At Capitalmind Premium, we have a very active Slack channel where we discuss a lot of interesting topics. In there, a number of interesting links come our way. Here’s the most interesting of such links shared by our members in recent days.
South Africa’s New Registrar of Banks Makes Shocking Discovery About Bank Licenses
When Kuben Naidoo was appointed as South Africa’s Registrar of Banks in 2015, he thought it was an opportunity to bring order to the country’s banking system. But when he asked his colleagues to point him to the banking division, he received the shock of his life. He was told that there was no banking division, because the government hadn’t received an application for a new bank in more than a decade. This made him get to work. Since that time, the office of the Registrar of Banks (South Africa) has received 27 applications to start new banks. South Africa’s banking industry is dominated by five large banks, which manage 90.5% of the country’s banking business between them. Link
Dhanuka Lab Acquires Orchid Pharma for Rs. 1116 Crore at the NCLAT
The NCLAT has approved the sale of Orchid Pharma to Gurgaon-based Dhanuka Lab for Rs. 1116 crore. Orchid Pharma owes a consortium of banks more than Rs. 3200 crores. The new deal will force banks to take a 65% haircut on their investment. Accord Life Spec had filed an objection to the deal stating that Punjab National Bank, and Punjab International Ltd. had withdrawn their approval to the resolution process, bringing down the percentage of those in favour of the deal to 65.6%. However, the NCLAT didn’t budge and awarded the deal to Dhanuka. Orchid Pharma was a major maker of APIs. It was forced to sell its penicillin business to U.S based Hospira in 2012, for $200 million to reduce debt, but that didn’t help much and company was finally dragged to the NCLAT in 2017. Link
Center Says E-cigarettes Deliver ‘Drugs’, Will Ban Them Soon
Nicotine-inhalers or ENDS (Electronic Nicotine Delivery Systems) are electronic devices that use a heating element to turn liquid nicotine into vapour which is inhaled by the smoker. Now, the government is all set to ban these devices contending that they deliver liquid nicotine, which is a ‘drug’. Currently, the Cigarettes and Other Tobacco Products Act does not regulate the sale and distribution of e-cigarettes. So the government had to find another solution. It turned to Section 3 of the Drugs and Cosmetic Act, 1940, which defines ‘drugs’. It said liquid nicotine was a drug, and therefore banned under Section 26 (A) of the Drugs and Cosmetic Act. There are over 460 brands of e-cigarettes in India, which deliver nicotine in more than 7700 flavors. Link
India’s Market Turnover is Among the Lowest for Major Economies Worldwide
India may be one of the largest economies in the world, but its market turnover (turnover in cash market by market capitalization) is nothing to write home about. Our market turnover is just 58, compared to 206 in China, 174 in South Korea, and 109 in the U.S. Basically, market turnover is more than market capitalization in these countries, while it is just more than half in India’s case. Even smaller markets like South Africa and Brazil fare better than India on this metric, at 79 and 147, respectively. Observers say India’s low record is to be blamed on high costs involved in trading and increasing taxes, including the securities transaction tax. These have worked to reduce volume and liquidity in the traded securities. Link
India’s 2019 Defense Budget is Disappointing, Say Defense Experts
The new Finance Minister, Nirmala Sitharaman, has kept the Indian defense budget unchanged at Rs. 3.18 lakh crore, from the interim budget announced in February. The new budget is a mere 6.87% more than last year’s defense budget, and comes to 1.6% of the country’s gross domestic product. Industry sources said that this was the lowest allocation for the defense sector, since the 1962 India-China war. According to Maj. Gen. Aswani Siwach (rtd), former head of the Territorial Army, the allocation does not make any space for modernization, and for a country like India, which is surrounded by potential threats, the defense budget should have been at least 2% of the GDP. Link
Govt Makes Income Tax Filing Mandatory in Some Cases
