Sebi cracks down on pseudo buy and sell orders designed to deceive

The Securities and Exchange Board of India (Sebi) has trained its guns on ‘spoofing’ and ‘quote stuffing’—stock market jargon for pseudo buy or sell orders aimed at deceiving other traders. Stock exchanges have put in place a new order-level surveillance mechanism to deter such practices. Under the new guidelines, serial offenders could face trading disablement ranging between 15 minutes and two hours. “There shall be an additional order based surveillance measure to deter persistent noise creators, that is excessive order modifications and cancellations with an intent to avoid execution,” NSE has said in a circular dated March 26. The new measures put in place will be applicable on the daily trading activity at the customer level as well as the broker level. NSE has issued three parameters to flag off such practices. These include high order-to-trade ratio, high instances of order modifications and persistent deferred or lower order execution priority due to frequent modifications. If the surveillance system detects of three activities, it will be considered ‘one instant count. Based on count of instances over a period of 20 trading days, exchanges will determine the penalty. If the count exceeds 99 on a rolling 20-trading day basis, the client or a broker trading will face trading disablement for 15 minutes. Any additional instance of repetitive violation on consecutive trading days will lead to trading disablement for 15 more minutes up to a maximum of two hours. “This is a positive for retail traders. Spoofing and quote stuffing orders placed with no intent to execute will reduce significantly,” Nithin Kamath, Founder & CEO, Zerodha has tweeted. Quote stuffing is the practice of quickly entering and then withdrawing large orders. Such activity is done with an intention to gain an edge over competitors. The large orders disrupt other traders, who lose time in processing the orders. Meanwhile, spoofing (also called as layering) is placing large buy or sell orders at multiple price points in order to create an illusion of huge demand or supply. The spike in bull or sell orders prompts other traders to react. As the stock price moves such orders in the system are withdrawn. Market players said such practices are typically used by high frequency traders (HFT) and algorithmic traders. Given the preponderance of HFTs and algo trades, the curbs issued by Sebi and exchanges are much-needed to protect the market integrity, said an analyst requesting anonymity. Business Standard, 30th March 2021.

