Top 10 tips to boost investing results in 2016.

1. Keep an eye on the Fed (and other central banks)

Central banks may not be in the driver's seat when it comes to world markets right now, but they definitely have a hand on the wheel. A few words from Federal Reserve Board Chair Janet Yellen or European Central Bank President Mario Draghi can send stock markets across the world charging upward or downward hundreds of points.

A big part of the investing story in 2016 will undoubtedly hinge on how well Yellen manages the U.S.'s transition to normal, non-zero interest rates. If she raises rates too quickly, it could push the still-rickety U.S. economy back toward recession. If she raises rates too slowly, cheap credit could fuel a bubble in asset prices.


In general, higher interest rates mean slower economic growth and thinner profits for U.S. firms, so you'd think that the longer Yellen holds off in raising rates, the better for U.S. stocks.

But Yellen's reluctance to raise rates hasn't always been interpreted as a positive signal by the markets, perhaps because it's seen as evidence that the U.S. is on shakier economic ground than we'd like to think.

In short, the Fed is a wild card this year.
One stable investment is a certificate of deposit. Find the best CD rates.

2. Get ready for some volatility in 2016

A number of studies have shown that periods of intense volatility tend to cluster together. The 2nd half of 2015 featured several months of intense volatility, so that would seem to augur for more of the same in at least the 1st half of 2016.

On top of that, changes to the federal funds rate have tended to be accompanied by volatility in the markets over the past few decades, so it's shaping up to be a bumpy ride in 2016.

3. Keep enough cash on hand to avoid liquidating assets

In low-volatility times when asset prices are on an upward trend, it's tempting to be invested in the market as much as possible. Why hold cash that's earning next to nothing, the thinking goes, when you can have your money working hard in the markets for you? In an environment where the market is continually setting record highs, you can always liquidate investments at full value to fund whatever cash needs you may have.

With volatility likely to be strong in 2016, it might make sense for those who depend on their portfolio to pay some or all of their living expenses to set aside a larger cash cushion ahead of time. That's so they don't have to sell assets at temporarily depressed prices in order to meet routine or unexpected expenses.

4. Be aware of assets outside of your brokerage account

When you're planning out your portfolio, it's easy to lose track of non-financial assets because they don't appear on brokerage statements. That can lead to accidentally concentrating too much of your overall wealth in some sectors and not enough in others.

For instance, say you decide you want exposure to the residential housing market, and you go out and put a sizable chunk of your stock portfolio into the SPDR S&P Homebuilders ETF (XHB). If you're also a homeowner and have a big percentage of your net worth tied up in your home equity, as many homeowners do, your total exposure to residential real estate is your equity, plus whatever percentage of your overall assets are in XHB. At that point, you may be overexposed if the housing market goes sideways again.

The same applies to your human capital -- a complicated-sounding term that means the present value of all your future paychecks put together. For example, if you're a petroleum engineer, your paychecks, and consequently, the value of your human capital, are very much tied up in the fate of the oil industry.

If things go really bad, you could end up seeing your wages stagnate or, worse, you could become unemployed. In that case, it may not be a great idea to have a huge allocation to oil companies in your portfolio on top of that.

A good financial planner would take into account all of your assets, not just the financial ones, and so should you.

5. Make a plan and stick with it

When you see the value of your portfolio take a big hit, it's understandable to want to log on to your investment accounts immediately and sell, sell, sell.

But how do you avoid falling into the buy-high, sell-low trap? Mostly by having -- and sticking with -- a comprehensive investment plan. That plan should have 2 essential parts:

1. An investment policy statement, or IPS, that takes into account your particular time horizon, risk tolerance and goals.
2. A strategic asset allocation designed to help you reach the goals within the constraints outlined in your IPS.

Of course, your investment plan shouldn't be carved in stone. It's important to update it regularly, particularly if something fundamental changes with your investing needs or market conditions.
Stick to your plan through day-to-day fluctuations rather than going on a selling frenzy every time you get uncomfortable. Think of it as a guardrail to keep you between the ditches when market turns get twisty.

6. Dollar-cost averaging can be your friend

Research seems to suggest that if you have money on the sidelines, you're more likely to get better returns by putting it into the market all at once rather than making smaller securities purchases at regular intervals -- a practice known as dollar-cost averaging.

But dollar-cost averaging can have benefits from a behavioral finance perspective -- that is, it helps investors not to freak out and sell everything when the blue chips are down.