From now onward, if you spend more than Rs. 2 lakh on a foreign trip, more than Rs. 1 lakh a year on electricity bills, or deposit more than Rs. 1 crore in a bank account (in a year), you have to compulsorily file an income tax return, even if your income is less than Rs. 5 lakh (the current threshold for income tax returns). Moreover, from now on, any person who claims long term capital gains tax exemptions, under Section 54 of the Income Tax Act will also have to file an income tax return. The silver lining is, these amendments will come into force only from April 1st, April 2020, applicable to assessment year 2020-2021 and thereon. Meanwhile, the government has taken other steps to increase tax collection, and to make cash transactions more expensive, like levy of 2% TDS on deposits of more than Rs. 2 crore per year by a cooperative bank, NBFC or post office into the bank account of a recipient. Link
Payments Council of India Raises Objection to Zero Merchant Discount Rates
The Payments Council of India has said that the recent government decision to do away with merchant discount rates, will sound the death knell for an industry which is mainly dependent on merchant discount rates for revenue. The Payments Council of India is a representative body of more than 100 payment and settlement service providers. According to Vishwas Patil, PCI Chairman, and Director at Infibeam Avenues, the merchant discount rates in India, are among the lowest in the world. Without the authority to levy MDR, most payment and settlement service providers in India will be forced to shut shop, vs banks which have other means to recover the shortfall. Link
Bank of Baroda Acquires Rs. 3000 Crore Worth of DHFL Loans in Lieu of Debt
Bank of Baroda has acquired Rs. 3000 crore worth of DHFL housing loans, which will be adjusted against loans made to the non-bank lender. Before the transaction, DHFL owed Bank of Baroda close to Rs. 6500 crore. These acquired loans are actually going to improve Bank of Baroda’s loan book, because they happen to be of a higher quality. The loans will still be collected by DHFL, which will keep 10-15% of the repayment to itself and transfer the rest to Bank of Baroda. The transaction is a form of securitization, the major difference being the borrower will use the funds to address its liquidity needs, rather than using it to cancel future loan repayments. Link
McLeod Russel Net Loss is Not Rs. 4.4 Crore, But Rs. 1821 Crore Says Auditor
McLeod Russel’s auditor has made a series of startling revelations, including under reporting of losses by MSIL (McLeod Russel India Limited) and a series of inter-corporate deposits, without provision. It also said that MSIL currently has a negative net worth, which if true, will be disastrous for the company’s stock holders. MSIL’s management has rejected these allegations, saying the company’s losses could be traced to a downturn in the tea industry and higher production costs. MSIL has postponed its account finalization twice already and has also suffered a ratings downgrade, for refusing to cooperate with rating agencies. Link
Welspun on the Brink of Settling Claims, Receives U.S Court Approvals
Welspun Corp. has received the approval of a U.S court to settle all legal claims brought against the company, due to mislabeling of certain cotton products. In 2016, Target Corp. terminated its partnership with Welspun Corp. after it was revealed that the latter had supplied inferior cotton textiles to Target Corp, after mislabeling them as Egyptian cotton-made. Subsequently, a number of class-action lawsuits were filed against Welspun in the U.S. Recently, the company reached an understanding with the plaintiffs to settle the cases, by increasing payouts on the individual cases without breaching the $36 million cap it had set for settlements. The company has also taken many steps to prevent a recurrence of the issue. Link
CLP India Purchases Power Transmission Assets Worth Rs. 3275 Crores
CLP India, a joint venture between CLP Group, one of Asia’s largest power businesses and CDPQ, a large Canadian institutional fund manager, has agreed to purchase three power transmission assets belonging to Kalpataru Power Transmission Ltd. and Techno Electric & Engineering Co. Ltd. for Rs. 3275 crores. The projects are located in Madhya Pradesh, Bihar-West Bengal and Assam, Nagaland, and Manipur, respectively. CLP India has been looking to enter the power transmission sector, and this will be the company’s first deal in this segment in India. Link
Can the Answer to Cox & Kings Commercial Paper Default be Traced to its Business Model?