No dearth of liquidity, but RBI sees little demand for govt bonds

A vigilante and a gambler walk into a bond market. No, that’s not the start of a new joke, just the comical look of India’s fixed-income saloon nowadays. There’s no dearth of liquidity, but the bartender — the central bank — is having a tough time getting orders for the good stuff even by cajoling and threatening customers. At the same time, potent but risky hooch is selling briskly, although the lawman — the Federal Reserve — is almost at the door. Indian government bonds are the “good stuff” and must sell. It’s the only way tax-strapped authorities can raise money and spend it to shake the economy out of its Covid-19 stupor. Yet a yield of just about 6% on 10-year rupee paper from a barely investment grade sovereign has none of the kick of the near-21% rate of return offered by a D-rated private borrower on a five-year note. That’s how much Kesoram Industries Ltd., a Kolkata-based cement manufacturer that defaulted last year, recently gave on its 16 billion rupees ($221 million) in junk bonds, which got sold to the likes of Goldman Sachs Group Inc. and Cerberus Capital Management. But rather than the gamblers, it’s the vigilantes — pesky investors never happy with lax fiscal and monetary policies — who seem to be bothering the Reserve Bank of India. The RBI, which has the job of raising money for the government, invited fixed-income investors to join it in a tango and “forestall a tandav” — the solo dance of destruction of the Hindu god Shiva. (I didn’t make this up. See the bank’s March 19 monthly bulletin for a veiled threat involving acrobatic moves and colorful imagery around bond vigilantes, who “prowl markets, guns holstered and saddled up.”) However, right now the Fed is the only deity whose wrath — and gyrations — emerging markets truly fear. It’s the same story from Istanbul to Mumbai, with one key difference: Turkish President Recep Tayyip Erdogan has sacked three central bank chiefs in two years, while Prime Minister Narendra Modi, already on to his third RBI governor, is more concerned right now with unseating the state chief minister in upcoming elections for West Bengal, where his party has never been in power. That isn’t enough to impress bond buyers. Foreigners have pulled out billions of dollars from India’s bond markets over the past 12 months. Even domestic banks have been shunning debt auctions ever since the government’s Feb. 1 budget delivered the unpleasant news of a planned 6.8% deficit for the upcoming fiscal year, on top of a 9.5% shortfall in the year that will end March 31. While anxiety in the U.S. market stems from the prospect of above-normal growth and inflation, India’s economy might permanently lose 11% of its potential output, according to Crisil, the local affiliate of S&P Global Inc. At the eve of the nationwide lockdown last March, the growth rate had already halved — to 4% from 8.3% in March 2017. Then came the virus, and an estimated 8% tumble. Vaccinations are picking up pace, but if the ongoing second wave of infections overwhelms the population, even sporadic, localized lockdowns will make the recovery sluggish. Add the risk of a taper tantrum, a real possibility if the Fed is forced to abruptly rethink just how fast it can afford to let the U.S. economy run before reining it in by raising interest rates. That could accelerate capital flight out of emerging markets. Currencies could swoon, like the Turkish lira this week. Even though the rupee is the best emergingmarket currency so far this year, 6% isn’t adequate risk compensation for 10-year notes. However, it’s also true that unlike in 2013, there’s no unsustainable current account deficit to worry about. So there’s a chance that the fear of the Fed won’t creep into Indian markets as viciously as it did back then. In that case, it would be a better gamble to buy super-pricey Indian equities or distressed bonds offering 21%. Vanilla government bonds are paying so little in Asia that insurers are being forced to take to take credit risks to pay policyholders. “Take Vietnam, for instance; who would ever have thought that we would have a 2% interest rate for 10-year government bonds in a country that's BB rated?” Stephan van Vliet, the chief investment officer of Prudential Corporation Asia Ltd., said at an AsianInvestor conference recently. “But the only way to deal with that is to find attractive credit spreads.” Thus, neither the vigilantes dumping bonds nor the gamblers raising their bets are being wholly irrational, even though one of them may be laughing all the way to the bank next year, while the other becomes the butt of bar jokes. Business Standard, 24th March 2021

AT-1 bonds just need to be traded often to survive after Sebi rules

*RBI allowed capital-starved banks to raise money through AT-1 bonds or perpetual bonds. *Under the new Sebi rules, mutual funds must treat AT-1 bonds as 100-year paper. The Securities and Exchange Board of India (Sebi) has softened the blow for investors of additional tier-1 (AT-1) bonds by allowing them to value them as 100-year paper in a staggered manner. To begin with, fund managers can consider these bonds as 10-year paper for FY22. Beyond that, it would be a hop of six months and a skip of another six to the 100-year tenure for valuation. In short, fund managers can pretend these bonds have a fixed tenure when actually they don’t, but only for two years. Starting April 2023, the bonds will need to be valued as 100-year papers by investors. AT1 bonds or ‘perps’ (short for perpetual bonds) in market parlance were allowed by the Reserve Bank of India (RBI) to enable capital-starved banks to raise money through a route other than equity. These instruments are essentially debt but with an equity-like characteristic of having perpetual tenure. Banks were also allowed to add a call option at the end of tenth year and then even fifth year to sweeten the bond offerings to investors. That led to a comfort that these bonds can be considered as having a tenure of five-ten years. According to bond traders, most banks have called back these bonds on the scheduled date, giving investors comfort that they do not have to hold it for eternity. To be sure, there have been exceptions such as Yes Bank Ltd, Lakshmi Vilas Bank Ltd and Andhra Bank. But all this confidence shook when the Sebi ordered fund houses to treat these bonds as 100- year paper for valuation purposes. Moreover, a fund house cannot have more than 5% exposure to a single issuer and not more than 10% of the scheme’s net asset value (NAV). While the valuation diktat has been softened, the investment caps still stay. Ergo, incremental demand from mutual funds is expected to thin out. “Banks will have some difficulty in raising money through Tier-1 now because the appetite has reduced. Yields for these bonds have already risen sharply because of the rules," said a bond trader requesting anonymity. That said, there is unlikely to be a huge negative impact on mutual funds, given that these bonds are regularly traded in the market of late. “There are many perpetual bonds that are being traded in the market. Even if on a given day, one bond is traded, it is enough to extrapolate and arrive at a valuation for similar bonds. Of course, some hit on NAV cannot be ruled out," said a debt fund manager, requesting anonymity. Around 12 AT-1 bonds got traded in the market on Tuesday worth roughly ?1000 crore, the reporting platforms of stock exchanges showed.Mutual funds have become wary of perpetual bonds but as long as these bonds are traded regularly, fund houses may not abandon them. Mint, 24th March 2021

