Indian Stock Markets Are Idling At A Turning Point

On today’s episode, financial journalist Govindraj Ethiraj talks to veteran economic journalist and New Indian Express columnist Shankkar Aiyar.


Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (01:00) Indian Stock Markets Are Idling At A Turning Point
  • (03:48) Foreign Institutional Investors Are Back With A Bang
  • (07:28) India Makes Fresh Pitch To Tesla, Might Be Late Though
  • (11:54) Iron Ore Prices Are Falling, Copper Is Rising Now
  • (13:32) What Is The Most Important Economic Issue Facing Some 970 Million Voters As India Goes To Polls On April 19
  • (25:36) The Inherent Conflict Of Indian Promoters Buying Electoral Bonds


NOTE: This transcript contains only the host’s monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

The Stock Markets After The Turning Point

Last week was a turning point for the markets in a way because of the clear separation now between large caps and small caps.

While the market regulator Sebi has been issuing warning after warning for several weeks, the markets have begun reacting, also after it also emerged that some of the funding going into the middle of the market was dubious in nature.

Before I come to small caps, let’s pick up from Friday.

The BSE Sensex ended 454 points lower at 72,643, losing around 2 per cent in  the week while the Nifty 50 closed down 123 points at 22,023.

Wall Street which could provide some direction for Asia today was also weak.

The S&P 500 fell on Friday for a second weekly loss, with technology stocks under pressure. Other indices, the Dow Jones and Nasdaq Composite were all down as were tech shares like Amazon, Microsoft, Apple and Alphabet. Tech favourite Nvidia saw saws and ended lower on Friday but was up marginally for the week.

Now back home, the Sensex and Nifty as we said fell 2 percent each last week, while broader markets – the BSE Smallcap and the BSE Midcap – slipped up to 6 percent. 

Sectors like energy or oil refining companies were more hit because of a reduction in fuel prices by Rs 2 per litre in petrol and diesel which affects their margins.

But small caps are the hardest hit with MoneyControl estimating that some Rs 9 trillion in investor wealth has been lost due to this market correction since February 19, accounting for more than 50% of the total value destruction.

From April 1, 2023, to February 19, 2024, the BSE Sensex posted a gain of about 24%, compared to BSE Smallcap’s 71%.

Small cap and mid cap are of course broad brushes and there is reason to be wary of stocks in this segment, also because of the mutual fund stress test directive and we will come to that shortly.

But as analysts like G Chokkalingam told The Core Report last week, he welcomed the sharp corrections in the smaller cap segments because there were good stocks in them and patient investors would return while the antsy ones would obviously exit.

Elsewhere, oil prices are now over $85 a barrel at $85.34. This is still within the rough band it has been moving in recent months but on the higher side.

Higher oil prices are a matter of concern for countries like India in general and now in specific with access to cheaper Russian oil diminishing. Oil stocks as I mentioned are already weak following a reduction in selling prices of refined products like petrol and diesel.

Foreign Institutional Investors Are Hitting The Accelerator 

Just when everyone else is going easy or having second thoughts about segments of the market like small caps and mid caps, foreign institutional investors have bounced back quite strongly into the Indian equities.

FPIs have bought shares worth Rs 40,710 crore in just the first 15 days of March, according to depository data quoted by PTI.

You have to see this number in the content of February and January. In February, FPIs bought just Rs 1,539 crore of shares while in January they sold Rs 25,743 crore worth of shares.

The reason is being attributed to how bond yields in the US are moving which have been low though that is changing.

On the other hand, FPIs continue to buy into debt and this number is expected to rise further.

Moreover, FPIs have been pumping money into the debt markets for the past few months driven by the upcoming inclusion of Indian government bonds in the JP Morgan and Bloomberg indices.

Investment by foreign portfolio investors (FPI) in the Indian debt market so far in the current calendar year has hit Rs 45,572 crore or some 66% of all debt investments of Rs 68,663 crore in the whole CY 2023.

Elsewhere, India’s merchandise exports rose 12% to a 11-month high in February of $41 billion while imports increased 12% toa fourth month high of $60 billion, led by gold imports which rose 133% to $6.15 billion, the ET reported.

The export surge was driven by engineering goods, electronic items and pharmaceuticals products.

A Stress Test For Small Cap MF Investors

 Its an interesting mathematical and perhaps sociological experiment but grounded in real money

The Securities & Exchange Board of India, responding to overheated small and mid cap stocks issued a 15-day disclosure directive to ascertain how soon a fund manager shall be able to liquidate holdings based on recent trading volumes, if investors were in a hurry to exit positions owing to adverse market conditions.

