There are two aspects to news- knowing the headline and understanding the intricacies of it. We at The Connectere focus on both. While The First Forum edition gives a brief about the headlines, The Weekly Analysis Edition is meant to educate the reader on what do various news mean and what are their intricacies. This initiative is meant to educate the reader on how to understand the important news. In the Tenth Edition we are covering the following news:
1. The Reliance Rights Issue
2. Why do the liquor revenue sales matter to States?
3. Impact of COVID-19 on MSME’s
4. The ventilator question: Why Covid-19 patients starve of oxygen?
5. Fuel prices tank, tanker rates spike for lockdown glut
6. India lodges protest with Islamabad over Pak court’s order on Gilgit-Baltistan

By Shruti Jha, Nikunj Gulati and Kanika

Reliance Industries Limited posts record profit in Q4 and FY18 ...

The Reliance Rights Issue

A company that is listed on the stock exchange. Do you know how they can show their strength in the Indian stock market?
In the current scenario when the stock market crashes hard from the coronavirus pandemic many companies are fearing to raise the money in the market. But there is one company which is not fearing raising more and more capital even in the gloomy condition. It is Reliance Industries which has come up with a Rights Issue. This is just because they still believe that there would be investors that die to invest more and more into their company. In this manner, the company proposed to raise Rs.53,125 crore. If shareholders owned RIL shares as on record date (announced May 14), then they would be entitled to one new share for every 15 shares held in the company. Thus, one share will be offered at Rs. 1,257 which is a 14% discount to the closing price on April 30, 2020. The shareholders willing to subscribe to the issue will have to pay 25% on application and the rest in one or more calls.

The next question is why Reliance came up with the Rights issue?
The reason could be multiple as of now but the possible reason is to reduce their debt. Since the recent Facebook deal helped the company to reduce its debt as it was an all-cash deal, the same can be applied to the Rights issue strategy. Meanwhile, RIL failed to get through a big deal of acquiring a stake in the oil refinery Saudi Arabian company due to the ongoing crude oil price crash. So, Reliance came up with the deal of rights issue which will lead to an overall 7% equity dilution. Moreover, they’re trying their level best to fulfill their dream of becoming a debt-free company by 2021 and that’s the reason rights issue is also one more step toward becoming debt-free.

Now the very big question is what is the Rights Issue?
A simple meaning of Rights Issue is an invitation to shareholders to purchase additional new shares in the company. Note one thing that not everyone can subscribe to the Right issue. Only existing shareholders can purchase the rights at a discount price. Discount price to what?
Discount to the prevailing market – the price that was being quoted in the open market.

The next thing that comes into the mind is that whether Right issue something new for the Reliance or have they given this deal in the past also. Well for your information, it has been more than three-decade i.e. 30 years since they had issued a Rights issue.

Experts feel that the Rights Issue after the Facebook deal is a tool to build confidence among shareholders and create tremendous value for the same. In this case, the Rights issue presents a very good opportunity for existing shareholders to reap the benefits from the value unlocking from the new and emerging businesses such as digital, telecom, retail businesses over the next few years. Existing shareholders can also have the liberty to ignore/ sell their rights.

Why do the liquor revenue sales matter to States?

In the most unlikely scenario, alcohol has become the talking point in India in the middle of the coronavirus pandemic. This happened after the Central government released new guidelines on May 1 which allowed the sales of liquor across states on the approval of the state governments. Hence state governments allowed the sale of liquor.

The very next day we saw long queues of people outside liquor stores around the country without practicing social distancing. So, in order to prevent overcrowding in the shops, the government had to do something. Therefore, the government increased the tax on liquor. The Delhi government imposed a 70% tax as the corona fee, Andhra Pradesh imposed a 50% hike and West Bengal imposed an additional 30% sales tax.

One thing to note is that why didn’t the government stop the sale of liquor instead of imposing a tax. This is primarily because the states are set to gain as the liquor sales are expected to bring revenue to the state of coffers and Delhi corona fee on alcohol highlights the importance of liquor to the economy of the state. The ban on alcohol during lockdown led to the Delhi government losing Rs.645 crore in revenue from the sale of alcohol.

Why state government is so concerned about liquor sales?
The only reason is revenue. Here let’s get deep into the analysis of revenue from the sale of liquor. Liquor contributes to a considerable amount to the exchequers of all states and union territories except Gujarat and Bihar, both of which have enforced prohibition. Generally, the state levies the excise duty on the manufacture and sales of liquor in some states. For example, Tamil Nadu imposes VAT, States also charges a special fee on imported foreign liquor, transport fee, etc. Few states such as Uttar Pradesh imposes a special duty on liquor to collect funds for special purposes such as maintenance of stray cattle.

