Domestic equity markets opened lower on Monday tracking weak global cues. (Express Photo)

9.50 am: The rupee slipped from a one-month high by depreciating 21 paise to 65.88 against the US dollar at the Interbank Foreign Exchange in early trade on Monday on foreign funds outflows amid fresh demand for the American currency from importers. The BSE IT index was down 0.22 per cent at 11,204.37. Sensex was down 176 points, or 0.67 per cent, at 26,042.71. Nifty was down 49.45 points at 7932.42.

9.20 am: Sensex was down 214 points at 26,004. Nifty was down 64 points at 7,917. In the 30-share index Hindalco, Tata Steel and ICICI Bank were trading 2.36 per cent, 1.77 per cent and 1.76 per cent down at Rs 74.35, Rs 223.70 and Rs 273.10.

Domestic equity markets opened lower on Monday tracking weak global cues. The BSE Sensex opened 110.93 points down at 26.107.98. NSE Nifty opened 70.40 point down at 7,911.50.

Asian shares tumbled on Monday after the US Federal Reserve’s decision to keep interest rates at record lows raised fresh concerns about growth globally.

France’s finance minister reaffirmed the country’s commitment to economic reforms on Friday after ratings agency Moody’s cut French bond ratings by a notch to Aa2, citing continued weakness in the country’s medium-term growth outlook.

Back home, Sensex and Nifty gained around 1 per cent on Friday.

Global Markets

New York: Wall Street stocks closed lower on Friday in heavy trading as the Federal Reserve’s decision to keep interest rates near zero fuelled concerns about the potential impact of continuing weak global growth on US corporate earnings.

London: Britain’s top share index fell sharply on Friday, led lower by commodities stocks, after the U.S. Federal Reserve left interest rates unchanged on concerns about the health of the global economy.

Tokyo: Japanese stocks snapped a three-day winning streak on Friday after the Federal Reserve kept interest rates at a record low, raising worries about the health of both the U.S. and global economies.

Hong Kong: The Hang Seng Index down 1.1 percent.

(With inputs from agencies)

Reliance Mutual Fund’s CEO Sundeep Sikka today said domestic mutual funds in India have seen inflows worth USD 18 billion in the last one year. (Express Photo by Dilip Kagda)

Bullish over the growth prospects of Indian markets, top fund house Reliance Mutual Fund’s CEO Sundeep Sikka today said domestic mutual funds in India have seen inflows worth USD 18 billion in the last one year.

“This shows a renewed sense of optimism about Indian markets, where foreign investors also continue to repose faith,” Sikka told a gathering of institutional investors and fund managers here.

Sikka, who is also Chairman of mutual fund industry body AMFI, said there have been a lot of ambitious projects that have been launched, and Prime Minister Narendra Modi and Finance Minister Arun Jaitley have been travelling across the world to invite foreign investors.

“The stock markets have been at life time highs and the domestic institutional investors have invested huge amounts of money in the markets. While foreign investors are investing, domestic asset management companies have seen USD 18 billion of inflows in the last 12 months,” he said.

The summit organiser Asia Pacific Investors Cooperation (APIC) CEO Ana Sharp said it is a business platform created by and for Asian institutional investors including pension funds, sovereign wealth funds, government funds, social security systems, and insurance companies.

“These institutions represent APIC’s private membership. APIC covers 22 Asia Pacific markets and the members currently present here at the Summit represent USD 10 trillion worth of Assets Under Management,” she added.

Finance Minister Arun Jaitley delivered keynote address at the summit.

Spectrum trading rules could have a short-term marginal respite for RCOM, if 4G entrants find it appropriate to have a short-term coverage and capacity boost as Reliance Communication (RCOM) spectrum holdings in the 850 spectrum band come up for renewal in c5 years. RCOM 850 spectrum can allow 4G entrants to have 10MHz in the attractive 850 spectrum band, allowing them to have both capacity and coverage, which incumbents may find tough to replicate in a few markets. However benefits for 4G entrants will be short term, unless they renew these radio waves as and when they are put to auction. Separately, if the pending RCOM-SSTL merger is approved, 4G new entrants can access an additional 5MHz of spectrum in 850 in eight additional markets, and this could be used for coverage.

