A turmoil in Indian markets : Opportunity for Indian firms

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Sameer Jain, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur.

—————————————————————————————————————–

Financial-Advisory

Indian stock market is still facing a downward trend with the public sector bank facing high pressure due to increased provisioning for the NPAs. Sensex is down nearly 7% in February and around 11%. Given the growth outlook of the world and the challenges in overseas market several foreign players had either scaled down or sold their wealth management businesses and exited the Indian market. With the foreign players slowing down and Indian players are now rushing to gain the additional market share of business and acquire talents from them.  IIFL Wealth Management has increased its advisor count by roughly 20 per cent in the past year, recruiting senior executives from foreign entities such as Citibank, Morgan Stanley and Standard Chartered. Domestic companies are trying to fill the gap created by the foreign companies. Other players such Anand Rathi Financial Services and ASK Wealth Advisor have also increased or planned to increase the their advisors count.

Last year, RBS sold its Indian wealth management business to Sanctum Wealth,  HSBC shut its private banking business in India, through which it provided asset management services to wealthy individuals. UBS and Morgan Stanley exited their wealth business in 2014. A few years earlier, Credit Suisse scaled down its Indian wealth management operations and DSP Merrill Lynch sold its domestic wealth management business to Swiss banking group Julius Baer. (source – Business Standard )

With promoters selling their stakes before the budget on 29th Feb, a  lot of new wealth is being added in the market. This have created an opportunity for the companies to cater high net worth investors. Given the volatility and the uncertainty in the market the role of the wealth advisors has become crucial. Given the various options of investments such as stocks, real state, bullion, etc quality of advice plays a critical role. As observed the stock market was declining while at same time real state price were stable and the gold prices have gained around 10%. Only the time will how the Indian wealth advisory firms are able to capitalize on this increased need of wealth advisors and gain the market share left by the foreign players.

References-

http://www.business-standard.com/article/markets/indian-wealth-managers-rush-in-as-foreign-players-exit-116022400896_1.html

http://www.business-standard.com/article/markets/sensex-braces-for-worst-monthly-show-in-4-years-116022600915_1.html

Advertisements

Double Irish with a Dutch Sandwich

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Sameer Jain, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur.

—————————————————————————————————————–

Google moved 10.7 billion euros through Netherlands to Bermuda in 2014, using a strategy known to accountants as Double Irish, Dutch Sandwich, which allowed it to earn most of its foreign income almost tax-free.

The Double Irish with a Dutch Sandwich is a tax avoidance technique which involves the use of  combination of Irish and Dutch subsidiary companies to shift profits to low or no tax jurisdictions. The double Irish with a Dutch sandwich technique involves sending profits first through one Irish company, then to a Dutch company and finally to a second Irish company headquartered in a tax haven (source : Investopedia).

maxresdefault
This strategy has allowed companies to reduce their corporate tax liabilities drastically.
Google which is now a part of holding company has employed this technique to pay just around 6% on its foreign income as compared to 35% in US. As per the accounts of Google Netherlands Holdings, it transferred almost all of its revenue from an Irish affiliate to a Bermuda based, Irish-registered affiliate called Google Ireland Holdings. This allowed Google to avoid US corporate tax as well as European withholding taxes on funds. While Bermuda charges companies no income tax, Google Netherlands Holding which has no employees had paid just 2.8 million euros as tax on its income.

This technique is mostly used by the multinational tech companies as these firms can easily transfer their profits to other countries by assigning intellectual property rights to the foreign subsidiaries.

References –
http://www.business-standard.com/article/international/google-moves-12-bn-via-low-tax-dutch-sandwich-116021901160_1.html
http://www.investopedia.com/terms/d/double-irish-with-a-dutch-sandwich.asp

BoJ’s Negative Interest Rates : Desperate move

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Sameer Jain, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur.

—————————————————————————————————————–

BOJ Governor Haruhiko KurodaBank-of-Japan

Bank of Japan (BoJ) took the world by surprise when the BoJ governor Haruhiko Kuroda announced a rate cut that put the interest rates into the negative territory. Board voted 5-4 to put an interest rate of -0.1 percent on current accounts held at the bank This move came in a response to the risk of global slowdown, slowdown in Japan’s economy, declining crude oil prices, and turmoil in stock markets around the world. BoJ is not the first bank to cut its interest rate to negative rates. The European Central Bank was the first major bank to adopt negative interest rates, followed by the Swiss National Bank. .

Through the negative interest rates BoJ hopes to boost Japan’s economy and increase the inflation. This policy change intends to dissuade institutions to park their money with the bank, and to push institutions to lend their money to individuals and lenders that will increase the consumption and investment which in turn will contribute in the growth of the economy. It also hopes that the investors will take their money out their bank accounts and put it somewhere else in the market to get higher yields. “Through the minus interest rate combined with quantitative easing, I hope we can support companies and individuals in breaking their deflationary mindset,” said Mr Kuroda.

BOJ-tiered-rates
Source – Bank of Japan

Instead of a fixed direct rate, BoJ has adopted a tiered system for the interest rates. While most of the deposits will fetch 0.1 %, a required deposit will get 0 % interest rate. Above these deposits, the new deposits will face a – 0.1 % interest rate. The BoJ said it’s adopting the three-tier system so that there would not be “undue decreases in financial institutions’ earnings.”