The report published by RBI shows that during 2019-20, the 29 states and the union territories of Delhi and Puducherry have budgeted a combined Rs. 1,75,501.42 crore from state excise on liquor. This was 16% higher than the Rs. 1,50,657.95 crore that they had collected during 2018-19. So, on average, the states collected about Rs. 12,500 crore per month from excise on liquor in 2018-19, which rose to about Rs.15,000 crore per month in 2019-20 and which was further expected to cross Rs.15,000 in the current financial year. This protection was before the COVID-19 outbreak. This figure highlights the importance of liquor sales to the government.

State levies excise duty. So, what exactly is the Excise duty?
Excise duty is levied mainly on liquor and other alcohol-based items by the respective States government. Revenue receipts from state excise come mainly from commodities such as Country Spirits, Malt liquor, Foreign liquor, Medicated wines, etc. Besides, a substantial amount comes from license fine and confiscation of alcohol products. In fact, State excise duty on liquor is the second or third contribution to the category of state’s own tax revenue; sales tax (now GST) is the largest. Alcohol does not come with the purview of GST because exempting alcohol from GST was a key request put forth by the state government when the tax reform was being implemented across the country. Not only alcohol but other major items such as land, electricity, and petroleum products are beyond the ambit of GST.

In view of analysis, it can be concluded that the manufacturer and sales of liquor are major sources of revenue for states. The reopening of liquor shops will help the state to meet the expense of public welfare.

small town

Impact of COVID-19 on MSME’s

The COVID-19 pandemic has brought the entire world to a standstill. It is a very serious threat to the global economy. There is no doubt that it impacts all the sectors including Micro, Small, and Medium Enterprises which forms the backbone of the Indian economy and is one of the crucial sectors that led everyone to grow by leaps and bounds. The sector which provides employment to over 114 million people and contributes to more than 30% of the GDP is going through one of the tough phases because the small industries are the most vulnerable ones. This is because of their size, scale of operations, and limited financial resources.

MSME is the sector that was already reeling under huge distress mainly due to three reasons, firstly because of demonetization, secondly due to poor implementation of GST followed by the prolonged economic shutdown and finally, because of COVID-19.

The problems that aggravated due to COVID-19 are :

  1. Declining Revenue – MSMEs are grappling for stability when sales and revenue remain at a standstill whereas it is difficult to hold expenses.
  2. Supply Chain Disruption – China plays a very pivotal role in the global supply chain for India and for its MSME sector as well, this sector is largely dependent on China for its raw material.
  3. Loan against Collateral – Loans to MSMEs are mostly given against property (as collateral) but in a time of crisis, when property value falls, it inhibits the extension of new loans.
  4. Job Crisis – The total lockdown has raised an issue of the existence of small industries primarily due to the unavailability of cash for salaries which subsequently result in the job crisis.
  5. Lack of Labour – The return migrant laborers will create an issue of lack of labor availability.

The government needs to come up with immediate relief measures to build up the confidence of MSME. A stimulus package is required to re-energize the market economy. Many countries like the USA and China have rolled out many measures to save MSMEs from COVID-19. The RBI has been trying to pump money into this sector but given the structural constraints, it had limited impact. Since it is unclear when life comes back to normal, the government should introduce a policy framework, not just for the short term, but also for the long term, considering both supply and demand-side impact.

The government can provide tax relief (GST and corporate tax), or provide liquidity to rural India (maybe through PM-Kisan) to boost demand for MSME products. A credit guarantee by the government can help as it assures the bank that its loan will be repaid by the government in case the MSME falters. It is high time for the government to do its bit otherwise it would be too late to undo the mistake.

breathingThe ventilator question: Why Covid-19 patients starve of oxygen?

Health experts and authorities maintain that only about 15 percent of Covid-19 patients actually need hospitalization, treatment in ICU, oxygen supply for breathing, or ventilator support. Around 1 out of every 6 people who get COVID-19 get seriously ill and develops difficulty in breathing. For a healthy person, the health experts say, Covid-19 is mostly harmless with a large volume of patients showing mild or no symptoms of illness. It gets severe in some cases and fatally complicated in those who have pre-existing health conditions. Such patients need assisted breathing and need to be taken under hospital care urgently.

Covid-19 causes prolonged and progressive hypoxia, which is like starving the body of oxygen. The virus binds itself to the heme groups in hemoglobin in red blood cells. This disrupts the normal respiration process. In Covid-19 patients, the coronavirus blocks hemoglobin from exchanging carbon dioxide for oxygen, and patients simply begin desaturating. That is, they start losing oxygen content in their bloodstream. The normal saturation level shows the oxygen level in the body at 95 percent. A report by The Lancet said the oxygen level can drop to 60 or 50 percent in some of the Covid-19 patients. In such a situation, oxygen supply to different organs starts drying up, and eventually, organ failures happen. In some cases of re-hospitalization of cured Covid-19 patients, patients complained of breathlessness caused by hypoxia. This is has happened even in cases when patients have not reported respiratory fatigue. That is, they are physically capable of respiration – inhaling and exhaling – but their bodies starve of oxygen.