However, the spectrum trading arrangements will be complex as they will need to meet several conditions

(a) five-year validity: RCOM spectrum comes up for renewal in five years and, therefore, any sharing or trading arrangements will be short term;

(b) one-time fee: RCOM will need to pay a one-time fee of $400m to get spectrum liberalised before it can trade spectrum in overlapping circles with 4G players;

(c) CDMA is revenue generating: RCOM CDMA spectrum is presently being used for data cards and voice, and RCOM will need to be compensated for the loss in CDMA revenues by 4G entrants over and above the one-time fee. In other words, it is not a pure upside, as RCOM will have to sacrifice present CDMA revenues before it opts for trading the spectrum

(d) regulatory support: RCOM 850 spectrum band is not contiguous in four markets, and 4G entrants don’t have contiguous spectrum in five markets where they own 850. The regulator will need to help to harmonise this spectrum and get it contiguous;

(e) separately, RCOM will need to pay $600m to the government for the SSTL spectrum before it can trade spectrum. Further regulatory support will be required to get this spectrum contiguous and harmonised.

Reiterate Reduce rating with a TP of Rs 55. We believe the upside for RCOM will not be much and, therefore, we are not making any changes to our estimates. Complex short-term spectrum trading arrangement comes with several costs.

We highlight the costs 4G entrants may have to bear to benefit from RCOM 850 via spectrum trading in the short term.

(a) One-time fee to liberalise spectrum: As stated above, RCOM’s present spectrum in most markets is not liberalised, and there is a need to pay a one-time fee of $400m before the spectrum can be used for spectrum trading. Further, RCOM will need to pay $600m to the government for the SSTL spectrum before it can trade this spectrum, assuming the merger goes through. In other words, 4G players will need to compensate RCOM for such regulatory levies to use the RCOM 850 spectrum band.

(b) Compensation for loss in CDMA revenues on subsidised migration: RCOM is using the 850 spectrum band today for voice and data cards, and once the spectrum is deployed for 4G, the 4G entrants will need to compensate RCOM for the loss in CDMA revenues or facilitate the migration of existing RCOM CDMA subscribers to 4G by subsidising devices.

(c) 10MHz spectrum will need fibre backhaul: That is not all; any network with 10MHz of spectrum will have to be backed by investment in fibre backhaul as well. This may not have been the case if it was a mere 5MHz but with 10MHz it becomes mandatory.

(d) Regulatory support to harmonise spectrum: A large part of the spectrum is with both 4G entrants, and RCOM is not contiguous in nature, so regulatory help will be needed to harmonise spectrum. This may take time as such activities require the cooperation of other telcos.

(e) Spectrum comes up for renewal in five years: RCOM spectrum in 850 markets will come up for renewal in five years and it is not necessary that 4G entrants will win the spectrum from auctions. Moreover, the current auction format allows everyone to participate in spectrum auctions and the competition will attempt to be disruptive or make the spectrum expensive for 4G entrants.

(f) Regulatory ambiguity: Present M&A norms suggest a spectrum cap at 10MHz for the 800 spectrum band.

However, the 2015 auction document published by the regulator suggests a spectrum cap as 50% of the total spectrum in the 800 band. We await more regulatory clarity on the issue. The pending RCOM SSTL merger meets the 10MHz rule in all markets but is not meeting the 50% cap in most markets (refer Figure 2).

Conclusion: The complexity of this aforesaid spectrum arrangement makes it expensive and time consuming and will leave little value in hand for 4G players to incentivise RCOM, in our view. Non-cash incentives could be easy, such as allowing RCOM to use the 4G network and allowing RCOM to sell 4G services. Such incentives may not help, as RCOM has been struggling with subscriber traction on one hand and on the other it needs to repay debt and reduce leverage. We don’t see much upside for RCOM in the current format.

How will such complex short-term spectrum sharing arrangement help 4G entrants?

We have been highlighting that 4G entrants need spectrum in the sub-1Ghz spectrum band to offset the coverage issues as in the present form they have too much dependence on the poor quality 2300 spectrum band. Even though temporary in nature, the access to the 850 spectrum band seems to be the only near-term solution available to 4G players, in our view. Access to good quality sub-1GHz spectrum on a long-term basis is not an option today. So, 4G entrants are faced with two options—either launch with a network of around 2,300, which may prevent them to have a good subscriber value proposition, or take a more short-term approach and leverage 850 using spectrum trading. That said, we highlight that access to 850.