For example, say you get a $2,000 bonus at work and want to put some money into a tax-advantaged 529 college plan account for your kids' education.

If you put the entire lump sum in right before the market takes a big hit and your brand-new investments lose 10% of their value in a day, you're going to be tempted to sell it all and move into unproductive cash investments.

On the other hand, if you put $200 per month in for 10 months, day-to-day price fluctuations may not have the same emotional impact.

Particularly in a year that's looking to be fairly volatile, that type of strategy might be useful, especially for beginning investors.

7. Watch for bargains

When you're investing for the short term, big drops in asset values are bad news. The prices may never recover before you have to cash out, locking in your losses.

But when you're investing for the long term, bear markets and large-scale drops in asset prices should be looked at the same way you look at a buy-one, get-one-free sale at the supermarket -- as an opportunity to stock up (no pun intended) when prices are low.

There are a few key sectors that look likely to be depressed in 2016, most notably energy, materials and utilities. As long as it fits in with your overall investment plan, taking the opportunity to pick up some of the historically highest-performing companies in those sectors may help boost your returns over the long term.

8. Be skeptical of portfolio-based lending

Portfolio-based lending, or using securities in your portfolio as collateral for loans, has become a big business for banks' wealth-management arms. It's often sold this way: Why liquidate investments that are doing well when you can take out a low-interest-rate loan and pocket the difference?
But there's 1 big reason that portfolio-based loans are usually a bad idea: If the securities decline substantially in value, you could be on the receiving end of a margin call. If that happens, you may either have to put up more collateral or face having the loan come due immediately.

In an environment where security prices could be fluctuating more than in the recent past, that could end badly for investors. If you need cash to make a purchase, a better move might simply be liquidating part of your portfolio and using the proceeds from the sale instead.

9. Take advantage of tax management opportunities

One positive effect of rocky markets is that they allow for some substantial capital gains management on taxable investments.

Basically, any investment you own in a taxable account that has gone up in value a lot is a tax bomb waiting to explode and stick you with a bill for up to 20% of the gain, depending on your income.
The 1 thing that can defuse these tax bombs is using losses on investments that didn't work out to offset the gains.

Here's the basic trick: You see that stocks in a particular category are falling across the board because of some broad economic trend. You happen to own a stock in this category that's been a loser compared with its peers for some reason -- its products aren't as good, its management is clueless, whatever. You don't want to own it anymore, but you believe the sector it's in will recover at some point before the end of your time horizon.

But wait! There's another stock in that same category that's consistently beaten your bad stock and looks well-positioned for a comeback. You can sell the bad company's stock, use the proceeds to buy the good stock, and boom, you have a tax loss to offset gains elsewhere in your portfolio, and you haven't violated the wash-sale rule.
Times of elevated volatility, like 2016 is looking to be, are a perfect time to pull off just such a maneuver. So, if you have chronically underperforming investments that you've wanted to unload for a while and have some long-term capital gains issues that need to be addressed, keep tax-loss harvesting in mind.

10. Be aware of the difference between cyclical vs. secular trends

A cyclical trend is just what it sounds like: a market trend that will reverse itself within a few months or years and go back the other way, like how broad stock market indexes fall in the lead-up to a recession and then begin rising as an economy comes out of recession.

A secular trend is different. It's a longer-term trend in an industry or market brought on by some fundamental change, like the fall of Polaroid as digital cameras gained in popularity or the decline of newspaper stocks as Web-based news consumption became the norm.

Sometimes in the moment, it can be difficult to tell the difference between the 2. For instance, are current low oil prices a cyclical trend that will soon reverse, leading to prices rising to record levels in the future? Or are oil companies looking at more or less permanently slow growth, thanks to gains in renewable technologies and increasing environmental regulation designed to slow global warming?
Will financial stocks recover as they adjust to (and lobby against) new regulations designed to keep them from blowing up the global economy again? Or, are their low stock prices a symptom of disruption by prepaid debit card providers, robo-advisers and other fairly recent "fintech" competitors?

As the pace of technological change accelerates in 2016 and beyond, these types of questions will become even more pressing for investors, increasingly determining which investors win and which ones lose.

Sun Capital

Paragon Partners launches $200-m India-focused mid-market PE fund

PE firm Paragon Partners has raised $50 million, marking the close of its $200 million growth fund, PPGF-I to invest in mid-size companies.

PPGF was established in 2015 by Siddharth Parekh and Sumeet Nindrajog. It is an AIF-Category II Private Equity fund, investing in high growth mid-market private companies in India.

