Modi naysayers who are mourning the fact that the government has rewarded itself with a windfall, are mistaken., writes the author.
For all those clamouring about lack of "animal spirits" to fuel the Indian capital markets, well, besides the removal of "Angel Tax" and the "FPI surcharge" last week, what the Narendra Modi-led government truly deserves kudos for, is its ability to take the bull by its horns and give the "bears", a run for their money! Yes, professional pessimists and purveyors of gloom and doom who make money by virtue of their knack to "sell" and "short sell", are called the proverbial bears, in stock market lingo.
If indeed there was any misgiving about whether the Modi government takes investors seriously, that was laid to rest, with a slew of measures announced in the last seven odd days.
Sebi, last Wednesday, simplified and rationalised the rules for foreign portfolio investors (FPIs) as it did away with the broad-based eligibility criterion for institutional FPIs. The regulator also hinted that it is not in favour of increasing the minimum public shareholding to 35 per cent from the present 25 per cent and has apparently, communicated its view to the finance ministry, since over 45 per cent of PSUs don't even meet the 25 per cent mandate, at this point.
Some of the key highlights of the Sebi board meeting held last week, are listed below --
a) Offshore funds of MFs can invest in the country after registration as FPIs .
b) Central banks that are not members of the BIS, eligible for registration as FPI
c) FPIs shall be permitted for off-market transfer of unlisted, suspended or illiquid securities
d) Issuance and subscription norms of offshore derivative instruments rationalised
e) Regulations concerning credit rating agencies amended
f) Nod to changes to the norms prohibiting insider trading
On the FPI issue, Sebi approved several recommendations made by the H R Khan Committee for “easing the operational constraints and compliance requirements”. Around 57 circulars and 183 FAQs pertaining to FPIs issued over the years have been merged into new regulations and a single circular, completely in line with Modinomics, which has always stressed on weeding out unwanted paperwork.
With a nudge from the Modi government, the regulator also decided to do away with the "broad-based" eligibility criteria for FPIs, which required a minimum of 200 investors, for a fund to be broad-based. Sebi said the registration process for FPIs will be expedited, and they will now be re-categorised into two categories instead of three, earlier.
One aspect for which the BJP-led Modi government needs to be particularly commended is the fact that, considering that most central banks are relatively long term, low-risk investors directly/indirectly managed by their respective governments, the central banks that are not the members of BIS (Bank for International Settlement) shall also now be eligible for FPI registration.
FPIs shall also be permitted for off-market transfer of securities which are unlisted, suspended or illiquid, to a domestic or foreign investor. Offshore funds floated by domestic mutual funds have been permitted to invest in India after obtaining registration as FPI, and the requirements for issuance and subscription of offshore derivative instruments, too have been rationalised.
FPIs that have been withdrawing from Indian equities after introduction of higher tax surcharge on the super-rich in the budget in July 2019, were pleasantly surprised, when on the evening of 23rd August 2019, the finance minister overturned the "FPI surcharge". Needless to add, the big positive of the Narendra Modi government is the fact that it has its ears to the ground and not only listens but also acts judiciously on constructive criticism.
It also needs to be added here that while in the past two months, FPIs have roughly sold Indian shares worth $3.07 billion, they were net buyers of shares worth $11.3 billion till June. Again, the sales in July and August cannot solely be attributed to the FPI surcharge issue because, most emerging and global markets have seen volatile outflows, with risk aversion ruling the roost thanks to rising global protectionism, continuing trade war rhetoric between the US and China, protests in Hong Kong and of course, escalating tensions between the UK and Iran on reported seizure of each other's shipping vessels off the strait of Gibraltar and in the Persian Gulf, areas.
Coming back to Sebi, FPIs will henceforth be classified into just two and not three, categories. The classification of an FPI depends on the way the offshore entity is regulated in its home market or the number of investors in the fund. The most well-regulated FPIs usually fall into Category-I. The new norms will usher in a more simplified regime, as for most FPIs, the biggest pain point was that a large part of the registration process and KYC was spent on proving that they are broad-based. Those will go away now, once again showcasing that, Modinomics is not xenophobic.
FPIs will now also be allowed to buy or sell shares off-market to any domestic or foreign investor even if the stock of such a company is unlisted, suspended or illiquid. The norms for issuance and subscription of contentious offshore derivative instruments such as participatory notes or P-notes have also been rationalized.
Sebi has also permitted offshore funds floated by Indian asset management companies to register themselves as FPIs and invest in Indian markets. The relaxation in FPI norms is again, mostly in line with the recommendations of the H.R.Khan committee report, submitted to Sebi in May 2019.The relaxation in the buyback norms also assumes significance in the wake of an increasing number of NBFCs and HFCs witnessing accumulation of debt and consequent deterioration in their DER.
