Stocks
Nifty, Sensex still on an uptrend but risks rising – Weekly closing report
We had mentioned in last week’s closing report that Nifty, Sensex were to head higher. The major indices of the Indian stock markets were in a flat-to-bullish trend on most days of the week. However, on Tuesday the market turned a little bearish. Over the whole week, the major indices have made marginal gains of less than 0.5%. The trends of the major indices in the course of the week’s trading are given in the table below:
 
 
On Monday, sector-wise, healthy buying was witnessed in automobile, oil and gas, and consumer durables stocks. The BSE market breadth was tilted in favour of the bulls -- with 1,542 advances and 1,212 declines and 154 unchanged. On the NSE, on Monday, there were 900 advances, 725 declines and 230 unchanged. Gains were capped due to caution ahead of the Reserve Bank of India's monetary policy review.
 
FMCG major Britannia Industries Ltd. on Monday reported a 13% rise in its consolidated net profit to Rs219.13 crore in the quarter ended June 30, 2016, as compared to Rs193.66 crore in the corresponding period in 2015. Its consolidated revenue in the quarter under review grew 8% to Rs2,162 crore against Rs1,998 crore in the year-ago period. The share price of the company closed at Rs3,143.00, up 9.07% on the BSE.
 
Profit booking, along with lower crude oil prices and a weak rupee, dented the Indian equity markets during the mid-afternoon trade on Tuesday. Selling pressure was seen in automobiles, fast moving consumer goods (FMCG) and metal stocks. The BSE market breadth was skewed in favour of the bears -- with 1,569 declines and 1,185 advances.  On the NSE, there were 542 advances, 912 declines and 58 unchanged. According to market analysts, consolidation and profit booking in the absence of any fresh positive development dragged the equity markets lower. Most IT (information technology) stocks traded down, while banking and pharma stocks traded with mixed sentiments. Auto and aviation sector stocks faced selling pressure. Most FMCG stocks traded down due to profit booking.
 
 On Tuesday, Reserve Bank of India (RBI) Governor Raghuram Rajan kept key policy rates unchanged in his last monetary policy review as the governor, with little elbow room on account of the country's retail inflation inching closer to the upper tolerance level of 6%. Accordingly, the repurchase (repo) rate or the interest commercial banks pay the central bank for short-term loans remains unchanged at 6.5%. The cash reserve ratio (CRR) that scheduled banks have to keep in the form of liquid funds also remains unaltered at 4% of deposits. In the previous policy update, too, conducted on June 7, the policy rates were left unaltered.
 
Profit booking, along with negative global cues and caution over upcoming quarterly results, dragged the Indian equity markets lower during the late-afternoon trade session on Wednesday. Heavy selling pressure was witnessed in automobile, banking and healthcare stocks. The BSE market breadth was skewed in favour of the bears -- with 1,896 declines and 832 advances. On the NSE, on Wednesday, there were 335 advances, 1,116 declines and 48 unchanged.
Most banking and pharma stocks traded down, while IT (information technology) and auto stocks also faced resistance at higher levels. Aviation stocks traded with sideways to firm sentiments on higher crude oil prices. Indian markets continued to trade with weakness and underperformed its global peers.
 
JK Tyre & Industries (JKTIL) on Tuesday reported a consolidated net profit of Rs100.26 crore for the quarter ended June 30, 2016. According to the company, its consolidated net profit for the corresponding period of last fiscal stood at Rs117.07 crore. "Consolidated financial results published, as opted by the company, include working of Cavendish Industries Ltd., acquired on April 13, 2016 which restarted its operations in mid-May, 2016," the company said in a regulatory filing to the BSE. "Therefore, results of the quarter are not comparable with previous period." The company's total income during the quarter under review stood at Rs1,786.77 crore from Rs1,771.06 crore earned during the corresponding period of 2015-16. The shares of the company closed at Rs102.20, down 2.76% on the BSE on Wednesday.
 
On Thursday, the Indian equity markets traded flat for most of day. Selling pressure was witnessed in automobile, metal and capital goods stocks. The markets were bearish with BSE having 1,165 advances, 1,500 declines and 67 unchanged. On the NSE, there were 585 advances, 871 declines and 62 unchanged.
 
