserve districts indicated that economic activity has expanded in nine of the districts since the previous Beige Book report and contacts in Boston were described as upbeat. Analysts thought that the Beige Book showed US economy was growing steadily, but not at a pace where the Fed would feel comfortable raising rates in the near future.
 
The top gainers and top losers of the major indices are given in the table below:
 
 
The closing values of the major Asian indices are given in the table below:

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Masala Bonds: Can it spice up Indian bond market?
Indian curry is quite a hit in the West. On a similar note, can global investors be tempted to try out Masala bonds? That is something the Indian Railway Finance Corp, which approved the raising of $1 billion through the issue of Masala bonds and other companies such as Indian Rail Finance Corp and NTPC are trying out now. However, it is Housing Development Finance Corp Ltd (HDFC) that is launching first sale of so-called masala bonds by an Indian entity this week, seeking to raise at least Rs2,000 crore with an option to retain oversubscription of up to Rs1,000 crore. The advent of much talked about masala bonds market is a positive precursor for corporates as it has opened up potentially significant new sources of funding over External Commercial Borrowings (ECB). This will also integrate financial markets in India further with the rest of the world. We can certainly envisage several innovative applications of the RDB option by companies going forward.
 
The term “Masala Bonds” is used to refer to rupee-denominated borrowings by Indian entities in overseas markets. The International Finance Corp (IFC), the investment arm of the World Bank, issued a Rs1,000 crore bond in November 2014. The purpose of issue was to fund infrastructure projects in India. IFC named them ‘masala’ bonds to reflect the Indian flavor. The term masala bonds have been used ever since. 
 
Before masala bonds, corporates raised finance from international market through external commercial borrowings or ECBs. However, since funds raised through ECBs are denominated in foreign currency, the same attracts risk of forex fluctuation. A year is a long time in forex markets where currencies fluctuate sharply. So, imagine the risk an issuer of bond has to face, especially of one with largely rupee earnings, where issue and repayment are years apart. This is how masala bond is different from other instruments as the risk of currency lies with the investor and not the issuer. 
 
China has been ahead. In October 2015, when President Xi Jinping was in London, the People’s Bank of China issued Yuan denominated bonds, dubbed “dimsum bonds” in Hong Kong to raise funds at a little over 3%. A key difference between these two countries is that unlike China, the Indian government has never borrowed abroad on its own — preferring to push its state owned units, instead. And Reserve Bank of India (RBI), unlike the Chinese central bank, cannot issue debt with no legal sanction for it.
 
Market Scenario
 
The need for a healthy corporate debt market in India has been emphasized repeatedly. A well-developed corporate debt market will not only support the banking system in meeting the long term funding requirements of the corporate but will also be a reliable source of finance in situations when the equity market is unstable. In the recent years, the Indian corporate bond market has experienced development both in number and volume; however, when compared with the Indian government bond market, it still has a long way to go. 
 
The corporate bond market in India is dominated by non-banking finance companies (NBFCs) as issue of unsecured bonds by non-banking non-financial Companies (NBNFCs), until recently, were covered under the ambit of deposits. The same has been discussed at length below. So, the issue of corporate bonds in India by NBNFC is quite small as compared to that of other developed countries and the same can be viewed in the figure below:
 
 
Looking at the global trends, bank financing seems to be an uncommon phenomenon as compared to that of bond financing, but the current situation in India follows a totally contrary path. The reason for hindering growth of corporate debt market against that of PSU’s debt market can also be attributed to the high fiscal deficit of Indian economy. 
 
Spate of action
 
The regulators have now started taking steps to streamline the regulatory regime surrounding the Indian bond market. The motive of regulators behind such push is to transform the Indian bond market into a much more vibrant trading field for debt instruments from the elementary market that it was about a decade ago, but there is still a long way to go. Lately, there have been a number of changes, which is likely to cause a positive impact. 
 
Until recently, the Companies (Acceptance of Deposits) Rules, 2014 barred the corporates from issuing unsecured debt instruments. However, the Ministry of Corporate Affairs (‘MCA’) vide notification issue on 29 June 2016 issued the Companies (Acceptance of Deposits) Amendment Rules, 2016 (‘Amendment Rules) thereby providing relaxation with respect to issuance of corporate bonds by excluding listed unsecured non-convertible debentures (NCDs) from the definition of deposits. Earlier, corporates, other than financial entities, were allowed to issue either secured bonds or bonds compulsorily convertible into equity within a period of five years from the date of issuance, anything apart from the said were treated as deposits. However, RBI allowed NBFCs to issue unsecured NCDs with a maturity of more than one year and minimum subscription amount being Rs1 crore per investor. 
 
