GDP Outlook: A report by CRISIL

GDP: Demonetisation pain, GST anxiety to the fore (A report by CRISIL Ltd)

The Central Statistical Office (CSO) released quarterly estimates of GDP for first quarter of current fiscal. Crucially, the government has also revised down gross value added (GVA) growth for the fourth quarter of last fiscal by 50 basis points (bps) to 5.6%, suggesting that the impact of demonetisation on the economy was more than earlier estimated. In the first quarter, real GDP growth slid to 5.7% from 7.9% in the same quarter last fiscal. The slowdown corroborates with corporate results for the first quarter, which had shown net profits declining for chunk of listed firms. The computation of GDP relies heavily on corporate data from the Ministry of Corporate Affairs database. The slowdown reflects sharp deceleration in exports of goods, and some moderation in consumption growth.

Data readings

§  GVA growth, or the supply-side GDP, which is supposed to be a truer estimate of underlying economic activity as it doesn't take into account the impact of taxes and subsidies, grew 5.6% in the first quarter, same as in the fourth quarter of last fiscal, but down from 6.8% on-year. The fact that GVA growth in the first quarter was the same as in the fourth quarter suggests waning demonetisation impact was offset by rising anxiety over the Goods & Services Tax (GST).

§  Industrial growth in the first quarter was down to 1.6% compared with 3.1% in the previous quarter, on account of a sharp slowdown in manufacturing growth (1.2% vs 5.3%) and de-growth in mining (-0.7% vs 6.4%). The former was arguably on account of GST uncertainty, which lead to destocking by retailers and slowdown in the production process. Agricultural growth in real terms, too, slowed to 2.3% from 5.2% in the fourth quarter. Here, it is important to note that despite real growth of 2.3%, nominal agricultural growth was only 0.3%, suggesting that while agricultural output grew, their prices fell. Real growth is derived by stripping the price impact from nominal growth. Services sector growth, however, anchored overall GVA growth, rising 8.7% from 7.2% on-year driven by improvement in two sectors -- trade, hotels, transport & communication, and financial, real estate and professional services. The latter reflected some pick-up in consumer credit in the banking system in the first quarter.

§  The headline real GDP (which measures the expenditure or the demand side) growth came in at 5.7% - slowest in the past thirteen quarters - from 6.1% in the fourth quarter, and from 7.9% a year back. The difference in GDP and GVA growth is net product taxes. So, given that GDP growth at 5.7% is only 10 bps more than the GVA growth of 5.6%, claims of real tax gains from enlarging tax base after demonetisation seems a too-early conclusion. However, this may see pick up going ahead as the government firms up its accounting exercise. Another noteworthy point is that despite moderation in growth in most demand-side components - private consumption, government consumption, exports - the unusually high growth (205% on-year) in valuables supported overall growth. The latter could be attributed to large gold purchases in anticipation of GST. There was also mild improvement in investment growth (to 1.6% vs 2.1%, on - year) which pulled up the share of fixed investments to 29.8% from 28.5%. This may be reflective of optimism in the growth recovery in the second half.

Outlook

In an environment of subdued global growth and weak investments, India’s GDP cannot grow fast in the short run. For fiscal 2018 as a whole, we are in the process of revising down GDP growth forecast down from 7.4% stated earlier. That said, normal monsoon, softer interest rates and inflation, and pent-up demand (demand postponed due to the demonetisation) will support consumption growth in the remaining quarters of this fiscal. There will also be a mild push to consumption from budgetary announcements.

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Margin Trading and Types of Margins

Before we begin with different types of margins, let us look back at what margin trading is. Suppose I is an investor and B is a Broker. I is extremely sure of an investment strategy that he has developed. But due to the limited capital, his gains are limited. So, he goes to his broker B and says that I have 10$ but I would like to invest worth 100$. Would you like to provide me with the remaining 90? B says, that he is willing to provide the same but he would charge some extra commission for that. A agrees and pays the 10$ , B gives him the remaining 90 and A then invests the 100$. He makes a profit and then returns the 90 plus the extra commission to B. The transaction above in layman terms is margin trading.

So in simple terms, Margin Trading is a way to magnify the buying power of the investor by borrowing the capital from the broker.