The fund will focus on five key sectors — consumer discretionary, financial services, infrastructure services, industrials and healthcare services. The fund has an advanced pipeline of investment opportunities across these sectors.

Paragon Partners advisory board includes Deepak Parekh (Chairman, HDFC Ltd), Harsh Mariwala (Chairman, Marico Ltd & Founder Member), Sunil Mehta (Chairman, SPM Capital Advisors Pvt Ltd) and Jeff Serota (ex Sr. Partner at Ares Private Equity).

Siddharth Parekh, co-founder, Paragon Partners said: “We believe the next decade in India will see a strong resurgence of growth in key sectors such as manufacturing, financial services and infrastructure.”

The company said with its first close, PPGF-I has completed the funding of its first investment in Capacite Infraprojects Ltd, a leading EPC player based in Mumbai. Capacite is engaged in the construction of buildings (including super high rise structures) and factories, for large real estate developers, corporates and institutions.

The company currently has a footprint across Mumbai, NCR and Bengaluru regions and will look to grow this on a selective basis. Capacite is promoted by Rahul Katyal, Rohit Katyal and Subir Malhotra.

PPGF-I has seen significant interest from onshore and offshore institutions, family offices and HNIs. Domestic investors include India Infoline, Edelweiss Group and Infina Finance Private Ltd (an associate of Kotak Mahindra Bank Ltd).

Sun Capital

Piramal Realty plans to invest Rs 16,000 cr in 4 years

Piramal said that the company is looking to increase its commerical portfolio as well in the coming years.

Piramal Realty, the real estate arm of Ajay Piramal-owned Piramal Group, plans to invest Rs 16,000 crore in development of real estate projects and acquisition of land, over the next 4 years.

Anand Piramal, executive director, Piramal Group told FE that while the company already has a roughly 9 million square feet of residential projects pipeline to be executed till 2020, the company is open to acquiring fresh parcels of land and distressed assets.

The company is also in the midst of developing an office project in Kurla, near Bandra Kurla Complex (BKC) ad-measuring 2.5 million square feet.

The company launched a luxury project at Byculla called Piramal Aranya, which will entail an investment of R4,300 crore over the lifecycle of the project.

The sea-facing 70-storey high rise residential project will be spread across 7 acres and is in close proximity to the 60 acre botanical gardens on the west.

In 2015, Goldman Sachs and Waurburg Pincus had invested a total of $434 million in Piramal Realty, giving the company a strong bandwidth to invest in real estate projects.

Piramal said that the company is looking to increase its commerical portfolio as well in the coming years. “As of now we just have one project, but going forward we would like to have a combination of both residential and commercial real estate.

With the expectation of 7%-8% growth in the Indian economy, the focus on commercial real estate will come back and we would like to have a healthy mix of both segments”.

Sun Capital

Jewellery sector contributes to black money: CBEC chief

Despite the ongoing jewellers' strike to protest against reimposition of 1 percent excise duty on gold and diamond jewellery, CBEC today said the sector contributes to generation of black money and needs to be brought under the tax ambit.

"We have brought jewellery (sector) into the tax net. This is the levy which we had attempted two years ago and withdrawn... This is the sector which you will agree with me needs to be brought into tax needs," Chairman of the Central Board of Excise and Customs (CBEC), Najib Shah today said at an event organised by industry body Assocham.

"This is a sector which lends itself to generation of unaccounted wealth." Finance Minister Arun Jaitley in the Budget for 2016-17 had proposed 1 percent excise duty on jewellery without input credit or 12.5 percent with input tax credit on jewellery excluding silver other than studded with diamonds and some other precious stones.

Jewellers are on a three-day pan-India strike to protest against the proposed re-introduction of 1 percent excise duty on gold and diamond jewellery and mandatory quoting of PAN by consumers for transaction of Rs 2 lakh and above.

Shah noted: "... manufacturing sector contributes 17 percent of GDP. We have a huge chunk of industry which is out of the tax net." The CBEC chairman said the revenue department will take a hit of Rs 1,000 crore due to the change in CENVAT credit rules.

"But we thought it is essential because the cost of litigation for you and me are much more than revenue which otherwise we have got," he said.

Noting that the government has increased some duties, Shah said it's done so to create a level-playing field for Indian industries as was the case in defence.

He urged industries to stop demanding exemptions to avail of goods and services tax (GST).

"If you want GST, you should not demand exemptions because two don't go together," Shah said.

