Is Indian Stock Market on the Verge of Crash?
Bombay Stock Exchange (BSE) has the highest number of listed companies compared to any exchange in the world (Approx 5000 companies). Between 2009-19, Around 720 companies (Including SME IPOs) listed in Indian stock exchange but more than that (around 1500 companies) delisted from the exchange during the same period.
The catch is that listing a company in stock exchange normally require audits. Many investors lose money due to inadequate monitoring of listed companies by SEBI & Exchange. From the last 10 years, we are campaigning that India is going to be the world’s largest economy in the world, let’s invest now. That money belonged to individual mom-pop investors who thought to be a part of the India growth story.
Is Stock Exchange a financial system or is it a gadget that we can use to make more money for ourselves and take more money from others? The Indian stock market is turning into a fertile ground for price manipulation. SEBI should not allow the companies if they don’t have a way to police them. We put faith in our market, in our government to police the market. This time it’s all the people who we think are the gatekeepers of the financial market be it SEBI, RBI, Auditing firms or Rating Agencies going to be responsible for upcoming Tsunami.
Who to Trust:
A new set of market risk prevailing nowadays in the market is Auditor’s credibility. Whenever we had a massive fraud in book & records of the company (Recent example Manpasand & Vakrangee), people always ask, who is your auditor? It’s important to understand that the financial statements are prepared by management, not by the auditors. Auditor’s job is to simply review the management’s work. If management is trying to hide something or has co-opted the auditors to hide then it’s a huge problem. Can investors trust company audit financial statement filed in exchange?
Unrated Rating Agencies:
Investors rely on rating agencies, which is able to assess risks adequately. Post IL&FS crisis, it questions the credibility of Indian Rating Agency. We all know during Mortgage Crisis how Banks use rating agencies to disguise crappy mortgage bonds. The merchant banker, the auditors, and Rating Agencies are making good money to ensure that markets are clean. They were not doing anything of that sort, they simply process the necessary paperwork, took their fees and moved on. It’s a huge problem for market & investors to losing faith in rating agency & Auditing firms.
The elephant in Room:
India has 10,190 NBFCs. They are involved in commercial and passenger vehicle finance, consumer durables finance, housing finance, housing project finance, loans to small and medium industries, loans for infrastructure projects and even microfinance. The seed of Crisis started in 2014 when public sector banks stepped back from lending due to rising non-performing assets (NPAs), NBFCs fill the gap. NBFCs began borrowing heavily from mutual funds by issuing short-term Commercial Paper (CPs). In the next three months, Rs 1 LAKH CRORE of commercial paper raised by NBFCs comes up for redemption. Any big failure to meet their payments or issue fresh paper to roll over that debt can trigger off a crisis.
Another side of Mutual Fund:
Indian Mutual Fund industry’s Assets under Management (AUM) stood at Rs 26 Lakh Crore. The total amount collected through Systematic Investment Plan (SIP) every month of approx Rs 8,000 crore. Mutual funds exposure to NBFCs is 34% of AUM. It’s a ticking bomb for Mutual fund Industry. Its the fund house & fund managers greed of higher returns that leads them to unethical practice. The popularity of Mutual Fund in India is at a peak. People are coming for a nice return, hoping to have a nice retirement egg for themselves. Allocation of the fund is going to be a daunting task for fund managers as in the coming days, on one side Indian Equity valuation is stretched and on another side, scary debt market crisis.
Gold price touched $1400 first time since 2013. India’s Gold import jumped by 37.43% in the month of May. Dovish central banks and fear of military strike between USA & Iran favor the sentiment. Immediate risk factor for gold is G-20 summit outcome. If Sino-china failed to make a deal then we can see further upside in Gold price which is again alarming for Indian Economy.
Stop living a big lie:
We need to stop living a big lie that India is somehow doing well. The economy is slowing, agriculture growth is collapsing, Investment is weakening, Private consumption is tapering off, Current account deficit is rising, Household saving is declining, Actual Tax collection is falling short of Budget Estimated & increasing unemployment is not only going to cause further weakness in rupee but also impact corporate earnings.
Add fuel to fire:
India Monsoon rains have been 44% lower-than-average so far in June, raising concerns that parts of the country could face a worsening drought. This shortfall could have a major impact on consumer demand, the overall economy and financial markets.
It’s an awakening call for regulatory, Finance ministry & agencies to save the financial system & restore the trust among the investors. Indian stock market is on the verge of a crash, if US-China fails to make a trade deal on 28th June (G-20 meeting). All together different roads (above discussed factors) are leading to the same path (Financial Tsunami).
Disclaimer: The views expressed in this article are those of the author (Author is a certified Research Analyst).
Stories written by same Author: The other side of Mutual Fund Sahi Nahi Hai