Automobile manufacturer Mahindra and Mahindra (M&M) on Wednesday reported a rise of 12.36% in its standalone net profit for the first quarter of the current fiscal. According to the company, Q1 standalone net profit stood at Rs955.21 crore from Rs850.09 crore for the quarter ended June 30, 2015. The company informed the BSE in a regulatory filing that its total revenue from operations during the quarter under review increased by 14.05% to Rs11,942.90 crore from Rs10,470.86 crore for the quarter ended June 30, 2015. The company said in a statement that while public investment expenditures remain strong, urban demand has been picking up pace since the third quarter of the previous fiscal and is expected to receive further impetus from the Seventh Pay Commission awards, which will be given effect in the current month. The company elaborated that rural demand can be expected to gather further strength in the coming months given the robust rainfall received thus far and IMD's (India Meteorological Department) prediction of normal rains for the rest of the monsoon season. The company cited that weak external demand, underutilised capacities and balance sheet stress have hindered domestic private investment. The company’s shares closed at Rs1,420.70, down 1.88% on the BSE, on Thursday.
 
Positive global cues on the back of higher crude oil prices lifted the Indian equity markets on Friday. Healthy buying was witnessed in banking, automobile and metal stocks. However, negative European markets and caution over the upcoming macro-economic data capped gains in the afternoon session. Stocks of SBI (State Bank of India) traded firm on positive Q1 (first quarter) earnings. However, IT (information technology) and pharma stocks traded with mixed sentiments on profit booking, pointed out market analysts. Friday’s rally was sufficient for the major indices to go up by around 1% over Thursday’s close.

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COMMENTS

Vikas Das

9 months ago

Hi, very informative article.
I am 28 years old and I am searching for good investment options. I just came to know about peer to peer lending as an emerging platform in India and wanted your views on that.

Time for clarity on Fintech regulations
There has been an exponential rise in the number of FinTechs in the country during the last six months. India now ranks 17th in the world in terms of number of FinTech companies present in the country. With the declaration of the Startup Action Plan, there has been a sudden boom in the number of FinTechs. The FinTech segment also attracts a huge number of investors and funding deals. The Indian FinTech segment mainly comprises of –
 
1. E-wallets / mobile wallets 
 
2. Smart tax solutions
 
 
4. Payment gateways,
 
 
However, for the FinTech-based startups, the regulatory aspect still remains unclear.
 
As most of the activities mentioned above involve handling of large financial data of the general public, the general presumption is that a separate registration would be required. However, these activities either do not come under the scanner of the Reserve Bank of India (RBI) or do not need any registration requirement.
 
Most fintechs are a fusion of a payment solution and technology (Pay-tech) to avail goods and services. Innovative payment solutions are a result of advance in technology and lower communication cost. This has enabled us to experience cashless transactions. This fundamental barrier of risky cash transactions can be overcome with the exchange of information in place of hard cash between the parties to the transaction.
 
To overcome this barrier, the Payment and Settlement Systems (PSS) Act, 2007 was enacted to govern and regulate the activities which involved payment and settlement of transaction as a substitute to paying or settling a transaction by cash or by other means of physical movement of payment instruments to settle a transaction.
 
Plastic Money
 
The RBI in exercise of the powers given to it by the PSS Act, issued the Payment and Settlement Systems Regulations, 2008. These regulations were made applicable to all the entities desirous of setting up the payment system. The words “applicable to all the entities desirous of setting up a payment system in the nation” is read differently by different entities, which is the main cause of confusion for FinTechs engaged in activities related with facilitation of payments and settlements. At first, it seems that the Payment and Settlement Systems Regulations, 2008, is applicable to all entities engaged in activities of payments and settlements. This view however, changes when we go a bit deeper into the modus operandi of the activities of the FinTechs engaged in payments and settlements.
 
FinTechs whose activities are directly related to payment, clearing and settlements of transactions are – M-wallets, E-wallets, Payment Gateways and Pre-paid Payment Instrument Issuers. The entities engaged in the above mentioned activities directly form part of the payment and settlement system and hence, are regulated by the RBI except the payment gateways. This is because the activities of the payment gateways are not seen as payment and settlement of transactions. To understand the point as to why the payment gateways are not seen as payment system providers by the RBI, we need to first understand three important points – 
 
1. Who is a payment system provider?
 
The PSS Act defines a system provider as – ‘system provider’ means a person who operates an authorised payment system.
 
