Why Axis Capital got barred by SEBI?

Our goal with The Daily Brief is to simplify the biggest stories in the Indian markets and help you understand what they mean. We won’t just tell you what happened, but why and how too. We do this show in both formats: video and audio. This piece curates the stories that we talk about.

You can listen to the podcast on Spotify, Apple Podcasts, or wherever you get your podcasts and video on YouTube.

You can also listen to The Daily Brief in Hindi.

Today on The Daily Brief:

• Axis Capital got axed
• China is getting older
• Are we exporting enough?

Axis Capital got axed

SEBI recently made a bold move—it banned Axis Capital Limited (ACL) from handling debt merchant banking. So, what does Axis Capital actually do? They’re a "merchant banker," which basically means they help companies raise money by selling things like bonds or shares. Think of them as financial middlemen who handle the paperwork, make connections, and keep things running smoothly.

Sounds pretty straightforward, right? So why did SEBI take this action against them? Well, it turns out ACL messed up big time. Instead of just arranging deals, they started promising to cover losses if things went wrong, which is a huge no-no.

This whole drama started with a report titled "Is Axis Capital an Investment Bank or a Hedge Fund?" published on January 16, 2024, by Hemindra Kishen Hazari, a SEBI-registered research analyst. The report pointed out some risky things ACL was doing, and SEBI decided to take a closer look at one of their deals.

The spotlight is now on Sojo Infotel, a small tech consultancy that needed to raise cash. Sojo issued corporate bonds called Non-Convertible Debentures (NCDs) and raised ?260 crore, with ACL helping them sell these bonds. But here’s where things get messy—ACL didn’t just arrange the deal; they promised to step in and pay back the bondholders if Sojo couldn’t. And that’s where ACL crossed the line.

See, ACL isn’t a bank. They’re not supposed to guarantee loans or act like a lender. Merchant bankers deal with market risks, like selling securities that might not get fully bought, but they’re not meant to take on credit risks. That’s a bank’s job. But ACL went all in and guaranteed the bondholders would get their money back, which is a big regulatory problem.

So, what went wrong? Sojo used the money from the bonds to buy shares in Lava International. Remember Lava? They were big in the Indian mobile market before smartphones took over. The twist is, the people running Sojo also owned more than 80% of Lava. So this whole bond deal was like moving money within the Lava family. But when Sojo couldn’t pay back the bondholders, ACL had to step in and pay ?166 crore, which wasn’t supposed to be their job.

That’s when SEBI, India’s market watchdog, stepped in. They saw ACL had crossed the line by guaranteeing deals, which only banks should do. And it wasn’t just this one deal; SEBI found that ACL had been doing this in other private bond deals too—mixing roles of merchant banking and lending.

To make things worse, Lava didn’t go public in time, which was supposed to help pay back the bonds. Without the IPO money, Sojo’s bonds were left hanging. Sojo’s promoters tried to repay some bonds by selling Lava shares, but it wasn’t enough. When Sojo missed the deadline, SEBI cracked down on ACL for guaranteeing the whole thing.

SEBI realized how dangerous it was for ACL to act as both the arranger and the backstop for these deals. They weren’t going to let that slide. So, SEBI banned ACL from taking on any new debt deals for now. Plus, SEBI is also investigating Axis Bank, ACL’s parent company, because this mess could have bigger risks for the whole banking sector. The Reserve Bank of India might even get involved—because when it comes to playing with credit guarantees, you’re definitely playing with fire.

China is getting older

Imagine working your whole life, looking forward to finally retiring and relaxing, only to find out that just as you’re about to retire, the government decides to raise the retirement age! That’s exactly what’s happening in China right now.

Starting next year, China is raising the retirement age. Men will now retire at 63 instead of 60, and for women, it’s going up to somewhere between 55 and 58, depending on their jobs. But why is China doing this? It’s not just about making people work a few extra years—it’s linked to a much bigger problem: China’s population is shrinking, and that could affect economies worldwide, including India’s.

Here’s what’s going on

China is facing a huge demographic crisis. For years, the population was growing, but now it’s starting to shrink. People thought China’s population would peak around 2030, but by 2022, it was clear that the peak had already happened. Last year, China’s population dropped by 850,000 people, and this trend is just beginning.

Why is this happening?

There are a few reasons. First, more Chinese women are joining the workforce, and many are choosing careers and personal goals over starting families. Plus, from 1980 to 2016, China’s one-child policy aimed to control population growth. While it worked at first, it ended up being too effective, leading to fewer young people to replace the aging workforce.

By 2035, China is expected to have about 400 million people over 60—that’s more than the entire population of the U.S. today! With so many older people retiring, there won’t be enough young workers to replace them, putting huge pressure on China’s economy. And this will push the world to reduce its reliance on China, which could be an opportunity for India.

Another big problem is pensions. With so many people set to retire in the next decade, who’s going to pay for their pensions? China’s pension system is already strained, and some experts say it might run out of money by 2035. And it’s not just China facing this issue; countries like the U.S. and Japan are struggling with similar problems as their populations age.

This opens up a big opportunity for India. India’s average age is just 28, so as China’s workforce shrinks, India could step in and attract businesses looking for young, skilled workers. But to really take advantage, India needs to quickly improve its skills and capacity, because right now, we’re still behind China in many areas.

The aging population doesn’t just affect pensions—it hits the entire economy. When people retire, they stop contributing to the country’s output. Fewer workers mean less production, which can shrink the economy fast. Plus, with fewer people, consumption drops too. China already struggles with low domestic demand, and this demographic imbalance will only make it worse.

