NSE Revises Stock Selection Criteria for Nifty Indices

Change in index
25/08/2021

On 23 August, the NSE Index committee made some significant changes to the criteria and the composition of the various capitalization indices and sectoral indices. There are two very significant shifts that the Index Committee has made in the index criteria, effective 30-Sep.

The first big shift is with respect to the eligibility for inclusion of REITs and INVITs in the indices. Currently, only equity shares are eligible to be included in the index. Going ahead, even REITs and INVITs have been declared as eligible securities to be included in indices. This will bring a lot of global passive funds to invest in REITs and INVITs.

The second big change is to give a better representation to the pharma sector in the sectoral index. Currently, only the top-10 pharma stocks are considered for inclusion in the pharma index based on 6-month average free-float capitalization. That is now being modified to 20 pharma stocks to give a wider choice for inclusion in the pharma index.

Major changes in key indices

There will be no changes in the Nifty 50 Index composition as part of this semi-annual review. However, other indices are likely to see shifts as captured in the table.
 

NSE Index
Category

Number of
stocks changed

Nifty Next  50

05

Nifty 500

23

Nifty 100

05

Nifty Midcap 150

20

Nifty Small Cap 250

32

Nifty Midcap 50

10

Nifty Midcap 100

10

Nifty Small Cap 50

16

Nifty Small Cap 100

24

Nifty 200

06

Nifty Large-Midcap 250

15

Nifty Mid-Small-cap 400

28

Nifty Microcap 250

40

Nifty FMCG

01

Nifty Healthcare

04

Nifty IT

01

Nifty Media

03

 

For a detailed list you can visit the NSE website at the following: https://www.niftyindices.com/Press_Release/ind_prs23082021.pdf

All the above changes will be effective from September 30th, 2021.

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Government plans to allow FDI in LIC

Government
25/08/2021

Foreign direct investment or FDI in the proposed LIC IPO may be permitted as a special case. To begin with, Indian government permits FDI in insurance up to 74% under the automatic route. Only if the FDI is above 74%, the matter is referred to the Cabinet Committee of Economic Affairs or CCEA for final approval. Then why does LIC need special approval?

The anomaly has to do with the regulatory ambit of LIC. Unlike other insurers that are entirely regulated by the Insurance Regulatory & Development Authority of India (IRDAI), LIC is governed by a statute of parliament under a separate Life Insurance Corporation Act. Hence the regular approval of 74% FDI will not apply to LIC and special approval has to be sought under the LIC Act, or an appropriate amendment made to the same.

The LIC IPO is expected to happen during the current fiscal year 2021-22 and the actuarial valuation report is still awaited. As per informal estimates, the government may sell around 5% stake in LIC as against the originally indicated 10%. The IPO will be a combination of a fresh issue and a sale of stake by the government of India. The indicative valuations of LIC based on its AUM and policyholder equity is pegged at over $250 billion, making it India’s most valuable company.

The government is clear that an IPO with a size of Rs.1 trillion cannot be absorbed by retail and HNIs, so aggressive institutional participation is inevitable. The government may also look at 75% allocation to QIBs to make absorption of the issue much easier. The government is firing on all cylinders as it needs to make a grand success of the LIC IPO if it has to even get close to its disinvestment target of Rs.175,000 crore for fiscal year 2021-22.

 

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Read all stories on life insurance corporation (LIC) IPO:

1.   LIC - IPO Update
2.   LIC IPO gets the Government Stamp of Approval
3.   LIC IPO once step closer to becoming reality

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Bajaj Finserv gets Approval for Mutual Fund

Bajaj finance
25/08/2021

Bajaj Finserv, the holding company of the consumer finance and insurance business of Bajaj group, got SEBI approval to sponsor a mutual fund AMC. The next steps for Bajaj Finserv would be to put in place a full-fledged asset management company as well as a trustee company to hold funds in trust.

The stock markets received the news with enthusiasm considering that the stock price scaled new highs in the aftermath of the news. If you look at the last 3 months, Bajaj Finserv is up nearly 42%, when the Nifty is up just 10%. That has been largely driven by the anticipated mutual fund approval for Bajaj Finserv.

The mutual fund segment in India currently manages over Rs.35 trillion with SBI Mutual Fund, ICICI Prudential Fund and HDFC Mutual Fund being top-3 in terms of AUM. There are over 40 AMCs in India but the top-10 AMCs account for over 80% of industry AUM. In short, this is a business where scale is a distinct advantage.

What is the distinct advantage for Bajaj Finserv from the AMC business. The first is synergy. Bajaj Finserv has built a solid retail franchise with deep reach across India through its consumer finance and insurance business. The AMC licence will facilitate Bajaj Finserv to cross sell one more product offering to its massive customer base.

The second advantage is valuations. Currently, there are 3 listed AMCs. While HDFC AMC is valued at 15% of AUM, Nippon AMC is at 10% and UTI AMC at 8% of AUM. Even if you assume a median valuation for Bajaj Finserv AMC business at around 12% of AUM, there is a lot of value that the group can build by originating mutual funds. For Bajaj Finserv, the AMC business will be a cross selling as well as value enhancement strategy.

