It was an eventful week with release of some annual economic data, series of adjudication by regulatory bodies and turmoil again in debt and MF market with downgrades of some debt papers of Reliance Capital and NCLAT decision.
Government’s efforts to improve tax compliance appears to be bearing fruit with GST collection reaching a record high at 33Rs 1.14 lakh crore for April’19. (April collection refers to business undertaken during the month of March). After hitting a low of Rs 97,000 crore in February, collection has improved impressively and has been more than Rs 1 lakh crore in both March and April. In another economy news, core sector comprising of eight sectors, recorded growth of 4.3% during FY19, same as in FY18. Growth rate for previous three months had been close to 2% giving policy makers reason for worry. Among individual sectors, Cement and coal have outperformed with growth rate of 13.3% and 7.3%. On the other hand, crude oil production decline by 4.1%, seventh consecutive year of decline.
In a landmark judgment, Securities & Exchange Board of India (SEBI) pronounced NSE, some of its officials, certain brokers and other individuals guilty of major lapses in governance and misusing the system for undue gains. Case dates back to the period 2010-15 and relates to what is infamously called, “co-location scam” where some of the brokers were given preferential server space in NSE’s server room. This, together with use of dark fiber and the then existing tick-by-tick (tbt) data transfer mechanism helped these brokers gain faster access to NSE data. SEBI imposed fine of over Rs 1,000 crore on NSE and barred two of NSE’s former CEOs from holding position in any listed company or financial body for five years other than monetary fine. The case is significant as it involved manipulation of technology and must have required considerable effort on SEBI’s part to assemble all the facts and arrive at a decision.
In another case, National Company Law Appellate Tribunal (NCLAT) reversed its earlier decision barring banks from classifying its exposure to IL&FS as NPA. The ban was contested by RBI citing prudential banking practice leading to its cancellation now. Classifying the debt as NPA means banks will have to set aside provision which will affect their profits. However, prudent banking requires that banks set aside capital against NPAs to reflect its actual financial health. IL&FS and its subsidiaries have over Rs 90,000 crore of debt and the government appointed board has been trying to sell company’s assets to pay back the lenders. Offer of for Rs 4,500 crore for wind energy business was received recently which covers complete dues on the banks and involves no haircut.
Reliance ADAG group continues to grapple with uncertainty and financial stress with downgrading of some of its short term debt paper by ICRA. The group, trying quite frenetically to sell its assets, is sitting on debt of over Rs 50,000 crore and most of its companies are under stress. In another development, National Company Law Appellate Tribunal (NCLAT) approved the request of group company, Reliance Communication to proceed with insolvency proceedings. The case is interesting since R-Com opposed the initiation of proceedings when its operational creditor, Ericsson, had filed for its insolvency. And when R-Com requested for insolvency, Ericsson opposed the same! However, the bigger issue is, how much will the banks be able to recover? The group had also entered into an understanding with some of its lenders some months back not to sell its pledged shares for six months. They could also be staring at losses as the share prices have declined sharply.
In the international news, US fed maintained status quo in its policy meeting in a keenly watched event world over. US economy stands at an interesting at the moment as even Fed is not sure, which way it may need to move in the months ahead! While Fed had begun its monetary tightening cycle with three rate increase in 2018, it had to take a pause because of a distinct threat of recession. While rate increase doesn’t look like a possibility now, what is being watched is – will the condition deteriorate so badly that fed is forced to cut rates? Even though ground situation doesn’t look that alarming, crude price, trade tensions etc pose distinct risk.
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