So it is hypothetical.

But the calculations are real and perhaps useful to see though the precise impact, I am assuming, is tough to measure.

The objective of the stress test is to actually make the retail investor aware of the potential risks and impact of the market volatility on the liquidity of the scheme.

The six largest small schemes would need more than 20 days to liquidate half their holdings, Business Standard reported.

For mid cap funds, the time required to sell half the assets of the top six schemes varied between 7 and 34 days.

SBI MF which manages the 3-rd largest small cap scheme with a corpus of 25,500 crore said it takes 60 days to sell half of the assets of the fund and 12 days for a quarter.

This is obviously tough and I am not sure many investors, particularly those who have been charging in in the last year or so, will really care. 

If prices fall too fast and too soon as they have, they would exit or go easy for some time. This has happened before, and many times.

On the other hand, the stress test for mutual funds is a stress test for investors too, as they wonder and fret about what could happen and if their mutual fund would protect their investments as opposed to it all happening at one shot.

India Makes Fresh Pitch To Tesla

The Indian Government is not giving up on bringing Tesla to India as we have been discussing here.

In its latest move, the  Ministry of Heavy Industries (MHI) on Friday announced a new policy to boost electric vehicle (EV) manufacturing in the country by imposing lower import taxes on certain electric vehicles for companies committing to at least $500 million (Rs 4,150 crore) in investment and a manufacturing plant within three years.

India will reduce import duties for interested EV makers to 15 per cent from the current 70 per cent or 100 percent on vehicles having a CIF (cost, insurance, and freight) value of $35,000 and above for a period of five years from the date of issuance of the approval letter by the government. 

The limit is 8,000 cars per year.

This would mean a car worth almost Rs 30 lakh before it appears at dealerships, road taxes and so on would take prices up further.. 

Which is obviously a small segment and reflects the clout of the Indian automotive players, both domestic and foreign, in ensuring a level playing field.

My sense is that had they not put their foot down, Tesla would have gotten away with much more.

At this point of course, Tesla does not seem in an expansionary mode and there are still competing offers from countries like Thailand on the table. So we will see.

Maruti Suzuki Chairman R C Bhargava told Business Standard he was comfortable with the new policy, saying cars over $35,000 was a very small market segment in the ICE (internal combustion engine) space, and even more so in the EV space.

Also, it has restricted the number of cars that can be imported to a minimum, which again won’t impact them, he said.

To  a specific question, he said that he was sure the Europeans, Vietnamese and Tesla would come to India under this scheme..if they saw a market.

Mr Bhargava said EV makers had to grapple with with other challenges, such as whether the country has enough charging stations for customers to feel comfortable about the range, sale value of a second-hand electric car, what the gap in price between ICE and a similar EV model, and will that get neutralised by lower operating costs.

Experts who have appeared on The Core Report have pointed out the rising concern among Indian buyers over the sale value of a second hand electric car and the secondary market in general.

Hybrid cars now sell more than electric cars in India.   

The new policy allows all international players, including Chinese manufacturers, to qualify for a duty reduction, provided they establish manufacturing facilities within three years and achieve a localisation level of 50 per cent by their fifth year of operations in the country.

Currently, fully assembled completely built-up (CBU) vehicles priced at more than $40,000 attract a 100 per cent tax. 

Those priced below $40,000 are subject to a 70 per cent tax. Completely knocked-down (CKD) units that require reassembly in the destination country already attract a 15 per cent duty.

Meanwhile, in another indication of how the electric car market is shaping up from the demand side, car rental giant Hertz is replacing its chief executive officer following what Bloomberg is calling a disastrous bet on electric vehicles that the company began unwinding in recent months.

Hertz had announced last year it would order 100,000 vehicles from Tesla Inc., sending the automaker’s market capitalization past the $1 trillion at the time.

The first domino to fall was when Tesla cut prices to keep growing vehicle sales which in turn caused resale values to fall and this was just after Hertz had added tens of thousands of Tesla cars to its fleet.

By December, Hertz started selling off 20,000 electric vehicles, or about a third of its EV fleet, as we had mentioned in The Core Report earlier as well. Germany’s Sixt SE — a leading car-rental in Europe — is taking even more drastic measures, phasing Teslas out of its fleet entirely, Bloomberg reported.

Iron Ore Prices Are Crashing

Iron ore futures fell below $100 a ton for the first time in seven months mostly thanks to investors betting on the fact that China’s property crisis will unlikely resolve itself this year, keeping steel demand low, Bloomberg reported. 