Now you maybe wondering what’s margin in this case. Margin account has to be maintained with the broker. This account is different from the regular cash accounts that are used for trading. The investor needs to post a certain amount in the account before he can start trading on margin.

Let’s have a look at how these amounts are classified:

Initial Margin: Before you start trading on margin , you have to deposit a certain amount in your margin account. That amount is known as the Initial Margin. According to the Federal Reserve’s Reg T, this amount is 50% of the amount that the investor is borrowing from the broker. The regulation sets only the minimum bar. However, your broker may charge you or ask you to post Initial Margin amounting to greater than 50%.

So, suppose you decided to start margin trading and want to buy Apple shares worth 1000$. Therefore, you will have to deposit 500$ in your margin account. So everytime, you need to trade on margin, you need to deposit the initial margin. But the initial margin is based on the purchase price and thus remains fixed irrespective of market volatility. E.g. IF a stock costs 10$, 5$ is the initial margin requirement and it will remain fixed irrespective of what the market price is.

Maintenance Margin: It is also known as maintenance requirement. It is the minimum amount that must be present in the margin account of an investor. According to the Reg T, this amount is 25% of the total value of securities which are bought via the margin trading account. Considering the same Apple example as mentioned above. 1000$ is the total investment and 500$ is the total Initial Margin posted by the Investor.

Now, suppose that the value of the investment falls to 600$. Remember, the borrowed amount is still 500$. That means the investor’s own funds has gone down to 100$.

According to the maintenance margin requirements, the amount in the margin account should be 25% of the total security value. Here the value is 600$, so the maintenance requirement is 150$. But as calculated above, the investor’s own funds only amounts to 100$, the remaining 500$ being borrowed from the broker. So the investor will have to deposit additional 50$ to meet the maintenance requirement.

This is known as margin call i.e. when the broker informs the investor to infuse more capital into the margin account to achieve the minimum required maintenance margin.

Variation Margin: The variation margin is the difference between the margin requirements between two successive days. It is measure as MTM value which is the abbreviated form of Mark to market. It implies that the most recent market price of the security has been taken into consideration to calculate the margin requirements. Suppose the margin requirement is 100$ for Day T-1 and it is 120$ for Day T. Thus, the variation margin is 20$. Variation margins are useful for daily settlements of contracts.

Suppose the client has posted a collateral to fulfill the margin obligations. The margin requirements are 100$ and he/she posts a collateral worth 100$. Now, the bank will constantly monitor the collateral’s market value. Suppose the market value is 120$, which results in a variation margin of +20$ and results in a condition where the client is fulfilling the margin obligations. In another case, consider that the value of the collateral according to current market price is 80$ which leads to a variation margin of ‘-20$’ and thus in this case, the client is unable to fulfill the original margin requirement of 100$ and thus will be served with a margin call.

Thus, these are the different types of margins and basics of margin trading.

We will talk about collateral management in the next blog post.

Happy Reading!

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Primary Market: Basic Concepts

Primary Market: Basic Concepts

Primary Markets are where firms issue new shares or bonds to the public for the first time. The primary market is where the IPO (Initial Public Offering) of shares takes place. The primary market also facilitates bond offerings for both – public sector and private sector companies.

Issues made by a company can be classified into different types. Given below are the different types of issues:

Initial Public Offering (IPO)

When an unlisted company makes either a fresh issue of shares or convertible securities for the first time to the public, it is called an IPO. This allows for listing and trading of the issuer’s shares or convertible securities on the stock exchange. In an IPO, the issuer obtains the assistance of an underwriting firm, which determines what type of security to issue, the best offering price, the number of shares to be issued and the time to bring it to market

Follow-on Public Offering (FPO)

When an already listed company makes either a fresh issue of shares or convertible securities to the public or an offer for sale to the public, it is called a FPO. A company doing an FPO has already gone through the IPO process before. FPO’s aim to raise additional equity capital for the company.

Rights Issue

A Rights Issue is when an issue of shares or convertible securities is made by an issuer to its existing shareholders as on a particular date fixed by the issuer. A rights issue entitles only the existing shareholders to buy additional shares in proportion to their existing holdings within a fixed time-frame.

