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Posted on 12-Apr-2019 Comments  0

FMP Fiasco

What the FMP fiasco has taught the debt fund investors in India

Most investors thought of fixed maturity plans (FMPs) as something that was absolutely safe. After all, they were debt securities and the funds were locked in so there was no maturity mismatch. Most Indian FMP investors were in for a rude shock when a couple of mutual funds unilaterally decided to extend the date of their FMP maturity by more than one year. The reason was that these funds had invested heavily in Zee group bonds and most of that had soured. What are the options now?

Actually, options are limited

The good thing is that there are not too many retail investors in FMPs and they are more of corporates and HNIs, who are relatively well informed. However, some retired employees do use FMPs for higher returns. The problem was that most of the mutual funds had actually given loans against shares to the Zee promoters which were structured as an NCD. After the sharp fall in Zee prices in February, Subhash Chandra had entered into a deal with mutual funds not to sell shares to avoid another price fall. The stock has stabilized because MFs are not selling. But Zee is unlikely to get a buyer at this price and for Chandra to sell his stake the price of Zee may have to fall. That would mean that the mutual funds will be allowing the collateral against their debt investments to deplete and that may not be acceptable for funds. Funds can get away with risk talk but investors are surely in a Catch-22.

Rating agencies and trustees

The total exposure of the Indian mutual fund industry to the Zee group bonds is in excess of Rs.9000 crore. There are quite a few questions that arise. Were the trustees aware that MFs were actually giving loans against shares? If so, then why did the trustees not flag the issue immediately? What is the regulatory follow up action that is being taken because the problem appears to be rampant across mutual funds? As usual, the rating agencies have been caught napping, exactly like in the case of the IL&FS fiasco. The job of the trustee is to protect the interest of the unit holders and how did the trustees approve such a unilateral extension of the FMP tenure; even if it was there in the fine print.

All about “Buyer Beware”

Unfortunately, the understanding of risk is still quite limited among mutual fund investors. Most investors tend to blindly believe that any kind of debt paper is an assured return product. That is not the case. Investors need to realize that like equity funds have their own set of risks, debt funds like FMPs also have their own set of risks. In the last few years, the sharp rise in MF inflows has forced fund managers to look at sub-par debt to enhance returns. MF investors would do better to get a clearer perspective of risk in the context of debt. FMPs have proved that there is no free lunch!

Fiscal Deficit

Honoring 3.4% fiscal deficit has little more than academic value

The government was almost celebrating when the full year fiscal deficit came in at the targeted rate of 3.4% of GDP. Of course, this is a revised target because the original target of 3.2% was modified in the interim budget. In a tough year, stemming fiscal deficit at 3.4% is surely no mean achievement but there is more to it than meets the eye. One must break up the revenue and expenditure side to get a granular picture.

Revenues have fallen short

If you look at the major sources of revenues for the government, it has fallen short on most fronts. The direct tax revenues for the year were short by Rs.50,000 crore. The GST collections fell short by nearly Rs.100,000 crore. The disinvestment revenues were artificially inflated through forced deals like ONGC taking over HPCL, which may not exactly be in the larger interest. The total disinvestment numbers may have been overstated due to CPSE ETFs, buybacks and liberal dividends.

Cutting expenses has a cost

Government resorted to expenditure control to keep the fiscal deficit in check. That means primary health and primary education have taken a hit. That is not long term accretive. Also, the government has aggressive plans for infrastructure and rural incomes. All this could throw fiscal deficit numbers out of shape. This must be watched!

What about state fiscal deficit?

That is a question not too many people are asking. For example, some of the items like Uday Bonds for power companies and the agriculture loan write offs are all being routed through the state. The state fiscal deficit overall is as high as the central fiscal deficit. If that is added to the federal deficit then the situation looks a lot more delicate.

There is the window dressing

It is said that there is no balance sheet without dressing up and the national balance sheet is no different. Take some instances of off balance sheet financing. Getting ONGC to borrow to buy the government stake in HPCL is off the balance sheet. Downstream oil sellers taking a subsidy hit is also off balance sheet. Finally, the biggest off balance sheet benefit for the government is the food grain subsidy that gets routed through the FCI. If you add all these up, the reality could be a lot grimmer.

Little by way of pump priming

The whole idea of a higher fiscal deficit is to pump prime the economy. But that is missing. IIP is at a 20 month low and GDP is below the 10 year average. As per CMIE, unemployment is at 7.5%, a record in many years. Without pump priming, fiscal deficit is just like taking a loan for the morning breakfast. It is time to show the real fiscal deficit!

Elections 2019

5 factors that could decide the outcome of Elections 2019

The first phase of elections has taken off and the fate of 91 seats is sealed. Over the next 6 weeks, we will get to see 6 more phases of polling before the final results are announced on May 23rd. What exactly will drive the outcome of Elections 2019 this time around?

Uttar Pradesh holds the key

With 80 seats in the Lok Sabha the state of UP remains pivotal. In the 2014 polls, BJP won 73 out of these 80 seats which set the tone for its all India sweep. But equations have changed with the alliance between BSP and SP along with a white knight in Congress. In 2014, the state of UP accounted for 25% of BJP’s total tally. Whether the SP-BSP alliance consolidates votes or cannibalizes votes remains to be seen. Needless to say, this state will decide the elections.

Will AIADMK deliver as an ally?

That is perhaps the big gamble that the BJP has taken by forming a pre-poll alliance with the AIADMK. In 2014, the AIADMK got 37 seats and DMK got none. Current calculations predicate on this trend repeating itself. But AIADMK has lost its tallest leader and as of now DMK appears to have a better hold over the state politics. They also have an alliance with the Congress in Tamil Nadu. How much can a factional AIADMK deliver will be one of the key factors that will determine the swings in these general elections.
Andhra Triumvirate

We are talking of Naidu, KCR and Jagan. The 42 seats of Andhra and Telangana are likely to be split amongst them. This election could be about post poll alliances. Which way Jagan and KCR veer toward will matter a great deal? The calculation as of now is that if the BJP gets closer to 220, then Jagan and KCR may support the BJP. In fact, one cannot also dismiss outside support from Babu. After all, he has been the wiliest survivor in Indian politics.

Federal alliance catalyst

Regional parties have traditionally got 50% vote share in the last 6 elections and that could either sustain or improve. Can we have a federal alliance of regional parties? A lot would depend on a driving force with vision but without urge for the highest office. Someone like JPN or HKS may be sorely missed now.

Will it be all about nationalism?

The big BJP gamble is that it could be all about security and nationalism. For all you know, they may be bang on target. Indian voters take nationalism very seriously as we have seen in 1971 and again in 1999. If the national security gambit really pays off, then the ruling NDA will immensely benefit from it. Else, there are too many X-factors at this point of time. We will have to wait till May 23rd for the final outcome!

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