In this edition, we talk about how SEBI is cautioning investors about the froth in the midcap and small-cap segments. We also talk about the government’s new EV policy and its possible impact, why there was a rush to buy ITC shares and why Paytm may finally have some reason to cheer.
Welcome to Kuvera’s weekly digest on the most critical developments related to business, finance, and the markets.
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Earlier this week, the central government directed states to ban the sale and breeding of a couple of dozen dog breeds that it said were ‘ferocious,’ after several cases of dog attacks made headlines. This decision left scores of dog lovers red-faced.
You see, several of these breeds are considered as excellent watchdogs, and are deployed to guard homes and other premises.
While the government may have had sound logic behind the blanket ban, its own watchdogs have also been hard at work, doing what they are supposed to be doing—watching over the interests of India’s investors who power its capital markets.
The week began with Madhabi Puri Buch, who heads the Securities and Exchange Board of India (SEBI), raising concerns over stretched valuations of small and mid-cap stocks. These stocks have become the favourites of retail investors, who have been lapping them up via the mutual fund route especially over the past couple of years.
“There are pockets of froth in the market. Some people call it a bubble, some may call it froth,” Buch said. “It may not be appropriate to allow that froth to keep building.”
This indicates price manipulation in small and medium enterprises segment, she said, adding that SEBI was willing to review norms that mandate small and mid-cap mutual fund funds to invest 65% of their assets in these stocks.
Buch also said SEBI was gathering evidence of price manipulation in the SME segment, where there has been an avalanche of IPOs. These segments’ valuation parameters are “off the charts” and not supported by fundamentals, she said. “These appear, as regulators like to call it… ‘irrational exuberance’.”
SEBI hasn’t just issued warnings to protect investors from a “bubble”. It has also suggested mutual funds to cap lump sum investments and ordered them to conduct a stress test to evaluate how well they will be able handle any sudden redemption pressures in mid- and small-cap schemes. And fund houses began releasing their test reports this week.
Edelweiss MF, for instance, said it would take two days to liquidate half the portfolio of its midcap fund and one day for a quarter of it. For the small-cap fund, the fund house said it would need three days and two days, respectively.
Nippon India said it would take 27 days to liquidate 50% of its small-cap fund, the largest scheme in this category, and seven days in the midcap fund. The results disclosed by the DSP Small Cap Fund are disappointing. The fund house said it would take 16 days to liquidity 25% of its portfolio and a staggering 32 days to liquidate 50% of its portfolio, which is the highest among funds that have disclosed their stress tests till now.
Buch’s remarks caused a sharp sell-off in the market on Wednesday, wiping off more than Rs 13.5 trillion of shareholder wealth. Although the market did recover a bit on Thursday, it slid back into the red by the end of the week.
So, what should you do as a retail investor? We have always advised that investors should take a cautious approach when it comes to investing in the stock markets and our mantra remains the same. Take a long hard look at what you are buying. It is after all, your own hard-earned money at stake.
Tesla on the way?
Although it wasn’t a good week for the stock markets at large, it turned out to be great for foreign electric vehicle companies looking to enter India’s growing automobile market.
The government on Friday said it will lower import taxes on certain EVs for companies who commit to invest at least $500 million and build a manufacturing plant within three years.
The government said that companies that meet these requirements will be allowed to import a limited number of EVs by paying a lower tax of 15% on cars that cost $35,000 and above. India currently imposes a tax of 70% or 100% on imported cars and EVs depending on their value.
The tax cut move boosts Elon Musk-led Tesla’s plans to enter the market. Musk has been trying to enter India for year but wanted India to cut taxes. India, on the other hand, wants him to commit to build locally.
“The policy is designed to attract investments in the e-vehicle space by reputed global EV manufacturers,” the commerce ministry said in a statement.
While Tesla hasn’t yet made any comment about its India entry, Vietnamese EV maker VinFast has already taken the lead. VinFast plans to invest $2 billion in India and started building a factory in Tamil Nadu last month.
On the flip side, growing competition will make things difficult for Tata Motors and Mahindra & Mahindra, who currently account for a majority of EV sales and had opposed any special incentives to foreign companies.
Batting for ITC
If you are an ITC investor, your stock made some of its best moves in a while this week. ITC Ltd’s biggest shareholder, cigarette maker British American Tobacco plc (BAT), sold a 3.5% stake in the Indian FMCG company through the open market. At Rs 400.25 per share, BAT went home with Rs 17,485 crore.