Private Placement

In private placement, the issuer makes an issue of shares or convertible securities to a select group of investors. Private placement is of 3 types:

a)      Preferential allotment

Allotment of shares is done on a preferential basis to a select group of investors. This is one of the fastest methods of raising funds.

b)     Qualified Institutional Placement (QIP)

A listed company can issue equity shares, non-convertible and convertible debentures other than warrants to Qualified Institutional Buyers only. Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets.

c)      Institutional Placement Program (IPP)

An Institutional Placement Program is basically an FPO made by the promoters of a company to Qualified Institutional Buyers only. The main purpose of doing an IPP is to achieve minimum public shareholding as required by the regulatory body.

The first step in an IPO is the offer document. An offer document contains information about the company, promoters and various details about the IPO. Different types of documents are used during different stages of the IPO.

1)      Draft Offer Document

It is the offer document at the draft stage. The Draft Offer Document is filed with SEBI at least 21 days before the filing of the offer document with the Registrar of Companies. Changes can be made to the draft offer document before the filing of the actual offer document.

2)      Letter of offer

The offer document in case of Rights Issue is called as letter of offer and is filed with the stock exchange.

3)      Red Herring Prospectus

A Red Herring prospectus is used in case of a book built issue. Book building is a process used to identify the right price for the issue. The red herring prospectus contains information about a company’s operations and prospects, but does not include key details such as the price and the number of shares offered.

A draft of this document is called as the Draft Red Herring Prospectus (DRHP). SEBI has made it mandatory to file a DHRP. After the document is reviewed and the final approval is given the document then becomes a Red Herring Prospectus. The name ‘Red Herring’ is derived from a bold disclaimer in red on the cover page of the prospectus. The red herring prospectus is issued to potential investors who can then express an indication of interest in the issue. Through this way an issuer tries to gauge the interest for the security and determine the right price band for the issue. After this process, a final prospectus is issued that contains the final price for the IPO and the issue size.

4)      Prospectus

It is the final document which has all relevant details including price of the share and the issue size. This document is registered with Registrar of Companies before the issue opens in case of a fixed price issue and after the closure of the issue in case of a book built issue.

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Bitcoin: The New Age Digital Currency

As of 25 June 2017 and growing there were more than 900 crypto currencies available over the internet. New crypto currency can be created any time. By market capitalization, Bitcoin is currently the largest blockchain network, followed by Ethereum, Ripple and Litecoin.

What is Bitcoin?

Bitcoin is a consensus network that enables a new payment system and completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet.

Who created Bitcoin?

Bitcoin is the first implementation of a concept called "crypto currency", which was first described in 1998 by Wei Dai on the cypherpunks mailing list, suggesting the idea of a new form of money that uses cryptography to control its creation and transactions, rather than a central authority. The first Bitcoin specification and proof of concept was published in 2009 in a cryptography mailing list by Satoshi Nakamoto.

Who controls the Bitcoin network?

Nobody owns the Bitcoin network much like no one owns the technology behind email. Bitcoin is controlled by all Bitcoin users around the world.

How does Bitcoin work?

Bitcoin is nothing more than a mobile application or computer program that provides a personal Bitcoin wallet and allows a user to send and receive bitcoins with them.

Blockchain technology is the foundation on which bitcoins function. Blockchain is a 'digital ledger', which will record and track all transactions in 'blocks' through a public ledger. This activity of processing transactions and updating the ledger in real time can be done by any user utilizing computing power of specialized hardware and they would earn bitcoins in return for their services. These users are called miners and the activity is called bitcoin mining.

Every single transaction is authenticated by every single user making fraudulent transactions difficult. The public ledger contains each and every transaction ever processed, allowing a user's computer to verify the validity of each transaction, all done in real time. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own bitcoin addresses.

EDGE OVER TRADITIONAL MODES OF PAYMENT

Bitcoins provide the flexibility to make payments for online purchases anywhere in the world, irrespective of time, holidays and it eliminates exchange rate hassles. It also enables one to process transactions at lower costs and no personal information is tied to the transactions, which provides complete anonymity. Transactions once recorded cannot be erased and, hence, are not subject to manipulation as they are cryptographically secure. Currently, on account of its uncertain legal status, it is viewed more as on alternative investment asset class rather than a pseudo currency to transact online.