Valuation and risks

We continue to value Reliance Communications on a DCF-based sum-of-the-parts approach. For our DCF valuation, we use a cost of equity of 14.5%, a cost of debt of 11% and a WACC of 13.6%, arriving at a fair value of Rs 40 per share for its core operations adjusted for regulatory levies. We value its real estate assets at Rs 15 per share (valuing them at a 20% discount to management estimates) as the company plans to unlock value in its real estate to cut debt. Our valuation leads to an unchanged target price of Rs 55. As this implies downside of c11% to the current share price, we reiterate our Reduce rating.

Key upside risks: ability to monetise non-core assets may allow the company to bring down leverage and will be positive for the stock price. Further approval of the merger with SSTL (which is pending now) may allow RCOM to consolidate spectrum in 800 and raise its ability to monetise overall spectrum holdings and boost near-term earnings.

In order to safeguard small investors’ interest, regulator Sebi is planning to put in place a mechanism to ensure prompt and proper disclosure of changes in credit ratings of listed firms, especially those with bad debt.

It is also looking to revamp norms for credit rating agencies, including the possibility of asking them to disclose their rating actions directly through the stock exchange platform for the benefit of investors, sources said.

Sebi is already looking into possible lapses on part of rating agencies in the wake of investors, including those investing through mutual funds, facing the brunt of huge debts turning sour for some listed companies.

Those under scanner also include the promoters and the top management of the concerned companies, as also some banks who appeared to have sold distressed debt securities to mutual funds at cheaper prices to hedge their own positions without making proper disclosure about adverse rating actions on such corporate bonds.

Some mutual funds have complained to Sebi that rating agencies were being following a casual approach in their rating actions, including for the distressed debt securities.

Any change in the regulatory framework would take place only after thorough consultations with all the stakeholders, a senior official said, while adding that Sebi is of the view that there is also an urgent need to enforce the existing regulations for credit rating agencies including the requirements to thwart any conflict of interest on their part.

The official said Sebi is looking to bring in a greater level of transparency in the way credit rating agencies work, including in their adherence to ‘Chinese Walls’ like structures between their sales and research teams.

The proposed measures include checks against any possible manoeuvring by the rating agencies in favour of their major or preferred clients while assigning ratings to them.

At the same time, fears have also been raised in the past that bad ratings may be assigned to the entities that have either fallen out of favour with the rating agencies.

Sebi is looking to instill a greater level of confidence among investors although the regulations already require credit rating agencies to keep their sales and research functions completely separated by ‘Chinese Walls’ like structures, so that income received from their clients do not affect the ratings being assigned to them.

Credit ratings are indicative of the creditworthiness and potential credit risks associated with the entity being rated. The rating agencies are regulated by Sebi, while ratings assigned by them are depended upon by both the borrowers and the lenders, when it comes to raising of funds from the capital markets.

The new listing regulations, which were notified by Sebi earlier this month, also make it mandatory for listed firms to disclose all rating actions involving them, including on their website and through stock exchange platform.

Listed companies also need to “co-operate with and submit correct and adequate information” to rating agencies.

The rating agencies also need to review the each rating assigned to a listed company with respect to non-convertible debt securities at least once a year.

The functioning of rating agencies has always been a matter of debate for possible regulatory violations, as the business model of such entities involves income realisation from the companies being rated by them.

The role of rating agencies becomes much more important during times of slowdown in macro-economic scenario, corporate earnings and the capital markets.

Industry experts say that Sebi already has a very strong set of regulations for such entities and the regulator has been very futuristic while framing these norms. However, changing business dynamics and the trends being witnessed in global markets require a fresh look at these norms.

In the developed markets of the US and Europe, a lot of regulatory thinking has gone into the potential safeguards against any possible manipulations by the rating agencies since the financial crisis of 2007-2008.

These entities had faced the brunt in a big way when many banks rated highly by them went bust during the crisis, resulting into the regulators across the world tightening their norms for such entities.