After last Wednesday’s board meeting, Sebi said that if a company has NBFC and HFC subsidiaries, the holding firm can pursue a share buyback only if the stand-alone company’s DER is 2:1 post buyback; the consolidated group’s DER would also have to be 2:1 after excluding the NBFC and HFC subsidiaries, provided DER of these subsidiaries doesn’t exceed 6:1.
Sebi also tightened regulations for credit rating agencies. It said that for rating firms to have timely information on the default of an entity, the issuer (whose loan instrument is being rated) and the rating agency need to enter into an agreement in which the issuer will provide explicit consent to the rating agency to obtain details of the issuer’s existing or future borrowings and its repayment or delay or default in servicing the debt, either from the lender or any other statutory organization.
Rating agencies are often blamed, but they should get information about the loans, defaults in time. By trying to address this issue through this aforesaid amendment, the Modi government has walked the talk in terms of transparency, where all stakeholders including the regulators are held accountable, in a time-bound manner.
The Sebi board has also allowed mutual funds to now invest in unlisted non-convertible debentures. Any MF can now invest up to 10 per cent of their debt portfolio of the scheme in unlisted NCDs as long as they are rated, secured and carry monthly coupons, which again showcases the Modi regime's commitment to deepen the debt market in India.
Also, Sebi said, entities established in the IFSC (International Financial Services' Centre) would be deemed to have now automatically met the jurisdiction criteria for FPIs. This is expected to serve as a big impetus for the financial centre in the GIFT City. RBI's decision on 26th August 2019, to transfer as "dividend and surplus", roughly Rs 1.76 lakh crore to the government, to stimulate the economy and recapitalise public sector banks, among other things, on the basis of the recommendations by the Bimal Jalan-led panel, should also serve as a booster dose for both the equity and bond markets, by boosting sentiment.
Of the little over Rs 1.76 lakh crore, while Rs 1.23 lakh crore will be via a "surplus" for the year 2018-19, the balance Rs 52637 crore, would be in the nature of "extra provisions", as per the Economic Capital Framework (ECF).Since Rs 28000 crore has already been transferred to the government, effectively speaking, Rs 1.48 lakh crore will be transferred now by the RBI, for the financial year,2018-19. The "realised equity range" mandated by the Jalan panel, has been set at 6.5-5.5 per cent of the RBI's balance sheet. Since, as on 30th June 2019, the realised equity stood at 6.8 per cent, well above the lower floor of 5.5 per cent, the entire net income of the RBI was decided to be transferred to the govt.
Hence, Modi naysayers who are mourning the fact that the government has rewarded itself with a windfall, are mistaken. This Rs 1.76 lakh crore is money that will be put to productive uses and money which shall be transferred to the government as it is being done, after having ensured, all risk parameters were complied with. For instance, the Contingent Risk Buffer (CRB), will at all times, be maintained in the 6.5-5.5 per cent range.
Ex-Congress President Rahul Gandhi and his coterie's baseless claims therefore that, the transfer of the aforesaid surplus is akin to looting the RBI, are juvenile allegations that reek of political immaturity and complete ignorance of the law of the land. The RBI Act of 1934 for instance, actually mandates the RBI to transfer any available surplus after making adequate provisions for bad and doubtful debts, depreciation in assets, contribution to staff and the super-annuation fund, among other things.
Apart from doing the needful to welcome FPIs, plug tax leakages and forseeable revenue shortfalls, there is a buzz about relaxations in single brand FDI on the anvil, with likely 100 per cent to be allowed in contract manufacturing and also higher limits to be possibly made available for the print media where the current cap is 26 per cent and brodcasting services where the existing cap is 49 per cent.
To cut to the chase, since business sentiment and consumer confidence, in large part, are a function of liquidity, the Modi government has fired a few well meaning and absolutely well timed salvos. Foreign and domestic investors can certainly expect better tidings going forward, as this is a government that listens, absorbs, assimilates and acts, in a manner that is both business friendly and investor friendly.
If indeed, any external vindication was needed about the "correctness" of transferring Rs 1.76 lakh crore to the government, then that has come in from international rating giant, Moody's no less, which feels this is a well meaning step in the right direction, that will aid investor and business confidence, accelerate capitalisation of public sector banks, improve provision of credit and most importantly, transmission of monetary policy easing.
[Disclaimer: The author is Economist & Chief Spokesperson, BJP-Mumbai. The views and opinions expressed in this article are those of the author and do not necessarily reflect that of Business Television India (BTVI)]