 

Sun Capital

Banks delayed in declaring Kingfisher as defaulters: CBI

Banks delayed in declaring Kingfisher as defaulters: CBI

The Central Bureau of Investigation (CBI) on Wednesday blamed commercial banks for the delay in declaring Kingfisher Airlines (KFA) and its promoter Vijay Mallya as defaulters.

"The CBI registered a case of cheating and fraud against Kingfisher and its erstwhile management involving allegations of defrauding banks to the tune of Rs 7,000 crore. This case was registered in July 2015, but loans were taken during 2004 to 2012. However, despite our repeated requests, banks did not file a complaint with the CBI. We had to register the case on our own initiative," CBI director Anil Sinha while addressing a conference jointly organised by the Indian Banks Association and the investigating agency.

HT had reported on February 29, 2016 that the RBI was questioning banks for lending Rs 5,253 cr to Kolkata-based REI Agro Ltd after the CBI uncovered fraud.

Sinha cited the example of how the agency's suo moto action against Pearls Agro eventually led to the arrest of the company's chairman.

SBI chairman Arundhati Bhattacharya, who was also present on the occasion, didn't comment on the issue.

SBI, along with other banks, had lent close to Rs 7,000 crore to the UB Group, the parent company of KFA. It was only last month that PNB declared the airline and Mallya wilful defaulters, a claim currently being contested by Mallya.

"While I fully understand that loan defaults can happen due to business risk and reasons beyond control of banks, borrowers and regulators, yet a significant part of the defaults are wilful and fraudulent," Sinha said. "What causes greater concern is that a major part of the NPAs and frauds are in large-value accounts," he said, adding that a large part of such funds moves outside the country to tax havens through unofficial channels.

Gross non-performing assets (NPAs) of banks have gone up from Rs 44,957 crore in 2009 to Rs 3 lakh crore in 2015.

The CBI investigated 171 cases of bank frauds involving Rs 20,646 crore of funds in 2015.

Sun Capital

DCB Bank buys 5.81% stake in Annapurna Microfinance

Deal values the micro lender at Rs 172 crore. 

DCB Bank Ltd has acquired a 5.81 per cent stake in Odisha­based Annapurna Microfinance Pvt Ltd for Rs 9.99 crore (about $1.5 million). 

The move strengthens the business partnership between the two companies, Murli M Natrajan, managing director and CEO at DCB Bank, said in a statement filed to stock exchanges. DCB’s microfinance initiatives help it achieve its financial inclusion goals, he added. 

DCB, formally known as Development Credit Bank, was founded in 1995. It has 176 branches in 17 states and two union territories in India. 

Gobinda Pattnaik, managing director at Annapurna Microfinance, said the transaction will help it strive forward to achieve its goal of serving the financially underserved. “This capital infusion is a mandate for growth,” he said. 

Annapurna focuses on rural locations of Odisha, Chhattisgarh and Madhya Pradesh. It has 14 branches each in Odisha and Madhya Pradesh and six in Chhattisgarh. It has half a million members and assets under management of Rs 720 crore

The latest transaction values Annapurna at Rs 172 crore. The firm had earlier also raised funding. In April last year, it secured Rs 25 crore in a Series C round of funding from Samridhi Fund, which is managed by SIDBI Venture Capital Ltd, a wholly owned subsidiary of state-run SIDBI and an existing investor in the firm. 

In 2014, the microlender raised Rs 30 crore in a Series B round of funding led by Belgian Investment Company for Developing Countries, with participation from the existing investor Incofin Investment Management's Rural Impulse Fund II.

The firm posted total income of Rs 61.61 crore for the six-month period ended September 20, 2015, up from Rs 22.69 crore a year earlier, according to its half-yearly audit report. Net profit jumped to Rs 6.85 crore from Rs 58 lakh.

Sun Capital Services

Budget 2016: Growth-oriented Budget

Amidst global challenges, the finance minister has presented a very prudent growth-oriented Budget without walking away from the fiscal deficit reduction road map.

Amidst global challenges, the finance minister has presented a very prudent growth-oriented Budget without walking away from the fiscal deficit reduction road map. This also opens up a window for the Reserve Bank of India to bring down interest rates further and expect at least one rate cut very soon.

Substantial investment of Rs 97,000 crore has been allocated for road sector. It is also been said that the government has decided to add 50,000 km of road length to the existing national highway network. This will create more development opportunities in the years to come.

To revitalise projects under public- private partnership (PPP) model, two significant steps have been taken which include issuance of guidelines for renegotiation of PPP concession agreements in a transparent manner, and new credit rating system for infrastructure projects to be issued.

