India’s benchmark stock index closed around 21737.60 Monday (29th January), jumping almost +1.80%, the biggest single-day gain since 4th Dec’23 after SEBI extended FPI’s Ultimate Beneficiary Ownership (UBO) disclosure norms by 7-months from earlier deadline of 31st Jan’24. As per SEBI sources, affected FPIs will have now 30 more days for full disclosure about UBO; otherwise they will be given another 6 months; i.e. till 31st Aug’24 to liquidate/reduce the holdings. Meanwhile, SEBI is also permitting DIIs like LICI to buy additional stakes to absorb FPIs selling to some extent. For example, over the weekend, SEBI approved LICI to hike its stake in HDFC Bank (NS:) to 9.99%.
Nifty was under pressure for the last two weeks on growing selling by FPIs amid regulatory tightening by SEBI about the contentious UBO disclosure norms. As per reports, SEBI may impose tightened UBO norms for FPIs, from 1st February despite pressure from foreign banks and a section of offshore fund managers to ease the rules ahead of the deadline. As per an estimate, there could be a sell-off in Indian stocks in the range of Rs 1.50-2.00T over the next six months by FPI/funds unable to comply with the norms. This relates to the Minimum Public Shareholding (MPS) requirement, a politically sensitive issue involving the Adani group, and a recent SC directive.
This is an old/legacy issue. In 2018, the Prevention of Money Laundering (PML) Act revised the definition of the ultimate beneficial owner (UBO), considering the beneficial owner as the ultimate beneficial owner. Subsequently, in 2019, the SEBI removed the requirement for mandatory disclosure of ultimate beneficial owners. At that time, foreign entities were only obligated to provide details of the senior managing official and were not required to disclose their stakeholders or contributors to the SEBI.
The PML Rules establish thresholds based on ownership or entitlement to capital or profits (economic interest) to determine the beneficial owner of legal entities. These thresholds are set at 10% for companies and trusts, and 15% for partnerships. Additionally, the rules specify that the beneficial owner includes natural persons who exercise ultimate effective control over a legal entity or arrangement.
The Indian Congress party (INC), the main political opposition has been demanding a joint parliamentary committee (JPC) investigation into the Adani matter following insider trading and other regulatory allegations made by Hindenburg Research in its January 24 report. The report accused the Adani group of fraud, stock manipulation, and money laundering. Despite the Adani group’s denial of all allegations, the SC has formed an expert committee to evaluate the existing regulatory framework. Additionally, the court has directed the SEBI to expedite its investigation into the allegations.
The expert committee headed by former SC judge AM Sapre found no regulatory failure during the sharp rise in prices of Adani group companies between March 2000 and December 2022 and their dramatic meltdown after January 24. But the report said: “While there was no adverse observation concerning Adani scrips in the cash segment, suspicious trading has been observed on the part of six entities. These are four FPIs, one body corporate and one individual”.
In Aug’23, the markets regulator had asked FPIs, who were holding more than 50% of their equity AUM in a single corporate group or with an overall holding in Indian equity markets of over Rs 0.25T, to disclose granular details of all entities holding any ownership, economic interest, or exercising control in the FPI. The norms were announced to prevent the possible round-tripping by certain Indian promoters using the FPI route.
In its Aug’23 circular, SEBI said certain FPIs have been observed to hold a concentrated portion of their equity portfolio in a single investee company/ corporate group. Such concentrated investments raise the concern and possibility that promoters of such investee companies/ corporate groups, or other investors acting in concert, could be using the FPI route to circumvent regulatory requirements such as that of disclosures under Substantial Acquisition of Shares and Takeovers Regulations, 2011 (SAST Regulations) or maintaining Minimum Public Shareholding (MPS) in the listed company.
