The Young and (not) Restless
Pump & Dump getting social, The smarter young wave of investors, Oil going green, and More bad luck for Paytm 📱 🧠 ☘️
Happy Holi! Here’s to a weekend of trying to get the silver colour out of your hair and failing miserably. Now, before you snooze off for the weekend here are the stories to catch up on ⬇️
Pump & Dump Goes Social
The next (not so) big thing
Navigating the equity market can be quite tricky. Everyone’s looking for the next big thing. So, naturally, when a trusted source provides stock tips, investors are likely to pounce on the opportunity. This is the premise of pump and dump schemes where a small group of investors with a large holding of a certain stock recommend that stock to a large group of unsuspecting investors. Once the price goes up, this small group dumps their shares, making a neat profit while leaving the rest with a worthless investment.
Cat & mouse games
Pump and dump schemes have been the bane of investors and market regulators around the world. Crooked market operators have been playing a game of cat and mouse with regulators for ages when it comes to these schemes. Recently, the Securities and Exchange Board of India (Sebi) cracked down on such an operation taking place through the messaging app Telegram. The entities running these Telegram channels were giving fraudulent market advice to some 5 million investors!
Social investor influencers
So, it should come as no surprise that even as the regulator is investigating such incidents, pump and dump schemes have emerged in a new avatar. The crooks of Dalal Street have turned to social media influencers to push their schemes and reach an even wider audience. The whole matter came to light when a few popular market analysts on Twitter spoke out about it. A marketing agency had approached them to promote a relatively unknown stock in exchange for cash.
Drawing the line
They said for up to ₹30,000, the agency asked them to push Salasar Techno, a construction and engineering company with a market cap of ₹725 crore. Some analysts who recommended buying the stock have deleted their tweets after receiving public backlash. The entity that employed the marketing agency remains unknown. The issue again shines a light on increasingly popular trends like social investing where experts influence people to follow certain trading strategies, and the difficulty market regulators face in where to draw the line.
Out With the Old, In With the New (Investor)
Volatile start
Capital markets around the world have been through a lot this year. The list goes on from the Omicron wave to rising oil prices to high inflation to the Fed rate hike to Russia’s invasion of Ukraine to China’s Covid resurgence, and it's only March. There’s been no shortage of volatility, something that makes the average investor quite jittery. But something is changing Indian capital markets for the better, making them more resilient to crises like these.
Fragile investors
From the 2008 global financial crisis to the 2013 taper tantrum, one common trend exacerbated their impact in India. Skittish foreign investors were accompanied by their domestic counterparts in their flight from equity to safe-haven assets like bonds and gold. In fact, in 2013, India was part of the ‘Fragile Five’ economies that were too dependent on unreliable foreign investment. So, what’s changed?
No panic at the disco
In one word - millennials. Many first-time investors who entered the market during the 2020 lockdown were brushed aside by Dalal Street veterans as out to make a quick buck while sitting at home. But the 25-27 year-olds who make for a substantial 45% of all Indian Demat account holders have proved them wrong. There were 39 million Demat accounts in December 2019. That number grew to 87 million by February 2022. Aided by the digital shift in financial services, these do-it-yourself (DIY) investors are certainly not the jittery type.
History does not repeat
It's not even been three full months into this year and foreign institutional investors have already taken out ₹1.31 lakh crore from the Indian stock market. And opposing past trends, domestic institutional investors have pumped in ₹96,000 crores into this market over the same period. The new crop of investors is proving to be quite savvy by not panicking when markets crash and even buying the dip. If Indian markets have not tanked, it is because of these investors who are not shying away from good buying opportunities even with portfolios ranging between ₹10,000 to ₹1 lakh, say experts.
(T)Oil and Trouble
Green is the colour for you
If life were an amusement park, crude oil prices would be the wild child riding on the biggest rollercoaster. Recently though, it seems that that roller coaster has been on a steady incline, thanks to the geopolitical tensions between Russia and Ukraine. The price per barrel of crude oil has been over $100 for a while now, and the trend will likely continue in the coming months as well. This does not put India in a good position especially since we import more than 80% of our oil. To tackle this, India’s taking the greener route of producing more Bioethanol.
