The week saw important developments in the financial services sector with debt repayment by DHFL, issue of new rules by SEBI for credit rating agencies and resignation of auditors of Reliance Capital. On the other hand, economy had some good news with a jump in IIP growth rate and inflation numbers being in the comfort range. Here is a look at the details.
CPI inflation rose marginally to 3.05% during the month of May as per the data released this week. While inflation has been rising over last seven months, it is still sufficiently lower than the target of 4% and nearly 5% recorded about a year back. WPI, the other inflation index, also recorded a figure of 2.5%, well within the comfortable range and down from 4.8% a year ago. Inflation numbers validate RBI’s decision to reduce interest rate in its policy meeting last week to meet the growth needs of the economy as inflation does not pose any serious risk. In another set of data, Index of Industrial Production (IIP) recorded growth of 3.4% during April’19, sharp jump from close to zero during March’19. Even though IIP records significant fluctuation on month on month basis, the number, coming after a weak fourth quarter GDP, does provide a psychological support.
In an important policy move, government invoked rarely used provision (rule 56(j)) to compulsorily retire 12 officers from Income tax dept on corruption and other charges. The move is first of its kind and has far reaching implications. (While it was used on a few occasions in last five years, the mass retirement is first of its kind). While this provision always existed but was never used even in cases of gross inefficiency or allegations of corruption. (Allegation of corruption, and not necessarily conviction, is sufficient reason to invoke this rule). The move is significant as it probably points towards sign of things to come and to rouse bureaucracy from inefficiency and lack of accountability. While this is still just the beginning, it certainly has the potential to change the bureaucratic governance standards within the country.
NBFC sector and most notably, Dewan Housing Finance Corporation (DHFL) was much in the news this week, which managed to honor its debt obligations. DHFL, a housing finance company with major presence in tier II & tier III cities, had defaulted on payments to its bond holders to the tune of about Rs 1,000 crore. These were due last week but had a buffer of one week. The NBFC shot to prominence in Sept last year when DSP mutual fund sold bonds issued by DHFL at a significantly lower price. However, the company does seem to be seriously engaged in attempts to raise resources largely through sale of assets. This includes sale of its affordable housing subsidiary to Blackstone earlier this week. As per the company, it has repaid nearly Rs 30,000 crore to the investors since the crisis broke.
In other important corporate development, Reliance ADAG group remained in the news although for all the wrong reasons. In an unprecedented move, PWC resigned as auditor of Reliance Capital for not receiving satisfactory reply to its query which can have significant impact on the company’s financial position. PWC’s move assumes greater significance in view of the fact that Ministry of Corporate Affairs (MCA) recently initiated action to bar auditors of IL&FS for failing in their obligations. It would not be surprising if more auditors resign from companies with questionable practices. In another development, Reliance Power reported consolidated loss of close to Rs 3,600 crore for March’19 quarter, more than double the sales during the quarter. Most of the group companies are in bad shape with the flagship, Reliance Communications, undergoing insolvency proceedings under NCLT. Rcom is estimated to have total dues of over Rs 60,000 crore and it is highly unlikely that lenders would be able to receive anything more than 20-30% of this.
International automobile industry is going through a challenging period, much like its Indian counterpart. The woes for the industry began about a year when Carl Ghosn, CEO of Nissan and a much admired figure in the industry, was arrested on various charges. The latest and related to that was the proposed merger between Renault and Fiat late last month and its cancellation last week, within just two weeks. While the merger could have been an important deal for both the companies, the proposal got complicated due to reservation expressed by Nissan, Renault’s partner in Japan. The calling-off of the deal has strained the existing tie-up between Renault and Nissan and it would not be surprising if there are more surprises from these two companies.
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