The announcement got a mixed response from the market. While the Nikkei 225 index closed after gaining 2.8%, many of the bank stock prices declined after the announcement. The Yen/Dollar exchange rate plummeted 1.8% as compared to previous close. The benchmark 10 Year yield touched 0.9% passing the previous low of 0.19%.

References –

http://www.bloomberg.com/news/articles/2016-01-29/bank-of-japan-s-negative-interest-rate-decision-explained
http://www.marketwatch.com/story/what-you-need-to-know-about-the-bank-of-japan-and-negative-interest-rates-2016-01-29
http://www.bloomberg.com/news/articles/2016-01-29/japan-bank-shares-tumble-as-boj-unveils-negative-interest-rates
http://www.bloomberg.com/news/articles/2016-01-29/japan-s-10-year-yield-drops-to-record-after-boj-s-negative-rate

A turmoil in Indian markets : Opportunity for investment

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Sameer Jain, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur.

——————————————————————————

This Friday the we witnessed a major downturn in the various Indian markets. In the stock market the sensex was at the 19 month low. BSE sensex was plummeted 318 points or down 1.3 %, while the Nifty was closed 99 points down or 1.31 %. In the currency market Rupee slipped 67.50/$ to a fresh 29  months low of 67.61/$. The crude prices went below 30$/barrel and gold prices were down Rs 115 on Friday.

This turmoil in the Indian market is majorly attributed to the instability in the global markets. China stocks closed 3% lower, European markets were down more than 1%, and the futures trading showed a soft opening in the US market. It  This created a negative sentiment among the investors. As a result foreign investors pulled out over Rs 1100 crores from the markets on Friday. It is estimated that FIIs have pulled out over Rs 4500 crores out of the Indian equity market since the beginning of this year.

As shown in the below graph, BSE sensex is down 6.36% since the beginning of this year.

BSEhttps://in.finance.yahoo.com/echarts?s=%5EBSESN

While this turmoil is a result of negative sentiment in the market, it can be used as an opportunity for investment. As Petyr Baelish  said “Chaos isn’t a pit. Chaos is a ladder.” Volatility in short term is a characteristic of the stock market. The current downturn in stock market have dropped the stock prices to a level that doesn’t attribute to the company’s performance. The herd mentality in the stock market has dropped the stock prices of companies which are still fundamentally strong. Given the positive outlook about Indian economy and reforms (GST, Maked in India, etc.)  this provides an opportunity to the investors to recognize such stocks and invest in them at a lower price, and get a good return in long term. 

References – http://www.business-standard.com/article/markets/mkts-slide-as-global-worries-persist-116011600028_1.html http://www.moneycontrol.com/india/stockmarket/foreigninstitutionalinvestors/13/50/activity/FII.   http://www.thehindubusinessline.com/markets/the-stock-market-crash-is-an-opportunity-for-the-longterm-investor/article8089325.ece

 

Strategic Debt Restructuring

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Sameer Jain, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur.

——————————————————————————

Electrosteel Steels, the first company where the lenders applied RBI’s strategic debt restructuring (SDR) mechanism, is close to finalize the new owners of the company. The Electrosteel Steels’ board in December approved a debt of Rs 2507 crores out of total Rs 10985 crores to be converted into equity. This move will help the lenders work in the direction of minimizing the losses by changing the management of the company.

In June 2015 RBI introduced Strategic Debt Restructuring scheme, which will help banks to work in the direction of recovering their NPA (Non-Performing Assets). Non-Performing Assets are defined as “a debt obligation where the borrower has failed to pay any previously agreed upon interest and principal repayment to the designated lender for an extended period of time” (Source – www.invetopedia.com). As shown in the figure below the GNPA has been increasing since the past few years with a slowdown in GDP growth rate.

GNPA

The SDR scheme should help the banks to recover their loans and control this increase in the GNPA.

This scheme is formed on the general principle that restructuring should be done in such a way that the shareholders must be the first one to face the losses and not the lenders. By allowing to convert debt into equity this scheme compensates the lenders for their losses. Further there are some cases when even the above measure is not successful. There are cases when companies under its current management were not able to revive its condition. At such situation the Strategic Debt Restructuring helps bank to change the management of the defaulter company. This scheme is intended to be the next step when the Corporate Debt Restructuring and other mechanisms fail to achieve the goal.

This scheme can be enacted when the companies fail to achieve necessary milestones under Corporate Debt Restructuring. By enacting this scheme the lending banks may initiate the process of change in management by converting full or a part of debt into equity shares. Such decision of invoking SDR should be approved by the majority of the members of JFL (Joint Lenders’ Forum). In order to achieve the change in ownership the lenders under JFP must hold the majority of equity share after the conversion.

Further details in SDR scheme about the shareholding, share pricing, compliances, etc can be noted from the RBI’s notification of Strategic Debt Restructuring Scheme.

References –

http://www.business-standard.com/article/companies/bankers-finalise-new-owners-for-electrosteel-116012200068_1.html,

https://rbi.org.in/Scripts/NotificationUser.aspx?Id=9767

http://www.mondaq.com/india/x/426592/Financial+Restructuring/Strategic+Debt+Restructuring

https://www.pwc.in/assets/pdfs/publications/2014/growing-npas-in-banks.pdf