Iron ore, a key input into making of steel, has shed more than 30% since early January. Loss-making steel mills are buying less ore, and stockpiles are piling up at Chinese ports, Bloomberg reported.

Interestingly, India and Indian companies like Vedanta and NMDC exports iron ore to China.

An article in Business Line in late December said nearly 95 per cent of India’s iron ore shipments have gone to China, having risen quite sharply in the last five years. 

India is now a net importer of steel, reversing a three-year record. 

Over the last five years, exports to China (from India) have gone up sharply. 

According to Bloomberg, Chinese steel mills are starting to announce production cuts as spot steel prices are falling. The poor performance this year is a reversal from 2023, when iron ore outpaced base metals and other commodities to rack up a gain of 20%.

Interestingly, while iron prices are falling, copper has rallied above $9,000 a ton as supply cuts hit the market.

Copper rose 5% last week, after being dormant for several months. Copper is a key ingredient in electric vehicles and renewables, growth sectors.

A Billion Voters

Nearly a billion people will be eligible to vote in India’s general elections, to be held over almost seven weeks starting next month April 19.

The elections for 543 seats in India’s Lok Sabha, the lower house of parliament, will run in seven phases, with several states seeing multiple phases within them. Results are to be announced on June 4. 

More than 2,400 political parties are likely to put up candidates.

Almost 970 million Indians are registered to vote at over a million polling stations across the country. 

Some 497 million male voters and 471 million female voters are registered and the number of first time voters is around 18 million, this figure was around 15 million in 2019. In all, there are around 197 million registered voters in the 20 – 29 years or age group.

Women voters are important for several reasons and we will come to that shortly.

Votes will be vast via electronic voting machines which have been around for over 40 years and some 5.5 million machines will be scattered across the country.

Every voter should be within 2 kilometres of a polling station so registered voters will be able to find booths close to where they are.

So what is the one economic issue that is likely to dominate the voters’ mind, whether veteran, first time or by gender ?

And how will that play out against other issues playing on voters’ minds as they cast their ballots.

I reached out to veteran economic journalist and New Indian Express columnist Shankkar Aiyar and began by asking him what he felt was the most important economic issue at this time.

Electoral Bonds, Why Promoters & Companies Are Inseparable

When I pose this question, I mean should it be the company or the promoters.

First, a very quick background. Electoral bonds were introduced by the Government in January 2018 as a means of anonymously donating to political parties via the banking system.

The Supreme Court then blew the scheme open by making the State Bank of India, which manages the scheme, disclose all the donors and the amounts donated.

India is a family run business country, like most of Asia. That also creates peculiar situations where the interests of the promoter who holds a considerable stake in the company and the company itself may be tough to separate.

Let’s take the case of two instances which I picked up from reports including The Reporters Collective.

In the first case, a company that is clearly affiliated to Reliance Industries called Quik Supply Chain bought Rs 410 crore of electoral bonds between 2021 and 2024.

The second was more intriguing and involved a company called Infina Finance, half owned by the Uday Kotak family and the other half owned by a subsidiary of Kotak Bank, a listed and profitable company and bank. 

This entity bought Rs 60 crore worth of bonds according to reports between 2019 and 2021.

In both cases, there was a clear distance created from the main listed entities. There are some questions on where the money that these entities put into the electoral bonds came from but that is not germane to this discussion.

So in the case of Reliance and Kotak Bank, whose interests were these purchases of electoral bonds – it also does not matter to whom they went – serving, the company or the individual promoter?

In the case of Kotak, the alignment is clearly with founder Uday Kotak.

In that case, what could be the benefit of first buying these bonds and that too in this distanced manner.

The question could be a little more philosophical, what is the benefit to the individual here which is distinct from the company or bank? It is not like Uday Kotak would seek favours that are distinct from the bank he founded. Or did he?

Ditto with Reliance. The amount is too large for someone to say they did not know about it…like a crore or so from some subsidiary company in a very regional context. In the case of Kotak, the amount is quite significant, contextually speaking.

So my question is if they were to buy electoral bonds and that is fine, why did they not do it through their primary, listed companies since they are all profitable and the amounts would not make any real dent.

Would shareholders quibble? Maybe, maybe not. Would the boards resist ? Highly unlikely again, given the control these promoters have on them ? 

These transactions for sure protect the primary listed company from any scrutiny. But they don’t protect the founders or promoters. And to the extent that the two are inseparable, they don’t protect the company either.

At least that’s the way I see it, I am not sure there is any other way to do so, at least in India.

So, whichever way electoral bonds go, companies should feel free to buy them and then declare them transparently to their shareholders the moment they do. That is all that matters.

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