Category: Excerpts

What is clear is as follows:

1. Banks will benefit, as much of this ₹ 15 lakh crore in currency will get deposited. Even if only 10 % remains with the banks it means an incremental ₹ 1.5 lakh crore of current and savings account ratio (CASA). Interest rates are headed lower system-wide as banks’ cost of funds decline, they lower rates and park these flows into government paper. Already we have seen Indian 10-year yields fall by 40 basis points in the last week, despite yields rising globally. Also remember this money left with the banks will have a multiplier compared to it sitting in cash. The system should be awash in liquidity.

2. The Reserve Bank of India (RBI) will cut rates sharply and quickly. This reduction in currency will be a deflationary shock, with certain asset markets declining sharply and economic activity weak for the next two quarters at least. Inflation will decline giving the RBI the space to cut.

3. Financialisation of savings will accelerate as both property and gold will now be challenged as alternate stores of value. The cost of capital will reset downwards for the country.

4. There will be a significant negative wealth effect. Some percentage of this ₹ 15 lakh crore will get wiped out. Black money that is either simply burned, or loses 30-40 per cent as the cost of conversion to legitimate money. Wealth destruction is also inevitable in property, as prices fall and markets freeze. There will be a shock to high end-discretionary consumption.

5. There is likely to be some behavioural change as those parts of the economy relying on cash need to adjust. Individuals and business that were using large chunks of cash on a daily basis will take months to rebuild these cash levels given the limits on daily withdrawals. In the interim, they will have to adopt e-payments or cheques to stay in business. As their business moves into the formal economy, it will be difficult to reverse and the tax buoyancy of economic growth will improve for the government.

6. For the vast majority of Indians, those having less than ₹ 2.5 lakh in cash or agriculturalists, things will normalise in a few weeks. They will simply need to wait till they can get the new notes. For these people, it is largely a logistical issue of note replacement.

7. Small and medium-sized enterprises (SMEs) will be in trouble. Many are doing business entirely in cash. Demonetisation, combined with goods and services tax (GST), will kill their business model, which was dependent on tax and labour arbitrage. Many sectors will see large market share gain for the organised players. Lenders to the unorganised sector will need to stress test their exposures; there may be far greater credit issues here than investors are modelling.

8. Expect more measures to tackle the flow (fresh creation) of black money. Demonetisation handles the stock problem. Once the short-term logistics around cash replacement are fixed, expect new restrictions on use of cash and continued curbs on cash withdrawals. These steps will continue to force behavioural change.

9. I am frankly quite amazed as to the extent of cash in the system and its all pervasiveness. It seems that there is no supply chain untouched, and even large organised players need to deal with cash. There are many segments of the economy which operate only on cash. Whether demonetisation works or not, we have to attack this cash and the mindset. That much is certain.

–wrote Akash Prakash

The impairments and write downs at Tata Sons were due to legacy issues, largely relating to TTSL.

There were also other investments of questionable nature such as Nagarjuna refineries (Rs. 400 Cr.) and SASOL JV.

One investment in Piaggio Aero, a company in the aerospace sector with a friend of Mr. Tata, was especially distressing. Tata Sons decided to exit the company at a commercial loss of Rs 1,150 Cr. This was after the efforts of Mr. Bharat Vasani and Mr. Farokh Subedar who managed to recover Rs. 1,500 Cr., overcoming the objections of Mr. Ratan Tata who in contrast favoured increasing investments in that company.

Today, the company is, for all practical purposes, nearly bankrupt. 

–from ET

In his Alternate Universe, Ratan Tata wants Regulators/Stock Exchanges should question/take clarifications from individuals and not listed companies:

Here, we are only referring to the shocking statement of Cyrus Mistry of five or six major Tata companies having to take ‘potential write-downs of $18 billion’ in future in their assets/investments and the following points/queries need to be raised –

a) Has Mr Mistry, the Chairman, informed the Boards of these companies at any time in the past specifically of the above mentioned potential write-downs? If so, when was this done and why was itnot made public as this is clearly a major item of information – apart from disclosing only the write-offs required to be  made to date. Surely he could not have ‘discovered’ such a large potential liability only a day  or two after he was replaced as the  Chairman of Tata Sons. Therefore, he must have been aware of this potential large provision much earlier but did not disclose it. It presumably relates to possible future provisions to be made (with no firm basis) but only his own expectation, i.e. a forward-looking statement which is normally not permissible due to its uncertainty. It also suggests that  he had no intention of or given up any attempt to revive the value of these companies. It is unfortunate that  the  BSE/NSE have  asked the   companies to explain this statement and not Mr Mistry as the author of this statement.

b) On the same point, it has been widely reported that  this statement of potential write-downs of this magnitude has been largely responsible for the loss in the total market value of these five or six companies of an amount of over Rs 25,000 crore and all the shareholders would naturally be unhappy at this loss in their own value for no fault of theirs but mainly due to this shocking and sudden statement on the part of the Chairman of these companies which may or may not have been shared with the Board and certainly not publicly disclosed earlier. Here again, it is unfortunate that the shareholders and regulatory authorities would put the onus on the companies and not  Mr Mistry as the author of the statement for being responsible for this large loss in market value.

-from Full Statement of Tata Sons

Source: Bloomberg

Shares of software and heavy equipment provider Wisesoft Co. Ltd. moved more than 6 percent higher on Wednesday morning. The local name of the company sounds like “Trump Wins Big” to Chinese speakers. It’s fitting that as a man who accumulated wealth through licensing deals en route to the presidency is now helping others profit off the association with his own.

Meanwhile, at Yunnan Xiyi Industrial Co. Ltd., an auto-parts manufacturer whose name sounds like “Aunt Hillary,” shares tumbled by 10 percent.

The Reserve Bank of India has dismissed as “figments of imagination” rumours that a new series of Rs 2,000 will come with a GPS-chip that will help government track illegal money transactions.

“Such a technology does not exist at the moment in the world, then how can we introduce such a feature?” RBI spokesperson Aplana Killawala told News18.

Reports of a chip-enabled series of new currency notes had surfaced immediately after Prime Minister Narendra Modi announced on Tuesday that the government was scrapping the existing denominations of Rs 500 and Rs 1000 currency notes.-from News18