Enabling Provisions by RBI
 
The RBI, on 29 September 2015, vide circular RBI/2015-16/193 has issued guidelines allowing Indian companies, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) to issue rupee-denominated bond overseas. 
 
As per the guidelines, the issue size by an eligible borrower has been restricted to $750 million under automatic route. The regulator also mentioned a minimum maturity period of five years. However, RBI, on 13 April 2016, vide circular RBI/2015-16/372 had reduced the tenure of such bonds to three years and allowed borrowing up to Rs5,000 crore under the automatic route. According to the RBI, the masala bonds can only be issued in a country and subscribed by a resident of a country that is a member of Financial Action Task Force (FATF) or a member of an FATF-style regional body. The country should have strategic anti-money laundering or combating the financing of terrorism deficiencies to which countermeasures apply.
 
Reason to invest in masala bonds
 
The following are the reason to invest in masala bonds:
The Ministry of Finance has slashed the withholding tax on interest income of masala bonds to 5% from 20%, making it lucrative for investors. Also, capital gains from rupee appreciation are exempted from tax. 
On a global scale, there is abundant liquidity because of lower interest rates in developed markets, but there remain very few investment options due to weak conditions of the global financial market. India, along with China amongst others, is that rare fast-growing large economy, so investing in masala bonds is one of the rare ways for investors to take advantage of this.
 
Reason to issue masala bonds
 
The following are the reason to issue masala bonds:
It helps the Indian companies to diversify their bond portfolio as previously they one issued corporate bonds. Masala bonds are an addition to their bond portfolio.
It helps the Indian companies to tap a large number of investors as these bonds are issued in the offshore market.
Masala bonds will help in building up foreign investors’ confidence in Indian economy and currency which will strengthen the foreign investments in the country.
 
Cost of funds
 
Borrowing from overseas is at low cost however hedging is made mandatory in the country and the cost of hedging is very high. The reduction in minimum tenure from five years to three years could have possibly been an indicator to reduce the cost of hedging, thus reducing the cost of issuance for Indian issuers. While, the cost of external commercial borrowings is around LIBOR + 150 bps but the hedging cost is as high as 6%-7%, which does not incentivize the borrowers to avail funds from overseas. Here, the investor has been allowed to hedge their exposure in Rupee through permitted derivative products with AD Category - I banks in India. 
 
Indian Companies desirous of playing safe and not having the natural hedge advantage like that of Reliance Industries Limited, who service the debt obligations in US dollars with the export proceeds in the same US dollars, would ebb from issue of ECBs and plumb towards masala bonds should the cost of such borrowings turnout up to be lower than that of Indian banks as well as under the ECB route with forex risk added to it. 
 
Consequent upon issue of masala bond to offshore markets, the Indian corporates will reduce their interest cost burden on the raised debt amount. Also, the funds raised can be used for infrastructural development in the country ultimately leading to the development of the nation at a global level. For this, RBI must be lauded for coming up with yet another avenue for raising international finance for Indian corporates.
 
(Saurabh Dugar works with Vinod Kothari Consultants Pvt Ltd)

 

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United India Insurance mulls listing of shares
Government owned non-life insurer United India Insurance Company Ltd has taken a preliminary decision to list its shares through an public offer raising around Rs1,500 crore, said top officials on Thursday.
 
"The Board has taken a view to list the shares and raise around Rs1,500 crore. This is the first step and not the final step. The owner - central government - has to take the final call on the matter," the officials told IANS on the condition of anonymity.
 
"We have not decided on the share capital and the premium at which the shares are to be listed," they added.
 
Presenting the 2016-17 budget, Finance Minister Arun Jaitley said "Public shareholding in government owned companies is a means of ensuring higher levels of transparency and accountability. To promote this objective, the general insurance companies owned by the government will be listed in the stock exchanges."
 
The central government owns seven general insurers - GIC Re, New India Assurance, National Insurance Company, Oriental Insurance Company, United India Insurance Company, Export Credit Guarantee Corporation and Agriculture Insurance Company of India.
 
"Insurance Amendment Act 2015 amended General Insurance Business Nationalisation Act and introduced a new section 10B providing that GIC and the public sector general insurers may raise their capital for increasing their business in rural and social sectors, to meet solvency margin and such other purposes as the Central Government may empower," K.K. Srinivasan, former member, Insurance Regulatory and Development Authority of India (IRDAI), had earlier told IANS.
 
He said the amendment also clarified that the shareholding of the central government shall not be less than 51% anytime, thus setting the stage for partial divestment of GIC and other general insurers.
 
Srinivasan said, New India and United India may have relatively better valuations than Oriental, National and others, Srinivasan said.
 
According to reports, the board of New India has also given its nod for listing its shares.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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