RBI sets up external advisory committee for evaluating banking applications

The Reserve Bank of India (RBI) on Monday set up a standing external advisory committee, which will evaluate applications for universal banks and small finance banks (SFBs). The committee has five members, with former RBI deputy governor Shyamala Gopinath as the chairperson. Other members include Revathy Iyer, director, central board, RBI; B Mahapatra, former executive director, National Payments Corporation of India; T N Manoharan, former chairman, Canara Bank; and Hemant G Contractor, former MD, State Bank of India, and former Chairman, Pension Fund Regulatory and Development Authority. The panel will have a tenure of three years. “The secretarial support to the committee would be provided by RBI’s Department of Regulation,” the central bank said. According to guidelines, applications for universal banks and SFBs will first be evaluated by the RBI to ensure prima facie eligibility of the applicants, after which the newly formed committee will evaluate the applications. In the guidelines for “on-tap” licensing of universal banks in the private sector, 2016, and for “on-tap” licensing of SFBs, 2019, the RBI had indicated that a standing external advisory committee (SEAC) would be constituted, which would be involved in the process of evaluating the application in these spaces. It also mentioned that the SEAC will set up its own procedures to screen the applications. The panel will meet periodically, as and when required. Furthermore, the committee can ask for more information as well as have discussions with any applicant and seek clarification on any issue. It will then submit its recommendations to the RBI for consideration. Business Standard, 23rd March 2021

After govt's intervention, Sebi eases valuation norms for AT-1 bonds

The Securities and Exchange Board of India (Sebi) on Monday relaxed the norms for valuing perpetual bonds. The norms, which had sought to value banks’ deemed residual maturity of Basel III additional tier 1 (AT1) bonds as 100-year debt from April 1, were strongly opposed by the finance ministry. In a statement released on Monday, the regulator said the maturity would be 10 years until March 31, 2022, and would be increased to 20 and 30 years over the subsequent six-month period. And from April 2023 onwards, the residual maturity of AT1 bonds will become 100 years from the date of issuance of the bond. Meanwhile, the deemed residual maturity of Basel III Tier 2 bonds will be considered 10 years or contractual maturity, whichever is earlier, until March 2022. Post that, it will be in accordance with the contractual maturity, Sebi said. On March 15, Sebi had issued a circular capping debt mutual fund (MF) exposure to perpetual bonds, which include AT1 bonds and Tier 2 bonds. It had also directed MFs to use the 100-year valuation norms for pricing such bonds. The circular was to come into effect from April 1, 2021. Industry players said deferring the 100-year valuation norm by two years would give fund managers and banks time to recalibrate their investments and bond issuances. Sebi said the new valuation methodology was based “on the representation of the mutual fund industry to consider a glide path for implementation of the policy and request of other stakeholders”. Sebi further said if the issuer did not exercise a call option, the valuation and calculation of duration would be done considering the maturity of 100 years from the date of issuance for AT1 bonds and contractual maturity for Tier 2 bonds. Also, if the non-exercise of a call option is due to the financial stress of the issuer or if there is any adverse news, this shall be reflected in the valuation. Business Standard, 23rd March 2021