Following this sale, BAT has brought its shareholding in the Kolkata-headquartered company from 29% to 25.5%.
This block deal was an opportunity for mutual funds to pick up the much loved stock and the counter was lapped up by more than 60 institutional investors including entities owned by the Singapore government, ICICI Prudential Mutual Fund, SBI Mutual Fund, DSP Mutual Fund, Societe Generale, Citigroup and Morgan Stanley.
In a separate development, BAT announced a buyback of $895 million worth of shares this year after selling down its stake in ITC.
Breathing space
Meanwhile, after have gone through the motions for months now, there was finally some good news for Paytm as its parent entity, One97 Communications, was permitted by the National Payments Corporation of India (NPCI) to participate in UPI services as a Third-Party Application Provider (TPAP) under the multi-bank model.
This would allow Paytm to continue offering Unified Payments Interface (UPI) services to its app users, after its banking unit, Paytm Payments Bank, ceases operations post March 15 following a ban by the Reserve Bank of India.
Under the new model, Paytm will now provide the payment service in partnership with four new banks—Axis Bank, HDFC Bank, State Bank of India and Yes Bank—who will act as its payment system providers.
Earlier, the fintech was powering this service via Paytm Payments Bank, which held the TPAP license. Since Paytm had a bank of its own, it did not need to be a separate TPAP license, unlike its rival apps such as Google Pay, PhonePe and Amazon Pay. Further, Yes Bank will act as the merchant acquiring bank for Paytm’s existing and new UPI merchants.
For context, Paytm, the third-largest app for UPI payments, processed 1.41 billion monthly transactions worth Rs 1.65 trillion in February, down from 1.57 billion transactions valued at 1.93 trillion in January, according to NPCI data.
The NPCI approval helped Paytm shares gain 5% on Friday, recovering a little from their all-time low after the RBI ban last month. But if you are waiting for the shares to touch their IPO price of Rs 2,150 apiece, that’s a long, long road ahead.
Market Wrap
As we said earlier, the markets were spooked by SEBI’s commentary and witnessed a mid-week correction. Following the heavy sell-off, both the benchmark indices ended the week in the red.
While the 30-share Sensex slid by more than 1.9%, the 50-script Nifty did worse and was down by about 2.3%. The small-cap index slumped 5.5% while the mid-cap index dropped 4.7%, recording their biggest weekly drop since December 2022.
Nifty stocks that dropped were led by state-run energy and power companies like Bharat Petroleum, Coal India, NTPC, Power Grid Corp of India and ONGC. Oil retailers Bharat Petroleum, Hindustan Petroleum and Indian Oil fell on Friday after the government cut petrol and diesel prices ahead of the announcement of the national elections.
Others that saw significant declines were auto majors Bajaj Auto, Hero MotoCorp, Tata Motors and Mahindra & Mahindra. Axis Bank, State Bank of India as well as IT major Wipro were also on the list.
Nifty stocks that resisted the selloff to end the week in the green included ITC, IT companies Tata Consultancy Services and Infosys, Britannia Industries, Bajaj Finance and Nestle India.
Other headlines
- PM Narendra Modi, British PM Rishi Sunak assess progress on FTA negotiations
- India-EU still diverge on key issues as EFTA deal goes through
- Work on FY25 full Budget begins ahead of 2024 Lok Sabha elections
- Apple supplier Rayprus eyeing Bengaluru facility
- Reliance acquires Paramount’s 13% stake in Viacom18 for Rs 4,286 crore
- National Stock Exchange to cut cash, derivatives transaction charges by 1%
- Retail inflation eases a tad to 5.09% in February from 5.10% in January
- Wholesale price inflation slows to 0.20% in February from 0.27% in January
- Industrial output rises 3.8% year on year in January, falling from 4.2% in January
- Oil marketing companies cut petrol, diesel prices by Rs 2 per litre
- Fitch lifts India’s FY24, FY25 GDP growth projections but lowers rate cut expectation
- IIFL Finance to raise up to Rs 2,000 crore via shares, debentures
- Fitch puts IIFL Finance on negative rating watch after RBI ban on gold loans
- Tata Motors to build Rs 9,000 crore factory in Tamil Nadu
- Spanish firm Ferrovial to buy 24% stake in IRB Infrastructure Trust for $810 million
- IndiGo co-founder Rakesh Gangwal sells stake worth $820 million
- Eris Lifesciences acquires India formulation business of Biocon Biologics for Rs 1,242 crore
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