Are You Losing Faith in Equity Investments?
My view is that the Indian economy is going to take a very long time to recover from the impact of our containment strategy for COVID-19. We are in for a period of deep pain that will be most excruciating at the bottom of the pyramid. More than 100 million families, who are part of the informal economy or the ‘unorganised’ sector, will be struggling to make ends meet. They are the ones who...
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  • Nifty, Sensex Under Pressure Again – Monday closing report
    We had mentioned in last week’s closing report that Nifty, Sensex would move with global trends. The major indices suffered major losses in line with global trends. On the NSE, there were 702 advances, 1,095 declines and 337 unchanged. The trends of the major indices in the course of Monday’s trading are given in the table below:
     
     
    Bear run continued in the Indian stock markets with the BSE Sensex falling over 1,000 points.
     
    BharatPe has partnered with ICICI Lombard to roll out ''COVID-19 Protection Insurance'' for shopkeepers. According to the policy, on diagnosis of COVID-19, the policyholder will be paid 100% of the sum insured, irrespective of the hospitalisation expenses. The premium starts at Rs 199 provides Rs 25,000 sum insured and value-added benefits, like health assistance and CHAT/virtual assistance, tele-consultation and ambulance assistance, as part of the offering.
     
    Maruti Suzuki has decided to extend the validity period of warranty and service of customer vehicle falling due during the period of lockdown. It has decided that customer vehicles, whose free service, warranty and extended warranty are scheduled to end in the period from March 15, 2020 to April 30, 2020 are now being extended up to June 30, 2020.
     
    Godfrey Phillips India suspended the operations in all its plants and factories in view of the nationwide lockdown.
     
    The Asian Development Bank (ADB) has signed an agreement to lend up to $60 million in Indian rupee equivalent to Aavas Financiers Limited to improve access to housing finance for lower income borrowers in the country, particularly women.
     
    Asian Paints has committed Rs. 35 crore towards Covid-19 Relief Fund. The contribution will be made to the Central as well as other Emergency Relief State funds to combat Covid-19 pandemic.
     
    Dhampur Sugar Mills has started production of 'hand sanitizers' at its unit at Dhampur from 29th March, 2020.
     
    Sonata Software announced that in the wake of Corona Virus (COVID-19) outbreak, one of its large clients had to temporarily suspend their operations thus affecting a majority of services to them. This will in the immediate future have a significant negative impact on our profits by up to 40%. Currently the firm expects this to affect its Q1 and Q2 performance for FY 21.
     
    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:
     
  • User 

    COMMENTS

    Ramesh Popat

    2 months ago

    Can u pl. Include FII/DII buy//sell figures?!

    Widespread Sell-off in Stock Market Increases Risks in Loan Against Shares Transactions: Ind-Ra
    A widespread sell-off in the equity markets amidst the coronavirus (COVID-19) outbreak is likely to deplete the cover available to investors in loan against shares (LAS) transactions. This could require borrowers to pledge additional shares to replenish the share cover, resulting in a rise in the proportion of pledged promoter holdings, says India Ratings and Research (Ind-Ra).
     
    In a report, the ratings agency says, "The decline in equity market prices comes against the backdrop of rising uncertainty surrounding the extent of disruption emanating from the COVID-19 outbreak. Equity prices bear a strong correlation with the earnings quality of an entity. Thus, the weakening share price in this case is accompanied by a similar erosion of the liquidity buffers of the underlying borrower. This could affect the entity’s ability to meet any unprecedented cash outflows emanating from an untimely recall of LAS or even pledge additional liquid collateral."
     
    In assessing LAS transactions, Ind-Ra evaluated two parameters—the probability of liquidation and the quantum of loss on liquidation. The agency says it believes that in the current market conditions, not only has the probability of liquidation increased, due an increase in encumbrances, but also the loss on liquidation is expected to be higher than what would have been initially factored in by lenders, owing to the sharp correction in equity prices.
     