2. What is a payment system?
 
The PSS Act defined a payment system as - “payment system” means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange;
 
3. Modus operandi of payment gateways.
 
a. The buyer/ cardholder fills out a payment information form to pay for a purchase at a merchant's website checkout.
 
b. The gateway collects the payment information and forwards it (securely encrypted) to the processing bank (gateway's nodal account maintaining bank) for authorization.
 
c. The processing bank sends the request, through Visa, Master Card or RuPay’s payment networks, to the card issuer or directly to the buyer's bank (in case of net-banking transaction).
 
d. The card issuer or bank approves or declines the transaction and sends its response, through Visa, MasterCard or RuPay, to the processing bank.
 
e. The processing bank forwards the response, through the gateway, to the merchant who completes the transaction accordingly.
 
f. In the case of an approved transaction, the merchant deposits the receipt with its processing bank, requesting payment.
 
g. The processing bank then credits the merchant’s account and submits the transaction to Visa, MasterCard, RuPay or buyer's bank for a settlement.
 
h. Visa, MasterCard, RuPay or buyer's bank then pays the processing bank, while simultaneously debiting the card/ account holder's account. 
 
The entire process is completed in less than five seconds, by way of high-speed transfers of encrypted data from one point to the other and back.
 
From a reading of the above points, we can understand that, to be identified as a payment system provider the entity must be in the activity of – 
 
i. Effecting payments between payer and beneficiary; and/ or
 
ii. Effecting clearing and settlement service.
 
Clearly, the gateways merely act as information exchanges, facilitating payments and settlements and not providing the services to effect payment, clearing and settlements. The activities of payment, clearing and settlements are carried out by the processing banks. Hence the gateways are not recognised as payment system providers by the RBI. 
 
However, the gateway does handle sensitive information of public, which includes credit or debit card numbers, ATM PIN, internet banking passwords, CVV numbers of the cards and other information. This information can be misused. While the PSS Act has paved the way to move on to a cashless economy, where payments and settlements will be by way of information exchange between centralised data centres, we need comprehensive regulation to keep a check on the activities of these emerging business activities.
 
(Ameet Roy works as Executive in Financial Planning Division at Vinod Kothari Consultants Pvt Ltd)

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Dhanlaxmi Bank fails to repay a coupon on debt instrument indicating capital pressures
Dhanlaxmi Bank's failure to pay a coupon on a subordinated debt instrument in July 2016 highlights the increased risk to bank capital investors from the mounting asset-quality and capital-adequacy pressures on India's banking sector, says Fitch Ratings.
 
Fitch says, "This was the case in 2014 at United Bank of India, and more recently at UCO Bank and Indian Overseas Bank. However, Dhanlaxmi Bank is a privately owned, small regional bank that was unable to attract new capital from its shareholders. State support appears not to be on offer, and therefore creditors are more exposed to non-performance if there are capital pressures." 
 
"This is the first time investors in India have had to forego interest on a bank capital instrument. We view this as a positive development for a system with a high expectation of support for banks and where moral hazard has developed around the assumption that support could be extended to regulatory capital instruments," the ratings agency says in a report. 
 
The Reserve Bank of India (RBI) can prohibit banks from paying coupons on subordinated debt instruments if capital adequacy ratios fall below the minimum requirements. RBI raised these to 9.625% in April 2016 from 9%, exposing creditors to risks at banks with tight capital ratios. The RBI is progressively pushing minimum capital requirements higher to meet Basel III capital requirements, and will reach 11.5% by end-March 2019. Systemically important banks will have a higher threshold of an additional 0.2%-0.6%. 
 
Fitch says, market concerns about bank capital have increased because of the RBI-imposed asset-quality review, which uncovered higher non-performing loans, triggering first-time losses at some banks. This limits banks' ability to generate new capital internally and makes it more difficult for them to access new sources of capital from the market, it added. 
 
"We believe Indian banks will need to raise an additional $90 billion of capital by 2019 if they are to meet minimum capital adequacy requirements. As long as potential capital shortfalls persist, creditors will remain exposed to high non-performance risk, which will affect banks' market access to new capital. This is likely to put pressure on the government to inject additional capital into the banks, over and above what it has budgeted so far," the ratings agency says. 
 
According to the report, capital ratios at the state-owned banks, which represent around 75% of sector assets in India, are particularly thin. 
 
The RBI appears to be making a distinction between banks that have new capital lined up, which so far have been public-sector banks, in decisions about the performance of regulatory capital instruments. Where capital ratios fell below, or very near to, regulatory minimum requirements, public sector banks have received capital injections from the government and were able to make coupon payments on regulatory capital instruments, it added.  
 
Fitch Ratings says, sovereign support remains a relevant ratings factor for it, particularly for the large state-owned banks and systemically important private-sector banks. 
 
"We think asset-quality indicators are close to their weakest point, but expect bank earnings to remain weak at least for the next 12-18 months. Capital ratios will continue to show signs of strain over the short to medium term, and banks will remain under pressure to raise additional funds. Until they do, risks for creditors will remain high," the ratings agency concluded.
 
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