SEBI also noted while Press Note 3 or PN3 issued by the government in April 2020 does not apply to FPI investments, there are concerns that entities with large Indian equity portfolios could potentially disrupt the orderly functioning of Indian securities markets by misusing the FPI route. To mitigate these concerns, a need was felt to obtain detailed information from FPIs: “Such concentrated investments raise concern and possibility that promoters of such corporate groups, or other investors acting in concert, could be using the FPI route for circumventing regulatory requirements such as that of maintaining Minimum Public Shareholding.”
According to the standard operating procedure (SOP) issued by FPI custodians on additional disclosure norms, existing FPIs, that are in breach of the investment limits as of 31st Oct’23, would be required to bring down such exposure within 90 calendar days i.e. January 29, 2024 (settlement date), unless they fall under any of the exempted categories.
In a consultation issued in May’23, SEBI had said that based on the data as of 31st March’2023, FPI assets under management (AUM) of around Rs 2.6T may potentially be identified as high-risk FPIs who would have to make additional disclosures or sell to reduce holdings.
However, on the weekend, SEBI/Government again blinked (as usual) on this legacy FPI/UBO disclosure issue as no government in the world would like to face a general election with a crashed stock market. SEBI sources said FPIs will now get seven more months; i.e. till 31st Aug’24 to liquidate their holdings if they do not meet the January’24 deadline to disclose UBO data about their investors. FPIs have already sold around Rs.0.25T in recent weeks to meet the Jan’24 UBO disclosure norms deadline.
On the weekend, SEBI sources pointed out:
· There is no immediate deadline or cliff for FPIs to liquidate any holdings
· If FPIs continue to meet the criteria for enhanced disclosures as of January end, they would have an added 10/30 working days to provide the additional details required
· Even thereafter, if they fail to provide any details, they would have a further 6 months to reduce their holdings
· FPIs that may be required to provide enhanced disclosures are expected to be significantly less than estimated in the consultation paper and the SEBI board note
Subsequently, on Monday, India’s Dalal Street had a relief rally, although the ghost of this legacy FPI/UBO disclosure issue remains. But SEBI is now also permitting Indian DIIs such as LICI to buy additional stakes in Indian companies on a case-to-case basis to absorb additional FPI selling (liquidation) so that the overall Indian stock market has financial stability and trade orderly. On the weekend, SEBI permitted LICI to buy an additional stake (for investment purposes) in HDFC Bank. Similarly, other blue chip/large caps such as RIL, ONGC (NS:), LT, Kotak Bank, etc having large FPI stakes were also boosted on Monday in hopes of Indian DII support led by LICI (government).
Apart from FPI/UBO/SEBI regulatory tightening issues, selected private Banks & financials are also dragging India’s Dalal Street amid increasing funding costs, RBI pressure on lowering CDR, limited hike in lending rates, and subsequent pressure on NIM (net interest margin). Indian savers/HNIs are now not so much interested in depositing large amounts of savings (apart from regular & emergency funds) with banks as the vibrant stock/MF market is providing much higher returns with adequate liquidity and safety.
Overall India’s Nifty edged up +0.04% for the month (till 29th January) amid mixed earnings/report card, FPI/UBO issues, hopes & hypes of fiscal stimulus in the forthcoming Indian budget, Fed/RBI pivot, and Chinese stimulus. Looking ahead the market focus will be on the Fed (31st January), the Indian Federal Budget (interim/vote on account-1st February), and also on RBI MPC meeting (9th February).
On Monday (29th January), India’s Dalal Street was also boosted by PM Modi/BJP’s ‘takeover’ of the Bihar government. Bihar CM Nitish Kumar, the famous political ‘Palturam’ again somersaulted (for the 6th time??) and re-joined BJP/NDA/Modi to become BJP-supported CM (for the 9th term) for the next two years. In 2020, Nitish Kumar won the Bihar state election in alliance with BJP (Modi’s face). But later was ‘hijacked’ by INC/Rahul Gandhi & Co (Lalu/Tej Prasad) to become INC/CONG/Lalu supported CM (rainbow coalition).