Due to creation of new credit rating system, the benefits accruing to infrastructure projects will be better appreciated, resulting in a better rating. This will help infrastructure developers tap bond market and because of better rating of projects, insurance and pension funds will be able to come forward to fund these projects.

Another significant step for a progressive public-private partnership  project frame work is making Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvIT) structure investor friendly.

In this regard, now distribution made out of income of special purpose vehicle to the REITs and InvITs having specified shareholding, will not be subjected to dividend distribution tax, in respect of dividend distributed after the specified date. With this change the long pending demand of investors will stand addressed and Infrastructure Investment Trusts can now become a success story.

The Budget will have a good impact on boosting domestic demand, which will help the overall economic growth. Renewed impetus to irrigation is also a very welcome move. The Budget talks about implementation of 89 irrigation projects under AIBP which were languishing for a longer time and fast tracking of the same.

The overall allocation for rural sector and agriculture sector will also help the growth to pick up substantially. Renewed focus on initiatives like skill development, Make in India and incentives associated with the same in the Budget will result in good amount of employment generation.

The only disappointment in the Budget proposal is with regards to double taxation of dividend income, and would have been good if the same could have been avoided.

Sun Capital

New RBI norms to help banks unlock Rs. 40,000 cr

Central bank eases norms governing treatment of certain balance sheet items

The Reserve Bank of India on Tuesday relaxed norms relating to the treatment of certain balance-sheet items, including property, which will help banks unlock capital aggregating about Rs.40,000 crore.

This capital relief comes at a time when the banks, especially those in the public sector, are struggling with bad loans, provisioning requirements and falling equity market valuations.

The revised norms will give PSBs access to additional capital of Rs. 35,000 crore, while it could be about Rs.5,000 crore for private sector banks.

The unlocking of capital follows a review carried by the RBI with the aim of further aligning the definition of regulatory capital with the globally adopted Basel III norms.

These standards aim to improve the banking sector’s ability to absorb shocks arising from financial stress and improve risk management and governance.

Banks have now been allowed to include some items, such as property value and foreign exchange, for calculation of Tier 1 capital (CET1), instead of Tier 2 capital.

Analysts say State Bank of India may benefit a great deal from the change in the carrying amount of a bank’s property as it has huge property holdings across the country.

As per RBI norms, CET1 capital, comprising paid-up equity capital, statutory reserves, capital reserves, other disclosed free reserves (if any), and balance in P&L Account at the end of the previous fiscal year, must be at least 5.5 per cent of risk-weighted assets.

By Sun Capital

IDBI Bank unveils Rs 20,000-crore investment plan over three years

To raise Rs. 20,000-crore capital via equity route

MUMBAI: A day after Finance Minister Arun Jaitley said the government may consider bringing down its stake in state-run IDBI Bank to below 50 per cent, the lender today announced a "transformational" plan entailing an investment of about Rs 20,000 crore over a three-year period. 

The plan includes doubling the bank's business volumes and reducing gross NPA level below 3 per cent. 

"The plan rests on business growth and our approach will be to catch up with the industry. We will double our business from around Rs 5 lakh crore in FY16 to Rs 10 lakh crore in FY19, representing CAGR of over 20 per cent per annum," Managing Director and Chief Executive Kishor Kharat told reporters here. 

However, he was quick to add the "transformational plan" has nothing to do with the Government's move to reduce stake in the bank. 

"The plan has nothing to do with whether we remain a public sector or a private sector bank because it does not talk abut composition of ownership or holding. On a standalone basis we have made this plan for transforming the bank and therefore the thrust is more on business transformation." 

Kharat said bad loan will remain an issue for some more time but expressed confidence the bank will be entering the next fiscal with a lighter stress. "Our endeavour will be to bring down gross NPA to 3 per cent and net NPA to near 0 per cent." 

For the quarter ended December, the bank's gross NPAs jumped to 8.94 per cent from 5.94 per cent in the same period last year, while net NPA rose to 4.60 per cent. 

To meet the plan, the bank is looking at raising around Rs 19,000-20,000 crore over the next three years, he said. Besides, it will be raising Rs 4,000 crore from Tier I bonds and Rs 8,000-9,000 crore through Tier II bonds. 

The city-based lender has lined up around Rs 3,000 crore of assets for monetisation, of which it is expecting nearly Rs 1,200-1,500 crore to accrue this month. 