    According to the ratings agency, 21 out of the BSE 500 companies are likely to face early redemption. Ind-Ra says its analysis indicates that 21 BSE 500 companies will be required to pledge more than 100% of the promoter holding as on 19 March 2020 to maintain a minimum 2.5 times share cover, assuming the quantum of LAS transactions outstanding as on 31 December 2019. 
     
    "In other words, these entities could be required to pledge additional collateral or deposit cash to maintain the original security cover. For these companies, more than 75% of the promoters’ holding was already pledged as on 31 December 2019. Consequently, investors in these LAS transactions could either be required to restructure these exposures, liquidate the collateral or in some cases also recall the loans," it added.
     
     
    According to Ind-Ra, during this period, financial flexibility of corporates to be constrained. Even in cases where the promoters have additional unpledged shares available, the rise in the proportion of shares pledged is likely to impede the financial flexibility of these entities in these challenging times, it says, adding, the proportion of unencumbered promoter shareholding determines the maximum share price correction a LAS transaction can sustain and, hence, is directly related to the probability of liquidationc and by extension probability of default.  
     
    Given that Ind-Ra’s adjusted base case assumes a gradual recovery from the COVID-19 outbreak, the recovery in the equity prices could also be protracted. In case there is a further build-up of risk aversion in the capital markets, equity prices could fall further—thereby necessitating additional share pledges to maintain the security cover, it added.
     
    Ind-Ra says its analysis indicates that the companies already classified as elevated risk of refinancing as per its asset funding and refinancing risk study are likely to be most affected. A large number of these companies already have a significant proportion of their promoter holdings pledged, it says. 
     
    As per the ratings agency’s analysis, of the 58 companies likely to have more than 50% of their promoter holdings pledged, 19 are already in default while another 19 are classified as elevated risk of refinancing.
     
     
    According to Ind-Ra, there is a strong correlation between operating cash flows and share price movement. As on 31 March 2019, the total debt outstanding with the aforementioned 58 companies stood at Rs5.35 trillion, while Ind-Ra estimates LAS transactions to account for Rs343 billion (at 3 times share cover) to Rs411 billion (at 2.5 times share cover). "It is imperative to note that the entire quantum of LAS transactions may not be outstanding on the books of these companies; rather promoters often pledge the shares of operating entities to meet the liquidity requirements of other group companies," it added.
     
    Ind-Ra’s analysis also indicates that sectors such as power, construction and metals—which have historically been most exposed to cyclical risks and have recently been under stress are likely to see a high proportion of their promoter holdings pledged. This highlights the inherent risk in these LAS transactions—i.e., the high degree of correlation between the earnings, liquidity and share price.
     
    Historically, the ratings agency says, players in these sectors have been accessing the LAS market to fund cash flows mismatches. "Incidentally, the fixed asset coverages for these sectors have been low and therefore, the ability of these entities to raise additional funds organically using operating assets has been restricted. This leaves investors in LAS transactions extremely vulnerable as the share covers deplete in tandem with the liquidity of these borrowers," it added.
     
     
    In an event of defaults, Ind-Ra sees coercive debt exchange taking place. In the past, there have been cases where the promoter had asked the investor to delay the margin call even in the event of breach of covenant. "The investor or lender had to comply with the borrower as the liquidation of shares may result in a loss on the investment; which they can avoid if they believe that the promoter should be able to make payments after the extension," the ratings agency says.
     
    Ind-Ra says it perceives these exchanges as coercive in nature however, given the present situation and the dispensations being provided by the Reserve Bank of India (RBI) and it will evaluate the implications and reflect it appropriately in the rating.
     
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    User 

    COMMENTS

    mahesh.bhatt

    2 months ago

    Mangna Maran Saman Kabir Mahesh Bhatt Kirticorp

    rajoluramam

    2 months ago

    With out any calamity in the stock market, GLOBAL TRUST BANK failed. Share holders got a zero. The shares came down so heavily, probably the value is much less than the margin fixed by RBI. Banks advised the loaners who took loans against equity shares. If the loaner is not having any more stocks and no further security, banks are helpless, as the share index came down by nearly 12000 to 13000 points. This is another on the banks.

    Ramesh Popat

    2 months ago

    so the crisis deferred for a quarter!

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