This means that hemoglobin, the carrier, is still plying like a carriage truck but is carrying only junk. It is moving to and fro the bloodstream but not carrying lifeblood to the organs. The patient may complain of suffocation just the same way she does in carbon-monoxide poisoning. If immediate treatment is not provided to the patients, they face a grave risk of death. The ultimate cause of the death could be cardiac arrest or kidney failure but triggered by oxygen starving of the body.

oil tankerFuel prices tank, tanker rates spike for lockdown glut

With virus lockdowns sinking fuel consumption globally, the demand for storing the oil glut has sent tanker-freight rates to a record high, industry data show. Their onshore storage facilities running almost full and quantities queuing up in the supply chains, oil-producing countries, traders, and refineries are now parking excess fuel in floating vessels in anticipation of future demands. Remember, the global demand for oil fell short by as much as 30 percent this quarter as lockdowns ground economies to a halt.

The US capacities in Oklahoma and Southern California are expected to reach the brim by May 2020, if things continue to function this way. The situation has pushed producers and traders to rent out oil tankers as floating storage units, at least for now. Experts believe that such a situation could also be used by companies and traders to artificially rake up demand and profiteer. The governments and monitoring agencies across the world must ensure that oil cartels do not manipulate fuel prices after the lockdowns are lifted. When WTI crude oil prices crashed to 1$ per barrel, there were expectations that the Brent crude would see similar lows, benefitting India. But the Brent crude oil prices held stronger than the WTI.

Nevertheless, the supply-demand conundrum exists for India too, which is in the second phase of its national lockdown. With the number of Covid-19 cases seeing a steady rise across major states, it is not clear as to when India will be back to normalcy. In terms of incoming capacity, there are 59 tankers approaching major ports of India — Vadinar (Gujarat), Chennai (Tamil Nadu), Kochi (Kerala), Paradip (Orissa), Mumbai (Maharashtra), Mangaluru (Karnataka), Vishakhapatnam (Andhra Pradesh) and Kandla (Gujarat). This may also be a time for India to stock up high on its petroleum reserves. The Modi government in its first tenure approved the building of additional SPRs (strategic petroleum reserves) in Odisha (4.4 million tonnes) and Karnataka (2.5 million tonnes). When fully functional, these facilities will enable India to hold an additional amount of 10.25 days’ worth of oil. Currently, India has the capacity to hold around 15 days’ worth of oil, which comes down to 5.5 million tonnes.

india pakistanIndia lodges protest with Islamabad over Pak court’s order on Gilgit-Baltistan

India has conveyed its strong protest to Pakistan over an order by neighboring country’s supreme court allowing the conduct of general elections in Gilgit-Baltistan. The Ministry of External Affairs said Pakistan was told that entire Jammu and Kashmir and Ladakh, including areas of Gilgit and Baltistan, are an integral part of India and that Islamabad should immediately vacate the areas under its illegal occupation. In a recent order, the Pakistan Supreme Court allowed the amendment to the Government of Gilgit-Baltistan Order of 2018 to conduct the general elections in the region. It was clearly conveyed that the entire Union Territories of Jammu and Kashmir and Ladakh, including the areas of Gilgit and Baltistan, are an integral part of India by virtue of its fully legal and irrevocable accession.

A senior Pakistani diplomat was served a “demarche”, or formal diplomatic representation over the telephone, to lodge India’s strong protest against the Pakistani Supreme Court’s recent order allowing the setting up of a caretaker administration in Gilgit-Baltistan to hold fresh elections, people familiar with developments said. The MEA said the government of Pakistan or its judiciary has no locus standi on territories “illegally and forcibly” occupied by it. India completely rejects such actions and continued attempts to bring material changes in Pakistan occupied areas of the Indian territory of Jammu and Kashmir and instead, Pakistan should immediately vacate all areas under its illegal occupation says the ministry.

The MEA said Pakistan’s recent actions can neither hide the “illegal occupation” of parts of union territories of Jammu and Kashmir and Ladakh by it nor the “grave human rights violations, exploitation and denial of freedom” to the people residing in these areas for the past seven decades. On April 30, Pakistan’s Supreme Court allowed the government to amend the Government of Gilgit-Baltistan Order 2018 to set up a caretaker administration in the region to conduct fresh elections. The order was issued in response to a petition filed by the Imran Khan government. The term of the current government in Gilgit-Baltistan is set to end on June 24 and elections have to be held within 60 days.

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