Kharat said he would like to list the bank's subsidiaries - IDBI Capital, IDBI AMC, IDBI Federal - but no final decision has been taken so far. "Right now, we will monetise to the extent of our need only." 

The bank has also put on hold its plan to raise Rs 3,771 crore through qualified institutional placement (QIP) route due to volatile market conditions. 

"We have put the QIP plans on hold for now because the price is not right at this point in time. The investor interest during our roadshow was very good but they wanted more clarity around the impact of AQR (asset quality review). Now that things are clearer, we will wait for the price to come back up," Kharat said.

JP-UltraTech Cement deal: Stressed lenders to receive about Rs 4,000 crore

MUMBAI: In what could be the biggest recovery of loans from a struggling company, Indian banks will receive about Rs 4,000 crore from the sale of Jaiprakash Associates' cement units to UltraTech Cement, said three people familiar with details of the deal. 

Lenders such as State Bank of India, IDBI Bank and ICICI Bank played an active role in the sale of the cement plants at an enterprise value of Rs 16,500 crore, said the people cited above. 

Banks have agreed to transfer about Rs 12,000 crore of Jaiprakash Associates' loans to the Kumar Mangalam Birla-owned unit, they said. Indian lenders are tightening the screws on promoters who are behind schedule in loan repayments. 
The RBI has set a deadline of March 2017 to clean up banks' books. While Jaiprakash has not been declared a defaulter in the technical sense of the term, the company has been lagging behind in payments. 

"The company was not classified as NPA (non-performing asset) but their payments were not happening on due dates which shows that they were strapped for liquidity," said BK Batra, deputy managing director of IDBI Bank. "Therefore, we exerted pressure on the company to sell its entire cement unit to reduce debt. The company has been cooperating by putting up the best of assets on block to reduce debt." 

Banks are being pressed by the Raghuram Rajan-led RBI to clean up their books after stressed loans in the system touched a high of 11.3% of the total. More loans could be classified as rotten and the demand for capital from the government could rise. Analysts estimate that more than Rs 2 lakh crore may be needed in the next three fiscal years to capitalise banks. 

There was a significant increase in bank credit to Jaiprakash Associates in the last three years. Its share in the firm's total debt of more than Rs 29,000 crore at the end of March 2015 stood at 82%, up from 58% in 2012, according to a Morgan Stanley report. 

ICICI's total exposure to the group was at Rs 6,624.2 crore, or 32.8% of the total, at the end of FY15, up from Rs 3,615.3 crore three years earlier. Under the terms of the UltraTech transaction, lenders won't be taking any haircuts even as the deal has been struck at a time when corporates can push lenders to write off a part of their loans to arrive at better valuation. 

Transferring some of their debt to Ultra-Tech means that lenders now have exposure to a business group that's regarded as being financially more sound than many others, thereby reducing the risk of defaults. They can also assign lower capital on the loans as UltraTech is a better rated company. The riskier the borrower, the higher the capital assigned on the loan. 

Among the major financially stressed conglomerates, Jaiprakash Associates has been relatively more cooperative with banks. Others have been delaying asset sales in the hope of an economic recovery and increased cash flow to service debt or, in some cases, bargain for writeoffs. 

The central bank recently identified about 150 companies that are potentially defaulters but banks were yet to declare them as such. More companies could be putting their assets on the block as lenders go after bad loans.

By Sun Capital

Why Morgan Stanley’s action on Flipkart is bad news for Indian unicorns

Given that Flipkart is expected to list its shares in the US at some point over the next few years, the valuation estimates of the mutual funds will be an important indicator of how stock market investors will value the company.

Bengaluru/New Delhi: Late last month, Flipkart India Pvt. Ltd, the country’s largest and most valuable Internet company, got a taste of the exacting standards of US stock markets, where it hopes to list.

On Friday, Morgan Stanley Institutional Fund Trust, a minority investor in Flipkart, disclosed a write-down in the value of its holdings in the company by as much as 27%. The mutual fund reported the number in a filing with the Securities and Exchange Commission (SEC), the US stock markets regulator.

Flipkart was valued at $15 billion when it received $700 million from Tiger Global Management, Qatar Investment Authority and other investors in June.

That was its fourth round of fund-raising in a year. Its valuation shot up roughly fivefold from $2.5-3 billion in May 2014.

Morgan Stanley’s latest estimate implies the mutual fund now values Flipkart at $11 billion.

The markdown is significant not only because it proves that Flipkart’s valuation had run ahead of itself, but also because mutual funds comprise one of the largest institutional buyers of shares in stock markets.