Is Bitcoin really used by people?

Yes. There are a growing number of businesses and Individuals using bitcoin. This includes brick-and-mortar businesses like restaurants, apartments, and law firms, as well as popular online services such as Namecheap, Overstock.com, and Reddit. While Bitcoin remains a relatively new phenomenon, it is growing fast. At the end of April 2017, the total value of all existing bitcoins exceeded 20 billion US dollars, with millions of dollars worth of bitcoins exchanged daily.

How does one acquire bitcoins?

·         Purchase bitcoins at https://www.buybitcoinworldwide.com/

·         Earn bitcoins through https://www.bitcoinmining.com/

While it may be possible to find individuals who wish to sell bitcoins in exchange for a credit card or PayPal payment, most exchanges do not allow funding via these payment methods. This is due to cases where someone buys bitcoins with PayPal, and then reverses their half of the transaction. This is commonly referred to as a charge-back.

The 6 Most Important Crypto-currencies Other Than Bitcoin

1) Litecoin (LTC)

Litecoin, launched in the year 2011, was among the initial crypto currencies following bitcoin and was often referred to as ‘silver to Bitcoin’s gold.’ It was created by Charlie Lee, a MIT graduate and former Google engineer. Litecoin is based on an open source global payment network that is not controlled by any central authority and uses "scrypt" as a proof of work, which can be decoded with the help of CPUs of consumer grade. Although Litecoin is like Bitcoin in many ways, it has a faster block generation rate and hence offers a faster transaction confirmation. Other than developers, there are a growing number of merchants who accept Litecoin.

2) Ethereum (ETH)

Launched in 2015, Ethereum is a decentralized software platform that enables Smart Contracts and Distributed Applications to be built and run without any downtime, fraud, control or interference from a third party. During 2014, Ethereum had launched a pre-sale for ether which had received an overwhelming response. The applications on Ethereum are run on its platform-specific cryptographic token, ether. Ether is like a vehicle for moving around on the Ethereum platform, and is sought by mostly developers looking to develop and run applications inside Ethereum. In 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). Ethereum has a market capitalization of $4.46 billion, second after Bitcoin among all cyrptocurrencies.

3) Zcash (ZEC)

Zcash, a decentralized and open-source cryptocurrency launched in the latter part of 2016, looks promising. “If Bitcoin is like http for money, Zcash is https," is how Zcash defines itself. Zcash offers privacy and selective transparency of transactions. Zcash offers its users the choice of ‘shielded’ transactions, which allow for content to be encrypted using advanced cryptographic technique or zero-knowledge proof construction called a zk-SNARK developed by its team.

4) Dash

Dash (originally known as Darkcoin) is a more secretive version of Bitcoin. Dash offers more anonymity as it works on a decentralized mastercode network that makes transactions almost untraceably. Launched in January 2014, this cryptocurrency was created and developed by Evan Duffield and can be mined using a CPU or GPU. In March 2015, ‘Darkcoin’ was rebranded to Dash, which stands for Digital Cash and operates under the ticker – DASH.

5) Ripple (XRP)

Ripple is a real-time global settlement network that offers instant, certain and low-cost international payments. Ripple “enables banks to settle cross-border payments in real time, with end-to-end transparency, and at lower costs.” Released in 2012, Ripple currency has a market capitalization of $1.26 billion.

6) Monero (XMR)

Monero is a secure, private and untraceable currency. This open source cryptocurrency was launched in April 2014 and soon spiked great interest among the cryptography community and enthusiasts. Monero has been launched with a strong focus on decentralization and scalability, and enables complete privacy by using a special technique called ‘ring signatures.’

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The Blockchain Technology

           

What is Blockchain Technology?

Before we talk about Blockchain it is important to know the role intermediaries play in economy. Intermediaries like banks and government facilitate the transaction of goods and services by creating trust and certainty. Like when an individual or business makes an electronic payment, they require a bank to track and record the transaction or when an individual buys a real state property then they need local government body to keep records stored.  What if there was a way of making a transaction that didn’t require the use of trusted intermediaries like banks, government or local body?

