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 Eighth Edition we are covering the following news:
1. How Oil Crash impacts Sugar Prices?
2.RBI’s Covid-19 booster shot: Is it enough to rescue the Indian economy?
3. Government Changes FDI Policy in the wake of Coronavirus
4. Franklin Templeton to close six India funds hit by a coronavirus
5. The Giant Facebook-Jio Deal
6. Amidst the pandemic, the net worth of few Billionaires rising massively
Recently, the price of raw sugar for May delivery in New York crashed to 9.75 cents per pound, the lowest since June 2008. What could be the reason for the collapse in global sugar prices? The reason for this collapse is the closure of restaurants and other social functioning not taking place. The impact of coronavirus induced lockdown on out of home consumption and institutional demand is obvious.
However, Is that the only reason?
Sinking crude prices appears an even bigger reason. When oil prices are high, mills (especially in Brazil) tend to divert cane for making ethanol (alcohol of 99%-plus purity) that is used for blending with petrol. With the recent fall in oil prices, mills will not find it attractive to divert cane for ethanol. The juice from crushing sugarcane can be crystallised into sugar or fragmented into alcohol. The impact of low demand sugar and low oil prices is bad news for both Indian sugar mills and cane farmers. The challenges faced by them are:
- Excess stock of sugar due to low demand and high dumping from Brazil will add to the woes of both farmers and industry.
- India is already grappling with high dues to farmers by the sugar industry as a slowdown in exports and not much domestic lifting of sugar. For instance, Factories in Uttar Pradesh have till now crushed cane worth roughly Rs. 32,000 crores in the 2019-20 season but managed to pay only Rs.16,456 crore.
- The industry’s problem is not from sugar alone. The lockdown has reduced offtake of alcohol – potable liquor or ethanol for blending with petrol. For instance, UP mills may produce around 100 crore litres (one billion) of ethanol this season (as opposed to 51 crore in 2018-19). This is due to automobiles not functioning, oil market companies aren’t very keen to procure ethanol.
The possible solution available to India increased import requirements from Indonesia and it also slashed the duty on Indian raw sugar from 15 % to 5%. The increased demand from Indonesia is on account of Thailand, a major supplier to Indonesia, experiencing a bad drought.
In his second big announcement since the onslaught of Covid-19 began to wreck the Indian economy, RBI Governor Shaktikanta Das announced a slew of measures to ease the flow of credit into the economy. A special refinance facility of Rs 50,000 crores was announced to meet sectoral credit requirements – this is to specifically boost the liquidity of financial institutions like NABARD, SIDBI, and National Housing Bank. NPA (Non-performing Assets) norms of 90 days have been relaxed. The period of the moratorium will be excluded from the 90-day classification norms of NPAs for those accounts, which would avail the moratorium facility.
The NBFCs (Non-Banking Financial Companies) have been given the flexibility to give such relief to their borrowers. There has been a cut in the reverse repo rate which will promote lending by commercial banks. Financial institutions continue to be wary of lending-businesses across sectors have complained that even as the RBI has brought down lending rates and has been urging banks to lend, their experience with lending institutions continues to be difficult. In fact, from the last time, the RBI announced a repo rate cut, the amount deposited with the RBI has gone up from Rs 2 lakh crore to Rs 4-4.5 lakh crore in the last 20 days. The risk appetite of banks continues to be low on concerns of loans turning NPAs. The RBI has stated that 50 percent of the funds should be utilized for ‘investment grade’, which is a safer bet and will mean that banks end up providing this money to higher graded NBFCs and several small NBFCs facing a massive liquidity crunch could be left out. RBI’s liquidity injection could help the real estate sector, which is one of the biggest employment generators and has been crippled for several years.
India amends FDI policy (the policy which dictates who can invest how much in Indian companies) mandates that investments from neighbouring countries (shares borders with India) would now require government approval effectively closing the “automatic route” for foreign investments. India’s decision to tighten the norms of FDI came amid reports of China eyeing to take over Small and Medium Enterprises at throwaway prices. This was done to curb opportunistic takeover of domestic firms in the wake of the economic downturn triggered by the pandemic. No country has any concern over new policy except China. Thus, China criticised India for the new norms calling it discriminatory and against International rules of free trade and investment. However, India is not the only country to have taken this step, several European countries have also tightened their FDI norms.
Startup and tech up ecosystem impact
China is the most active in India in the startup space. Several Indian startups have existing investments from Chinese investors. For instance, Flipkart has an investment from Tencent and Alibaba owns a significant stake in Paytm. Even large companies like Xiaomi have come through FDI norms. The government’s change is expected to have a significant impact on investments from China as in fact 18 of the Indian unicorns (startups worth over $1 billion) have Chinese investors on board. Therefore, the unicorns which depend on their largest investors to keep the cash flowing may now have to start looking for new investors, a growth-stage startup may also see investments drying up.