Subsequently, Nitish Kumar played an important role in the formation of the I.N.D.I.A. opposition coalition party with an aspiration to become PM of India in 2024, replacing ‘dictator’ Modi! But out of fear of backstabbing from Lalu & Co (Tej Prasad-Deputy CM) or any other reason including the fear of ED/CBI/IT etc, Nitish Kumar re-joined Modi/BJP (as highly expected for the last few weeks). In this way, Modi/BJP/NDA won around 42 MP seats from Bihar in the 2019 general election with the help of Nitish Kumar (caste equation). This time, BJP/Modi was somehow anxious about winning such huge 42 seats without the help of Nitish Kumar and his huge Kurmi caste support. Thus Modi/BJP is now targeting 350+ MP seats this time rather than 250 against 300+ in the 2019 election.
The Feb’24 Indian interim budget (vote on account) may be a visionary document for the next five years of planning without any major fiscal stimulus/policy decision/announcement. But ahead of the general election, the Modi admin may announce additional income tax exemption in the form of higher Standard Deduction (SD) for salary earners from the present Rs.50K to Rs.100/90K to keep lower middle-class salary earners in good mood (like we have seen in 2019 interim budget when the government announced Rs.50K SD). The market is also expecting further rationalization/lowering of GST rates and some structural reforms in labor and land reform. Modi admin may also bring some additional fiscal stimulus/subsidy for farmers, senior citizens, MSEMS, textile, overall infra CAPEX around Rs.10T, stress on techs/AI research & innovation, railway/transport and social infra (hospitals, schools etc). the market is now expecting an FF25 fiscal deficit of around 4.5% of nominal GDP. After winning the election with ease (300+ MP/LS seats), the Modi admin may present the FY25 full budget in July to ensure policy continuity.
On Monday, Nifty was boosted by RIL, HDFC Bank, LT, Kotak Bank, ONGC (higher oil higher refining margin/spreads and discovery of NG), Tata Motors (NS:), Coal India (NS:), Axis Bank (NS:), NTPC (NS:), ICICI Bank (NS:), Adani Enterprise, Adani Ports and SBIN. But Nifty was also dragged by ITC (subdued report card), INFY, TCS (NS:), (pressure in after the recent stupendous rally) CIPLA (family management rejig/feud and potential stake sale), Bajaj Auto (NS:) and Tech Mahindra (NS:) (subdued report card).
For the last 30 trading days, Nifty was boosted by RIL, INFY, Bharti Airtel (NS:) (hopes & hypes of higher telecom/data tariffs permission by the government/DOT), LT (various government infra project orders), ONGC, Sun Pharma (NS:) (upbeat report card), ICICI Bank, Tata Motors, Adani Ports, HCL Tech (NS:) and Coal India (almost monopoly in Coal in India and lower import supply, higher global prices). But Nifty was also dragged by HDFC Bank, HUL, Asian Paints (NS:), Kotak Bank, Axis Bank, ITC, LTIM, M&M (NS:) and IndusInd Bank (NS:) amid subdued report card and FPIs exit/UBO issues.
Overall for the last 30 trading days, the Indian market was boosted by energy, infra, realty, PSU Banks, Pharma, Techs/ITs, and automobiles, while dragged by media (led by the ZEE-Sony merger fiasco), private banks (subdued report card and FPI/UBO/SEBI issues), FMCG, and metals (hopes & hypes of Chinese stimulus). Technical trading levels: Nifty Future
Whatever the narrative, technically Nifty Future (21855) now has to sustain over 22000 for a further rally to 22100/22150*-22200/22300* and further 22450-22550*/22675-22850/23025 and 23260-23575 levels in the coming days; otherwise sustaining below 21950, may again fall to 21700/21600-21500/21300-21150/21050, and further 20950/20890*-20725/20575*-20350/20250* in the coming days.