Blockchain enables transaction of almost anything available in digital form like digital money, assets or information, etc from one individual to another individual without using any intermediaries.

Blockchain is open and distributed ledger, comprised of unchangeable, digitally recorded data in packages called blocks. These digitally recorded blocks of data are stored in linear chain. Each block in the chain contains data which is cryptographically hashed. The block of hashed data draw upon the previous block in the chain, ensuring all data in the overall Blockchain has not been tampered with and remains unchanged.

It is believed to be useful for any sector that has complex and large scale back office processes that may involve phone calls, emails and paperwork for example banks and remittance business. Similarly the technology can also be used wherever there is a need for reporting, transparency and dissemination of data, say stock exchange and clearing houses.

What is its advantage?

“It can Eliminate middle man” Because it validates transactions and the value of the property being transacted Blockchain can reduce the middle man, be it the art dealer, real estate agent, music agent or estimator. With Blockchain, artists can go straight to the people, rather than through music labels, to protect their own music and royalties.

“No reconciliation required” In current setup, for reconciliation, manual intervention is required which is done through an intermediary. In Blockchain there is no need for reconciliation, which is usually the back office in most businesses. This helps to reduce costs.

“It can Validate and Secure almost anything” The application built on this technology is believed to be difficult to break into. Saket Modi, CEO of Lucideus Tech “When you make any transaction, you have to sign it off using a digital signature which is cryptographically encrypted and is difficult to hack into. As every added block broadcasts the transaction into a public ledger, in case of fraudulent transaction, every node can spot it and deny the proceedings.

How Blockchain works?

In this example we have seen how a monetary transaction took place however in the same ways every agreement, every process, every task and every payment would have a digital record and signature that could be identified, validated, shared and stored without any intermediaries like lawyers, bankers and brokers. Any machines, algorithms, organizations or individuals would freely transact and interact with one another with no or little friction. 

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The Future of Payments Banks

Navi Mumbai based FINO PayTech Ltd. recently launched the FINO Payments Bank, which is the newest entrant in the space after Airtel, India Post and Paytm. FINO was one of the original 11 applicants which were issued an in-principle approval by the RBI for setting up a payments bank back in 2015. Paytm has also launched its Payments Bank in May 2017 offering an interest rate of 4%.

What are Payments Banks?

Payments banks - a new banking model proposed by the RBI, are similar to traditional banks but operate on a smaller scale without involving credit risk. The main objective of payments bank is to widen the spread of financial services to small businesses, low-income households, migrant labour workforce in a technology-driven environment. Payment banks will make use of mobile wallets and digital technology to bring about greater financial inclusion. Following are some of the guidelines that have been set up by the RBI to ensure that payments banks work within the prescribed agenda:

1)      Payments banks will deal in deposits of only up to INR 1 Lakh

2)      Cannot indulge in lending activities

3)      Cannot issue credit cards

4)      For the first 5 years, promoter’s shareholding should at least be 40%

The RBI gave in-principle approval to 11 entities to set up a payments bank - Aditya Birla Nuvo, Airtel, Cholamandalam Distribution Services, Department of Posts, FINO PayTech, National Securities Depository, Reliance Industries, Sun Pharmaceuticals, Paytm, Tech Mahindra and Vodafone M-Pesa. Out of these Cholamandalam Distribution Services, Sun Pharmaceuticals and Tech Mahindra have surrendered their licenses.

Challenges

1)      Profitability

One of the major challenges faced by payments banks is that they are not allowed to indulge in any lending activity. Instead, payments banks have to rely on fee based income and investment in Government Securities as their main source of income. Government bonds yield approximately 7 to 7.5%. The fee based income also will be largely dependent on the number of transactions.

2)      Costs incurred

The main aim of payments banks is financial inclusion and getting the unbanked rural areas into the banking zone. Rural areas have very limited infrastructure and the costs incurred to get these areas into banking would be very high. Payments bank entity like ‘India Post’ would do well in this area as they have a wider presence in rural areas.