Recently, Cox & Kings defaulted on repaying commercial papers worth Rs. 150 crores. Accounting experts have opined that the reason for the company’s debt default can be traced to its business model. For example, in the last four years, there has been a drastic increase in the company’s receivables (from Rs. 952.6 crores in FY-16 to Rs. 2031.3 crores in Fy-19). Receivable days have also shot up from 122 days in FY-16 to 269 days in FY-19. The question is, why does a travel company have such high receivables? The company has also been borrowing money on the basis of its standalone business to invest in its subsidiaries, many of whom are making losses. This has created a cash-flow problem for the company, because now it has to generate more sales just to pay interest on its loans. Link
Relaxed FPI Norms Will Help InvITs Attract Foreign Capital
The recent government of India decision to relax the norms for FPI investment in InvITs has come as a huge relief to a number of Indian companies who’ve set up InvITs or are in the process of doing so. Until now, FPIs could only invest in the corporate debentures of InvITs, which was not very attractive to them. From now on, they can also invest in the listed securities of these InvITs. A number of Indian companies are going to set up new InvITs soon to monetize assets and hive off debt, including Vodafone Idea, Reliance Industries, and Tata Power. With internal sources of credit drying up and foreign debt becoming more expensive, the government’s decision to make InvITs more accessible to FPIs, is a welcome change and will benefit these companies a lot. Link
RBI Panel Pours Cold Water on Government’s Dreams of Receiving Surplus Windfall from RBI
A panel of eminent economists, headed by former RBI chairman Bimal Jalan has estimated that the surplus money with RBI that can be safely transferred to the government, is just about Rs. 8000 crores and not hundreds of crores that some in the government were salivating for. Five of the six members on the panel agreed with this finding. The sixth member was Subhash Chandra Garg, the Economic Affairs Secretary, who showed his objection to the report by refusing to attend two meetings where the report was to be finalized before its presentation to the government. Moreover, if and when Rs. 8000 crores is transferred to the government, it won’t happen all at once but will be released in staggered amounts. Link
Government Wants to Extend ELSS Benefit under Section 80C, to CPSE and Bharat-22 ETFs
The government of India has written to the Central Board of Direct Taxes, seeking its opinion on whether Section 80C income tax benefits available to ELSS schemes can also be extended to the CPSE and Bharat 22 ETFs. Investments into equity-linked savings schemes or ELSS, up to Rs. 1.5 lakhs per year, are eligible for tax deduction. The only problem is, these investments are locked in for 3 years. By extending the scheme to CPSE and Bharat 22 ETFs, the government may be wanting to encourage investments into these schemes. CPSE ETF consists entirely of central PSUs, while Bharat ETF consists of 22 companies, 19 government owned companies and three private ones, where the government has a minority stake. Link
Economic Survey says, Mutual Funds Received 60% Less in Investment Inflows During 2018-19
According to Economic Survey 2018-19, Indian mutual funds saw a 60% drop in investments during 2018-19, compared to a year ago. During 2018-19, mutual funds received Rs. 1,09,701 crores, compared to Rs. 2,71,797, compared to a year ago. This is despite the fact that the BSE Sensex witnessed a 17.3% rise in March 2019, from March 2018. The NIFTY 50 also gained 14.9% during the same period. Market watchers have blamed the lack-luster show in mutual fund investments on trade wars, liquidity woes, uncertain market conditions, and weak macros. Meanwhile, the cumulative investments held by all Indian mutual funds in March 2019, increased by 11.4% (to Rs. 23,79,584 crores from Rs. 21,36,036 crores). Link
Finance Minister Ends Redemption Reserves Clause, Bringing Relief to NBFCs
The recent budget brought good news for the retail corporate bond market after FM Nirmala Sitharama said that henceforth, there won’t be any debenture redemption reserve requirement. Until now, NBFCs were supposed to set aside 1/4th of the amount they raised via bond sales to safeguard redemptions when the bonds mature. Of the money that was set aside, the company had to invest 15% in liquid government securities, which gave relatively lower interest, compared to some other securities. This provision discouraged many NBFCs from using the bond route to raise funds. Now that the clause has been done away with, a number of companies that are planning to raise funds through the bond route, like M&M Finance, Shriram Transport Finance, IIFL Finance, will benefit. Link