In view of this let’s clear this,
- Foreign investments from China are not banned, but rather a screening process has been initiated to examine the implications of the investment, as countries around the world are trying to manage the burden borne out of a pandemic while ensuring their economic stability and security.
- The changes have been made only to Foreign Direct Investment and not Foreign Portfolio Investment rules. Any investment of less than 10 % of the total paid-up capital of a listed company is treated as an FPI. Recently China Central Bank increased its stake to 1.01% in HDFC via FPI route.
In an unprecedented decision, Franklin Templeton has shut six of its mutual debt funds after the coronavirus pandemic wrought havoc in the country’s bond market. The funds included Franklin India low Duration Fund, Dynamic Accrual Fund, Credit Risk Fund, Short term Income plan, Ultra Short Bond Fund and Income opportunities. These schemes manage assets worth Rs. 26,000 crore. The decision to close this due to illiquidity and severe market dislocation. Thus winding up the funds is only a viable option for investors via the managed scale of the portfolio.
Does winding down of the six funds mean a full loss of the investor’s money?
Well no, Investors will receive money as and when the fund house is able to recover by liquidity the underlying investment. And investors in these schemes will not be able to sell or buy these schemes. No SIP/STP/ SWP will work on these schemes. Moreover, these funds will continue to publish their net asset value daily and investors will not be charged any investment management fee on these funds.
Will this hit other mutual fund schemes?
This is the first instance when a fund house is shutting its schemes because of the coronavirus pandemic. Since it is the first time a scheme is being wound up retail investors have not understood what the move is likely means and many investors are likely to get nervous and redeem their funds in a hurry. Let’s get this straight. Franklin Templeton has just wound up six of its debt schemes. This does not mean Franklin is shutting down. Hence this crisis does not impact bond schemes of other houses. Even equity funds that belong to Templeton will continue as before.
Reliance Industries (RIL) share prices rallied on April 22 after Facebook said it will invest $5.7 billion in Reliance Jio. The telecom unit of RIL sold a 9.99 percent stake to the US tech giant for Rs 43,574 crore. In addition to this enormous payment, there is an additional agreement that Facebook-owned WhatsApp will aid Jio in introducing JioMart. Reliance Jio has nearly 400 million mobile users, at par with FB’s numbers of about 400 million on WhatsApp, Facebook, and Instagram. Most of these subscribers are overlapping. Many FB users are subscribers of Jio’s rivals (Bharti Airtel and Vodafone Idea) to whom Jio’s other services can be extended. This way, Jio gets another channel to promote its other digital services to the customers of its competitors. The group is in the process of launching its marketplace, JioMart. It will allow millions of local retailers and Confectionery merchants to list their products on the portal and sell them to customers. It is currently under trial in select areas of Maharashtra.
Reliance Industries has spent almost $50 billion — most of it borrowings — to build Reliance Jio Infocomm, which became India’s No. 1 wireless carrier within about three years of its debut by offering free calls and cheap data. Many reports suggest that Jio plans to use most of the cash raised from the stake sale to Facebook will be used to pay the group’s debt, while the rest will be used to fuel growth at its digital platforms. Reliance Industries’ market value surged about $11 billion on the deal, which has been rumored for some months. It saw Ambani regain the title of Asia’s richest man from Alibaba Group Holding Ltd. co-founder, Jack Ma, after the market rout sparked by the pandemic wiped out about $30 billion from his wealth between Dec. 19 and March 23.
According to the Institute for Policy Studies (IPS) report, eight of these billionaires including Bezos, Zoom Video Communications Inc founder Eric Yuan and Musk saw a $1-billion jump in their total net worth. The combined wealth of America’s billionaires, including Amazon.com Inc founder Jeff Bezos and Tesla Inc chief Elon Musk, increased nearly 10% during the ongoing COVID-19 pandemic, according to a report published by the Institute for Policy Studies (IPS).
The wealth surge of America’s richest men happened during a period that saw as many as 22 million Americans file for unemployment. Even as the broader economy faced a recession, tech and stay-at-home stocks like Zoom have rallied in recent weeks, due to a surge in usage of video conferencing and remote work technology, thus boosting the net worth of billionaire founders with holdings in those companies. During the period between January 1 to April 10 this year, 34 of the nation’s wealthiest billionaires have seen their net worth increase by tens of millions of dollars, the reports have said. Musk holds an 18.5% stake in Tesla shares, which has soared over 73% since the beginning of the year as traders looked beyond the short-term impact of the coronavirus pandemic. Bezos owns about 15.1% in Amazon stock, which has gained nearly 31% this year as online orders on its platform have surged due to people staying indoors. As for Eric Yuan, the rise of his wealth seems the easiest to understand as there amidst the global lockdown work doesn’t stop, all meetings and conferences are taking place using Zoom majorly. Although facing some negative publicity due to reports suggesting a lack of security of information with Zoom, there still seems no end to Zoom with the major reason being absence of any kind of substitutes to it.