At least two other mutual funds, T. Rowe Price and Baillie Gifford, are investors in Flipkart. T. Rowe Price hasn’t yet reported the latest estimated value of its stake in the company.

Given that Flipkart is expected to list its shares in the US at some point over the next few years, the valuation estimates of the mutual funds will be an important indicator of how stock market investors will value the company. Flipkart declined to comment for this story.

Flipkart is hardly the only unicorn, a term that is used to describe start-ups that are valued at more than $1 billion, to have its value marked down by mutual fund investors.

Along with cutting the value of its stake in Flipkart, Morgan Stanley also reduced the worth of its holdings in file storage company Dropbox Inc. and data analytics company Palantir Technologies Inc. Late last year, mutual funds owned by T. Rowe Price, Fidelity and BlackRock cut the worth of their holdings in US unicorns en masse.

BlackRock is also an investor in online marketplace Snapdeal (Jasper Infotech Pvt. Ltd), which raised roughly $50 million last month at a valuation of $6.5 billion. BlackRock’s next filing on Snapdeal will be closely watched to see if other Indian unicorns will be marked down, too.

Snapdeal’s $50 million fund-raising, which was accompanied by $150 million in share sales by existing Snapdeal investors to new shareholders, took more than six months to close, primarily because there are not too many takers for India’s top e-commerce firms at their current valuations. The $50 million fund-raising was also significantly smaller than what online retailers typically seek from investors.

Mint reported on 4 February that China’s Alibaba Group is in early talks to buy a stake in Flipkart and increase its holding in Snapdeal. The talks are at a very initial stage and the likelihood of a deal is a function of Flipkart’s willingness to offer a discount on its current valuation of $15 billion, Mint had reported then.

“Our valuation has grown steadily between our last two funding rounds,” a Snapdeal spokesperson said.

There are two broad concerns about the valuations of Flipkart and Snapdeal. One, whether they will ever be able to cut their ballooning losses without sacrificing sales growth. Two, whether they will lose out to the Indian unit of Amazon.com Inc., the world’s largest online retailer.

Over the course of 2015, Amazon gained market share in India at the expense of both Flipkart and Snapdeal, according to publicly available data and several company executives.

Future estimates by mutual funds of their holdings in Flipkart and Snapdeal—and these companies’ eventual IPOs—will depend a lot on these two factors.

“Growing at negative operating margins to raise money in quick succession is a destructive style of doing business,” said Kashyap Deorah, serial entrepreneur and author of The Golden Tap, a book on India’s hyper-funded start-up ecosystem. “It kills the ecosystem... to build a thriving long-term business environment, we need to get off the addiction of global funds buying market spaces in India like territory.”

Deorah predicts Flipkart’s valuation will eventually slump to the amount it has invested. Flipkart has raised anywhere between $3 billion and $3.5 billion. “The downward trend will continue until Flipkart’s valuation equals invested capital,” he said.

To be sure, Deorah’s prediction seems extreme.

Flipkart is still the largest e-commerce firm in the last remaining big e-commerce market in the world. It has a solid brand, a strong leadership team and deep-pocketed investors, among other strengths.

“Flipkart’s valuation may look stretched at $15 billion in this current environment, but you can’t take away the fact that the company still has a solid business,” a Flipkart investor said on condition of anonymity. “In the worst-case scenario, it may take the company a year or two to grow into that valuation. But it will definitely happen. And if the market sentiment becomes better, it will happen sooner.”

By Sun Capital

Effect of rising NPAs of banks on aam aadmi

The domino effect of rising NPAs of banks

With public sector banks having accumulated Rs 4.5 lakh-crore worth of nonperforming assets or loans in which repayments are not happening in time, there has been a lot of talk going around on the performance of the banks and how it reflects on the broader performance of the Indian economy.

With public sector banks having accumulated Rs 4.5 lakh-crore worth of nonperforming assets or loans in which repayments are not happening in time, there has been a lot of talk going around on the performance of the banks and how it reflects on the broader performance of the Indian economy.

While RBI has gone ahead with a 125 basis points rate cut, the 'aam aadmi' is yet to experience the full transmission. With banks further saddled with a huge NPA burden now, the customers are bound to feel the pinch

1. How do NPAs affect a bank's balance sheet?Accumulated bad loans severely dent a bank's interest income. As per regulatory norms, banks are expected to make provisions against bad loans. High provisioning figures further eat away from their profits. Banks such as Bank of Baroda, Bank of India and Punjab National Bank have all posted huge losses due to high provisioning this quarter.