Households saved less in Q2, spent on discretionary items: RBI bulletin

Financial savings of households, which had risen disproportionately in the April-June quarter of 2020 (Q1) as the economic activity came to a halt, fell back to their usual levels in Q2, official data showed on Friday. In the quarter when the country was under a lockdown, net financial savings rose to 21 per cent of gross domestic product (GDP), according to the data released in the RBI’s monthly bulletin. In Q2, the net flow was 10.4 per cent of GDP. Apart from a fall in financial assets, the drop was caused by a rise in liabilities (net savings are assets minus liabilities). As for the debt stock, household debt is now 37.1 per cent of GDP. “This reversion is mainly driven by the increase in household borrowings from banks and NBFCs accompanied by a moderation in household financial assets in the form of mutual funds and currency,” an article in the Bulletin noted. “Some constituents of consumption, particularly discretionary, picked up after a quarter-long dormancy, which, in turn, led to the moderation in financial savings of households.” But there is a possibility that it’s the pent-up demand getting reflected in the rising consumption and falling savings in Q2, it said. Net financial savings of Indian households came back to usual levels after lockdown was eased Drop in savings reflects the sequential pickup in consumption and economic activity Household financial saving rate*, % to GDP

The flip-flop in flows of financial savings was not very different in advanced economies, where net financial savings rose sharply in Q1 and declined in Q2. But while the drop in Q2 was commensurate to the rise in Q1 for India, savings remained at a higher level in most advanced economies. Addition to household savings in the form of currency had shot up to 5.3 per cent of GDP in Q1FY21. It moderated to 0.3 per cent of GDP in Q2, meaning that households did not stash cash as they did during the lockdown, and they either spent the money or deposited it in banks. “This mainly reflected the lower uncertainty with the unlocking of the economy and resumption of economic activity,” noted the article. Savings in the form of bank deposits rose as households continued keeping more money in banks considering them as safe havens. Households poured in money to the tune of 7.4 per cent of GDP in commercial bank deposits in Q2. At the same time, non-bank deposits, flows to mutual funds and equities moderated in the September quarter. Currency claws back, bank deposits soar in Q2 FY21, when recovery began Interestingly, flows to insurance funds, which usually hover between 1 and 2 per cent of GDP, remained robust above 3 per cent of GDP each in Q1 and Q2 on the back of pandemic-led awareness, the report noted. As the lockdown was gradually lifted from June, loans picked up “quicker than expected”, pushing up household liabilities. From 31.4 per cent of GDP in the Q1 of 2018-19, household debt stock is now at 37.1 per cent of GDP. Household indebtedness soars as economy revives Bank credit is growing, albeit at a slower pace, monthly RBI data has been showing consistently. However, it also shows that retail credit is growing faster than overall credit, reflecting that households are at the forefront of credit revival, more than businesses. “The significant pick-up in household loans, juxtaposed with a tepid growth in aggregate bank credit, was reflected in the increase in household share in total credit by 1.3 percentage points to 51.5 per cent in Q2,” said the article. Preliminary data shows a further moderation in household financial savings in Q3, as bank advances picked up faster than deposits. Fast vaccination may further boost consumption and the pre-pandemic spending and saving pattern may get restored, the RBI said. Business Standard, 20th March 2021

