E Markets Review: A Warning

I add: The dramatic resignation and fraud investigation of Ravi Parthasarathy, who headed listed IL&FS, whose stock price cratered, a public-private sub of Indian state infrastructure finance body Infrastructure Leasing & Financial Services. IL&FS kept its top local credit rating despite defaults on infrastructure loans until now. But apart from the share, the collapse also mark new Indian macroeconomic risks.

IL&FS under Modi's government tolerated not only default on US$13 bn on its issued loans, but it also rewarded Mr. Parthasaraty with a 144% pay rise in the final fiscal year (to June) before his exit.

According to Moody's, its guarantees accounted for 3% of total bank loans in the last fiscal year—and for an unknown amount of credit in the unregulated shadow banking system.

With gold losing value, Indians switched to buying debt mutual funds which funded “shadow banks” among which IL&FS is numbered. These helped fill the Indian private investment gap. Now the tiny corporate bond market which benefited from the mutual funds is under a cloud, adding to the inefficiency of Indian capital markets and its inability to finance long-term investment.

India faces a $526 bn infrastructure funding gap over the next 20 years according to official New Delhi figures. Indian corporate bonds now finance only 15% of GNP according to Crédit Suisse, vs 63% for China (and 113% in the USA.) And even that low level of business lending is under a shadow because of corruption and fear of default.

While the outcome of the IL&FS probe is unknown, Mr. Parthasarathy's successor, Uday Kotak, is known for building Kotak Mahindra Bank into a large lender while avoiding the sector’s worst debt woes. The listed IL&FS sib must now undertake a huge asset liquidation program and increase its capital to repay its debts. But its top shareholders may not want to put up the new capital needed to shore up its balance sheet. And however brilliantly the new directors succeed in cleaning up the mess within IL&FS, they can do little to stop the fallout already rippling through the Indian economy.

*Before tackling India note that UK hopes of a Brexit deal are up again. I am shocked at the Financial Times' editorial attack on Boris Johnson, not because of the dirt it dregs up, but because it printed the f-word for the first time I can recall.

Our Indian and Emerging Market Funds

*Azure Power Global Ltd, which I averaged down in yesterday, is a victim of the IL&FS crisis but also suffering because a week ago it announced doing a capital increase of its own to deal with it. Off 5.47%, the AZRE share sank because it rushed to do a public offering of 14.8 mn new shares (including the greenshoe option to underwriters) at $12.50/sh, well below the $14.45 I paid to average down before I learned the dirt about IL&FS. Our local reporter did not warn us about the IL&FS mess; we got the info from Crédit Suisse. AZRE is at $12.3364 now. Abhimanyu Sisodia comforts me by noting that existing institutional holders will acquire about $150 mn of the new issue, plus 15% for the green shoe.

*Ripples from the India crisis also hit emerging markets funds across the board as they were already under a cloud over the US rate rises. The exception, because of timing, is Singapore-listed India REIT Ascendas India Trust, which lost only the equivalent of one US cent because the market closed before the IL&FS scandal was understood. ACNDF barely trades here so there is not much margin in trying to exit at 77 US cents. We bought at 73 cents and get a divvie of a penny.

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William K. 4 months ago Member's comment

The solution for the greed challenge is NOT to eliminate greed but rather to regulate it quite severely so that it is not able to do any serious damage. simply demanding that petroleum futures could only be purchased with cash, not borrowed credit, would have eliminated a lot of problems. Tighter regulation is the solution, not letting greed run rampant and out of control. Certainly there would be less profit for some, but far better that than disaster for many. ( I am well aware that such sound rather altruistic. Oh Well!)