2. Should investors be worried?With all public sector banks being listed entities, a bad quarterly result reflects strongly in the stock market. If a bank is suffering from mounting NPAs and does not give any positive forward looking statements then stock prices crash which in turn affects the bank's shareholders income. However, now with the RBI instructing banks to clean up their balance sheets over the last two quarters of FY16 it is left to be seen how the banks after recognising the bad accounts manage to recover them.

3. Does it impact your accounts with the bank?Yes. Banks already reeling under mounting losses will not offer any rate cut for the customers. Therefore, home loans and car loans will continue to pinch the pockets of the bank customers though the Reserve Bank of India has cut repo rates by 125 basis points.

4. What are the other constituents which are affected?The government which is the largest shareholder in public sector banks loses out on dividends from the banks. Moreover the government in its Economic Survey 2016 has mentioned that banks would require Rs 1.8 lakh crore which will be taxpayers' money at the end of the day. Another effect is that banks, being more worried about loan recovery fail to invest in latest technologies and digitization of banking. Thus, customer convenience is affected.

By Sun Capital

Publish list of loan defaulters, AIBEA asks Centre

Suncapital.co.in: All India Bank Employees Association today urged the government to publish a list of defaulters, who had failed to repay loans worth over Rs 100 crore.

Responding to a question on the expectations of bank employees from the general budget to be presented tomorrow, AIBEA General Secretary C H Venkatachalam told reporters here that the banking sector was awaiting implementation of reforms for the betterment of bank services.

The government should offer loans to farmers at lower interest rates, so that the sector could again contribute substantially to the GDP, he said.
The banks, which were lending money with small savings of Rs 90 lakh crore, should open five lakh branches in the rural areas, where there were no branches, Venkatachalam suggested.
As the government was attempting to waive NPAs, reportedly worth about Rs 2 lakh crore, it should come up with a defaulters' list who had failed to repay their loans and book a criminal case and initiate stringent action against them, he said while referring to the reports that business tycoon Vijay Mallya, who owed thousand of crores rupees to several banks, was allegedly planning to leave India.

By Suncapital.co.in

Budget 2016: Foreign investors can now establish ARCs in India

Sun Capital: Budget 2016: Foreign investors can now establish ARCs in India 

MUMBAI: The asset reconstruction companies got a huge leg up from the Union Budget
with relaxation in sponsor holding limit, 100 per cent foreign direct investment and a
complete passthrough of income tax. Finance Minister Arun Jaitley announced easing of
sponsor holding limit to 100 per cent from the current 49 per cent paving the way for foreign
investors to set up an ARC in India.

"I propose to make necessary amendments in the Sarfaesi Act to enable the Sponsorer of
an ARC to hold upto 100 per cent stake in an ARC and permit noninstitutional investors to invest in securitization receipts," Jaitley said.

Currently, no sponsor can hold more than 50 per cent of an ARC's shareholding either by
way of FDI or by routing it through foreign portfolio investor controlled by the single sponsor.

"It looks very clear now that a foreign entity can also come in and establish an ARC in
India," VP Shetty, Executive Chairman, JM Financial ARC told ET. "Easing of sponsor limit
would certainly help ARCs to strengthen their capital base."

"The easing of sponsor holding limit will resolve capital issue for the ARCs to a very large extent," Siby Antony, MD & CEO, Edelweiss ARC told ET. "It's a good thing that the budget has given a lot of importance to ARCs for NPA management."

The government also relaxed foreign direct investment rules for ARCs by permitting 100 per cent FDI through the automatic route. The investment basket of foreign portfolio investors will now be expanded to include securities issued by such special purpose vehicles.

"Earlier only QIBs defined by Sebi were allowed to subscribe now it has been expanded, though we need little more clarification on who all will be part of non institutional investors," Antony added.

The Finance Minister also announced a compete pass through of income tax for all securitization trusts. "I propose to provide a complete pass through of income tax to securitization trusts including trusts of ARCs," Jaitley added. "The income will be taxed at the hands of the investor instead of the trusts."

The measures announced by the FM is aimed at enabling banks to clean their balance sheet which is saddled with rising bad loans.

"We have been representing to the government and RBI to allow us to have more capital so that we can participate in the market more significantly," Shetty added. "All the ARCs together have Rs 4000 crore of capital invested, with this capital our capacity to invest in bank bids is limited."

Sun Capital Advisory Services