RBI hits out at bond vigilantes for risking 'nascent' recovery

The Reserve Bank of India (RBI) on Friday said bond markets across the world were hampering the nascent recovery, and urged local investors to help the central bank to ensure an “orderly evolution of the yield curve”. “As countries rush to inoculate their populations, the global economy should regain lost momentum in Q2. Bond vigilantes could, however, undermine the recovery, unsettle financial markets, and trigger capital outflows from emerging markets,” wrote the RBI in its State of the Economy report for the March bulletin. For the Indian bond market, in particular, the report said: “The Reserve Bank is striving to ensure an orderly evolution of the yield curve, but it takes two to tango and forestall a tandav.” The report has been authored by Deputy Governor Michael Patra, among others. The central bank is clearly using all the platforms at its disposal to engage with the bond market. Governor Shaktikanta Das, in the past, has asked the market to be cooperative and not combative, but the market has recently started demanding higher yields, seeing the US yields and oil prices heading north, and is asking for more secondary market support. The RBI has cut down on its secondary market support a little, but it has also given some concessions on the demand for higher yields. The 10-year bond yields closed at 6.19 per cent on Friday. The benchmark 10-year yield, which had averaged 5.93 per cent during April 2020-January 2021 surged to 6.13 per cent on February 2 on the announcement of the market borrowing programme of the central government, and has largely remained at those elevated levels, barring a few days when it dipped back below 6 per cent on RBI measures. “With the US 10-year benchmark soaring to 1.6 per cent from around 1 per cent, bond markets in India were pit-roasted by persistent selling and shorting. By March 5, the benchmark in India had touched 6.23 per cent,” the report noted. Yields have firmed up subsequently on spillovers from the spike in US yields, it said. The report went on to record how the short-lived turmoil “gave a glimpse of the destabilising impact of expectations running too far ahead of outcomes”. “As growth forecasts for 2021 are ratcheted up, they see in them the spectre of long dormant inflation …With these latent anxieties, bond vigilantes turn sceptical about the central bank’s promise to remain accommodative and start the rout,” the report said, adding: “Bond vigilantes are riding again, ostensibly trying to enforce law and order on lawless governments and central banks but this time around, they could undermine the economic recovery and unsettle buoyant financial markets.” Mentioning about the RBI governor’s promise of ample liquidity in the market, the report said “this type of calming forward guidance from central banks also hides a tension -- their nerves can fray if they see a painfully extracted economic revival, and financial stability built at the altar of regulatory forbearance, threatened by adventurism”. Central banks can do more asset purchases, but the stability in the market will come at the cost of market activity. The central banks can put a lid on yields if they want to, but what “markets do not realise beyond the break-evens, TIPS and policy stimulus is that there is no way the economy can withstand higher interest rates in its current state. It is recovering but certainly not out of the woods yet. There is much sense in what the Reserve Bank is doing in striving to ensure an orderly evolution of the yield curve,” it said. According to the report, the present stock of public debt at around 90 per cent of the gross domestic product (GDP) will go down to about 85 per cent at end-March 2026 as the GDP growth rate exceeds the rate of interest on the stock of public debt. India’s monetary policy is also credible. Thus, “India can decouple from other emerging economies for which rising financing costs and rising pile-ups of debt hamstring the recovery.” The rollout of vaccines, led by India, is helping the world economy recover faster. Domestically, “the swift pace of vaccination raises hopes of a faster recovery, given that the recent spike in Covid-19 infections is largely restricted to a few states, and restrictions in terms of partial lockdowns/squeeze in market hours/ night curfews have been primarily local”. But global trade logistics disruptions are posing fresh challenges to the recovery. The capex cycle in India, however, is turning for the good. The Union government has increased its capital expenditures; capital expenditures of 20 states have also picked up pace to the pre-pandemic level. The third-quarter results show revival of key capital goods producing firms, with revenue growth steadily improving. Infrastructure firms have also recorded a healthy expansion in order books, with demand from transmission, distribution, green energy business, roads and highways, railways and metro services, the report noted. The real estate sector has shown signs of revival, and investment in machinery and equipment has risen. Credit growth of banks may have bottomed out as it grew at 6.6 per cent yearon-year on February 26, 2021 compared with 6.1 per cent last year. Transmissions have improved in banks. In response to the 250 basis points repo rate cut since February 2019, the weighted average lending rate on fresh rupee loans sanctioned by banks declined by 183 bps, of which 112 bps cut was affected since March 2020. Inflation would likely ease after June, but would still look higher because of the base effect. Overall, “there is a restless urgency in the air in India to resume high growth,” and, “all around, optimism is taking hold, among households and businesses, investors and markets,” the RBI report said. Business Standard, 20th March 2021