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Rakesh Jhunjhunwala picks up 1.6% Stake in Canara Bank

JhunJhunWala
25/08/2021

Last week, we had reported about the Rs.2,500 crore qualified institutional placement (QIP) of equity shares by Canara Bank. This week it emerges that nearly Rs.431 crore in the QIP was invested by Rakesh Jhunjhunwala. In short, Jhunjhunwala has absorbed more than 17% of the total QIP issue of Canara Bank. Post the allotment, Rakesh Jhunjhunwala now holds a 1.59% stake in Canara Bank.

Canara did QIP of 16.74 crore shares to qualified institutional buyers at a price of Rs.149.35 per share taking the total size of the QIP to Rs.2,500 crore. Out of this total QIP placement, Canara Bank has allotted 2.885 crore shares to Rakesh Jhunjhunwala at the price of Rs.149.35 pegging his investment in the QIP at Rs.431 crore. However, there were other major QIPs that also participated in the QIP.

Check: Big Bull Rakesh Jhunjhunwala's Portfolio

While Rakesh Jhunjhunwala took 17% of the QIP issue, there were several institutions that took more than 5% of the QIP issue. The major investors in the QIP of Canara Bank included LIC (15.91%), BNP Paribas Arbitrage (12.55%), Societe Generale (7.97%), Indian Bank (6.37%), ICICI Prudential Life (6.37%), Morgan Stanley Asia (6.16%) and Volrado Venture Partners (6.05%).

However, on 25th August, after the disclosure, the stock of Canara Bank closed 3% lower at Rs.151.05 on the BSE. There could be two reasons for the tepid stock price performance. Firstly, the QIP placement has increased the paid up capital from Rs.1,647 crore to Rs.1,814 crore. To that extent, it will be EPS dilutive.

The other reason is that the market wants to see more traction in earnings growth and NIM expansion. The profit growth in the Jun-21 quarter was largely on the back of lower provisioning. Till there is greater clarity on performance, it looks like the markets will bide its time before getting enthusiastic about the stock.

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NSE asks Members to Desist from Offering Digital Gold

Digital Gold
26/08/2021

The National Stock Exchange has asked all its registered members (stock brokers) to desist from selling digital gold on their online trading platforms. Digital gold is a dematerialized facility where investors could even buy fractional gold in fractions of a gram. Many of the digital payment platforms like Paytm, Phone Pe and Google Pay were aggressively offering digital gold on their online platforms.

The recent NSE directive specifically pertains only to SEBI registered brokers selling digital gold. This had been highlighted by SEBI to the stock exchanges. SEBI’s objection arises from the fact that digital gold is not a security as defined by the Securities Contract Regulation Act (SCRA) 1956. As per the current definition, brokers can only offer equity, futures, options and commodity broking services. Digital gold does not fall under that category. 

SEBI has highlighted some more issues with digital gold. Unlike equities, commodities or derivatives, the creation and settlement of these contracts are not regulated by SEBI. Currently, SEBI registered members cannot sell such unregulated products. Secondly, experts have also pointed out that while gold equivalent to the digital gold created is supposed to be ring-fenced in a vault, there is no methodology to audit or verify it.

In India, one of the highly popular digital gold products has been the one offered by MMTC-PAMP. While government-owned MMTC holds the equivalent gold in custody, PAMP of Switzerland certifies the quality and veracity of gold holdings. As per estimates of the World Gold Council, digital gold accounted for 1.4% of the total gold sales in India.

Also Read: Merit in Buying Digital Gold - How to buy Digital Gold

What happens to existing digital gold holdings. The product continues as it is. It is only the SEBI registered brokers who have bene asked not to sell digital gold. Existing holdings will remain with MMTC PAMP and unregulated entities can continue to sell digital gold. The NSE restrictions will be effective from 10-September.

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SBI Balanced Advantage Fund NFO collects Rs.13,000 crore

SBI
26/08/2021

It looks like the SBI MF Balanced Advantage Fund NFO may go down as the largest garnering of funds among MFs. Just a month back, ICICI Prudential Flexi Cap NFO had garnered Rs.9,800 crore and that was a record then. Now it looks like SBI MF has beaten that by a margin collecting close to Rs.13,000 crore as per early estimates.

SBI Balanced Advantage Fund is an allocation fund. The mix of equity and debt will be flexible. The way such allocation funds work is that as the index level goes higher, the fund automatically reallocates more to debt. At the same time, as markets become cheaper, the allocation to equity is automatically increased. This ensures that the fund is programmed to take profits at higher levels and has liquidity at lower levels of the market.

To an extent, this NFO underlines the advantage of the bancassurance model in the mutual fund business. Today if you look at the top-7 funds by AUM, 5 of them are part of large banking group. In the of SBI Balanced Advantage Fund NFO, it is estimated that Nearly 45% of the collections came through the SBI branch channel. It is reported that out of the 24,000 branches of SBI, nearly 14,000 branches got inflows for the NFO. 

Also Read: Flexi Cap NFOs are the in-thing among mutual funds

One of the unique features of the SBI Balanced Advantage Fund is that it offers a unique percentage withdrawal facility. Under this facility, investors can either opt to withdraw 0.5% of the invested amount each month or 3% every 6 months or 6% each year. The catch is that if the fund is not able to deliver that kind of returns, then the amount will be paid out of the investor’s capital.
The company is expected to have received a total of 4 lakh applications, which would mean a fairly large number of big ticket applications in the NFO.