3)      Limited digital infrastructure

Most payment banks are relying on a digital platform for their banking transactions. The digital infrastructure in India is still in a growth phase. Although, government schemes such as Digital India have been created, but most of their plans are yet to materialize.

Opportunities

1)      Size of the market

Volume of transactions is a key factor to the success of Payments banks. India still has a very large unbanked population. Also, the spread of digital literacy will help increase the overall volume of transactions.

2)      Ability to utilize existing infrastructure

Some of the entities like Airtel, Vodafone and India Post already have a huge distribution network in place. They have a ready infrastructure and client base to start their operations with. The ability to make use of this existing infrastructure will be crucial.

Payments banks in operation

Apart from the recently launched FINO Payments Bank, there are three other payments banks that are already in operation.

1)      Airtel Payments Bank

2)      India Post Payments Bank

3)      Paytm Payments Bank

Airtel was the first to launch its payments bank operation followed by India Post and then Paytm. To compare the interest rates offered by each of these 3 players – Airtel payments bank offers the highest interest rate at 7.25%, India Post at 5.5% and Paytm payments bank offers the lowest interest rate at 4%. All of the 3 banks charge a cash withdrawal charge. Paytm is the only one among the 3 to allow free online fund transfer.

Future of Payments banks

For payments banks to work, there needs to be a sustainable business model with respect to profitability. Their approach to banking should be transaction centric as their growth depends on the volume of transactions. The challenges in the system are evident as 3 players have already pulled out. RBI should bring in policy changes to offer greater flexibility to payments banks and the banks also need to capitalize on their strengths and fully utilize the existing infrastructure to evolve into more sustainable entities.

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Participatory Notes: A Convenience or a Threat

Participatory Notes: A Convenience or a Threat

Remember the auction scenes depicted in the cinematic world where the bidder bids for some undisclosed third party? Ring a bell? What could be the purpose of such an activity? Well, such indirect participation is to bypass the formalities of registration with the regulating authority and obviously to maintain the anonymity of the participation.

So if the overseas investors want to invest in the Indian stock markets without getting into the regulatory approval process with the SEBI (Securities and Exchange Board of India) and other hassles, they can do so via participatory notes.

Participatory notes also called P-Notes are offshore derivative instruments (ODIs) with Indian shares as underlying assets. These instruments are used for making investments in the stock markets. However, they are not used within the country. They are used outside India for making investments in shares listed in the Indian stock market. That is why they are also called offshore derivative instruments. These notes allow foreign high net worth individuals, hedge funds and other investors to put money in Indian markets by getting into a contract with the local brokers and institutions without being registered with SEBI, thus making their participation easy and smooth. P-Notes also aid in saving time and costs associated with direct registrations.

Historically, P- Notes has been the preferred mode of investment by the FIIs right from their launch since 1992 which can be justified by the mere fact that they accounted for almost 50% of the FII investment in 2007. Firstly an investment avenue in such large proportion with the owner of the underlying not known adds up to the threat of market volatility. This was clearly evident when the Sensex crashed by 1744 points or about 9% of its value - the biggest intra-day fall in Indian stock-markets in absolute terms on october 17,2007 when SEBI announced the mere intent to curb the P- Notes. Secondly P-notes are identified as one of the routes through which black money transferred outside India comes back through a process called round-tripping.

Owing to such threats the SEBI has been constantly thriving to curb the use of P- Notes by bringing about regulatory changes and making the FII registration process easier. Presently about 6% of the total Foreign investment is in terms of P- Notes which is significantly lower considering it stood at over half the total investment at one point of time.

The recent policy changes made include levying a fee of $1,000 on each instrument to be collected and deposited by the issuing FPI once every three years, starting from April 1, 2017 and barred their issuance for speculative purposes to check any misuse for channelising black money. At the same time, SEBI decided to relax the entry norms for foreign portfolio investors willing to invest directly in Indian markets rather than through participatory notes.

P- Notes have often been in controversy in India for alleged misuse for round-tripping of funds and adding to the market volatility. But the norms have been made stringent in the recent years, following which they have also become less attractive. The intent of the watchdog was never to ban an investment avenue which has its own perks  but to rather encourage the investors follow a more regulated and transparent route, simultaneously making sure that the proposed route is easy, fast and convenient.

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