Bioethanol is a more environmentally friendly alternative to Petroleum. It is made by combining a certain percentage of Ethanol with Petrol. Now, this isn’t a chemistry lesson, so let’s not get into the nitty-gritty of how the chemical formulation works. But just know that Bioethanol is better for the environment and considerably reduces our dependence on foreign imports.
Big Targets
We know India is serious about going down the Bioethanol route since state-run fuel retailers have increased their Ethanol storage capacity by 51%. This is because we are close to reaching our target of 10% Ethanol in Gasoline (Petrol), and are targeting a 20% blend of Ethanol by 2025. Although this is a step in the right direction when it comes to being environmentally conscious, one criticism is that this would impact the food safety of the poor. How? Well, Ethanol is made primarily from the sugars of biomass such as sugarcane, corn, rice etc. This, some say, would exacerbate the food shortage issue for the poor, that already suffered a blow throughout the pandemic.
Food is fuel
The rise in oil prices wasn’t reflected in the Indian market because of the assembly elections that took place, specifically in UP. Now that we're done with the elections, according to a Morgan Stanley report, retail fuel prices should increase by 15% to reflect the current crude oil prices. With retail inflation already on the rise since last year, an additional increase in crude oil prices could leave the consumers in a financially tight spot. This is what makes this step to decrease dependence on crude oil important today, and for the future. However, critics also say that Ethanol production from food can push the prices of these foods further up. This impact of food being used as fuel, on retail prices, has already been seen in the U.S.
While the government says it has enough stockpiles of grains to support the production of Ethanol, critics still suggest an alternative - converting crop residue, wood pulp, animal waste and garbage to produce Ethanol.
Below rock bottom
Tough Luck
Paytm has now become the go-to example in conversations of failed IPOs. Like blackberry had become for phones and Kodak for cameras. If you’re a Friends fan - Paytm pulled a Monika. Despite the tanking share prices (lost 2/3rd of share value in November), Paytm marched ahead trying to expand its financial services portfolio, after RBI allowed them to function as a scheduled payments bank. Thus Paytm Payments Bank (PPB) was born. Recently however it suffered another blow. The RBI banned the onboarding of any new customers on PPB until an IT audit of the same is completed; permission to resume onboarding will be granted if the RBI is assured by the reports.
But what did it need assurance for?
Red card for the star player
RBI doesn’t publicly share the specifics about banning an entity - but it likely has issues with Paytm’s technology gaps, protocols relating to Know Your Customer (KYC), data privacy, data storage and outsourcing of data. While there were reports of Paytm sharing data with China-based entities, this is not backed by factual evidence and was denied by the entity in a recent statement.
The ban is a huge blow for Paytm since 33% of their revenues in FY21 (according to their Draft Herrings Prospectus) came from. More than half of the customers they onboard use PPB as their settlements bank. But since the wallets are interoperable with the bank accounts and UPI transfers, and since the operations of the existing customers are not halted, the immediate financial impact might not be huge. In saying that, the brand and reputation of Paytm will take a hit here.
What’s the way forward?
Paytm has its fingers in many pies, and most of these pies are not profitable. Its lending business, however, is the one profitable business responsible for any growth that Paytm is seeing. And this is despite not being able to lend directly. Since Paytm doesn’t have a small finance bank (SBF) license, it can only connect lenders with customers. One way to salvage this lending business from the woes of PPB would be to separate PPB from Paytm. But Since this is one of the only profitable verticals of the entity, it doesn’t seem likely.
If we have learnt anything about RBI bans from their previous bans of Master Card and HDFC, it is that these don’t get lifted quickly. So, the only way perhaps for Paytm to survive the ban and to grow in the future is to leverage this one profitable vertical of lending. Especially since its UPI proposition is operating in a competitive market. And the only way to do this is to get that SBF licence.
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