China’s economy has already slowed down, with growth dropping from 10.6% in 2010 to 6.1% in 2019. If China doesn’t find a fix, things could get worse. Some experts think China’s growth could fall to just 1% a year by 2035, similar to Japan’s lost decade from 1991 to 2001 when its economy stalled as its population aged.

What’s China doing to fix it?

First, they’re trying to boost birth rates. They’ve moved from a one-child policy to allowing two, then three children per family. But having kids is expensive, so many families still stick to just one or none.

China is also raising the retirement age to keep people working longer, but that comes with its own challenges, especially for physically demanding jobs. Imagine asking a 60-year-old construction worker to keep going until 63 or 65—it’s not easy.

China is also trying to increase productivity, hoping that even though there are fewer workers, they can get more done. Other countries like Japan have tried this with mixed results, but it’s one of the few options China has left.

For India, China’s situation serves as a cautionary tale of what not to do when managing population growth. Avoiding extreme measures like the one-child policy and focusing on balanced growth could help India dodge a similar crisis in the future.

Everything India has achieved over the past 30 years is because of our people and our favorable demographics. How we manage our population in the next few decades will play a huge role in shaping our economic future.

Are we exporting enough?

Remember on Friday, we wrote about India’s big merchandise trade deficit? We discussed how, despite over a decade of government efforts to boost manufacturing, India is still not quite where it needs to be. We’ve got a long way to go before we can call ourselves a global manufacturing powerhouse.

Let’s break it down a bit more today.

Right now, exports aren’t a huge part of India’s economy. Our exports-to-GDP ratio is a modest 22%. While we’re trying hard to attract manufacturing businesses away from places like China, we’re up against some tough competition. Countries like Vietnam, Thailand, and Malaysia focus a lot more on exports than we do.

So, we’re up against some serious competition, and we’ve got our own issues to fix too! There’s no single magic fix for our problems. The only way forward is to patiently tackle as many issues as we can, hoping it makes a difference.

Take shipping, for example.

Even if you’re a top-notch Indian manufacturer who’s done everything right—even if your product is just as good as or better than what your Chinese or Southeast Asian rivals offer—you could still lose export orders. Why? Because once your goods hit the port, a lot of things can go wrong.

First off, there are long waits at ports. Indian ports are notorious for being crowded. The infrastructure and manpower just aren’t enough to keep up with demand. So, when your shipment reaches the port, it could sit there for 2-3 days before it’s picked up. Not ideal, right?

Then there’s the container issue. To export goods, you need containers. But here’s the catch—India doesn’t have enough space to store empty containers. So, when it’s time to export, there’s often a shortage, leading to delays.

And finding a ship? That’s another challenge. Most big global shipping companies are based outside of India, and during shipping crunches, they might skip Indian ports altogether. And here’s a shocker: India has only one company that handles container shipping—the Shipping Corporation of India (SCI). And how many container ships does it own? Just two.

Plus, our ports have their own set of problems. Many of them are too shallow to handle the world’s largest ships. So, we end up using smaller feeder ships to move our goods to bigger ports in places like Sri Lanka, Dubai, or Singapore. This extra step takes time and adds to the cost of our exports.

Speaking of costs, they’re through the roof. Indian ships can only handle about 5% of the country’s shipping demand, so we rely heavily on foreign ships. These foreign shippers charge us more because stopping at an Indian port requires extra planning and clearances. All this adds up—India spends a staggering $109 billion a year on shipping.

And while your goods are stuck at the port, you need to pay for storage, which isn’t cheap.

Although things are better than they were a decade ago, we’re still way behind global standards. Indian manufacturers are at a huge disadvantage. Even if they do everything right, getting their goods shipped costs more time and money compared to international competitors.

No wonder Indian exporters are frustrated. Exports have dropped for two months straight, with August seeing the biggest dip in over a year. A major reason is shipping costs—freight costs in August were 70% higher than they were the previous year.

Some of this is beyond our control. Geopolitical issues, like tensions in the Middle East and the US-China trade war, make things worse. But when you add these outside factors to our existing problems, it’s clear why India doesn’t look like the best place to do business.

But there’s a silver lining.

The drop in exports has finally pushed the government to take action. Commerce Minister Piyush Goyal recently met with key officials and industry representatives, and they’ve announced several new measures:

1. Five new ships: SCI will buy five second-hand container ships to boost its capacity.
2. More ships on the way: While buying new ships takes time, SCI plans to charter enough ships to handle an extra 9,000 containers in the meantime.
3. Cheaper container storage: For the next 90 days, containers can be stored for free at the Railway Board and Container Corporation stockyards. After that, storage fees will be cut in half.
4. Lower port charges: The costs of loading, unloading, storing, and handling goods at ports are being reduced.
5. Faster customs screening: The Customs Board will now screen two containers at once, speeding up the process.

Will these changes solve all our shipping problems? Of course not. To paraphrase Robert Frost, we’ve got miles to go before we sleep. Expanding SCI is just a temporary fix. In the long term, we’ll need more Indian shipping companies and a major overhaul of our ports. India is also working on updating its old shipping laws and pushing other reforms that could make things smoother in the future. But until all that happens, these structural issues will remain a challenge.

That said, these new measures are definitely a step in the right direction. If India is going to transform into a manufacturing-driven economy, it’ll take a lot of small improvements like these. For now, things are looking a bit brighter for Indian exporters.

Tidbits:

• Securities Transaction Tax Revenue (STT) collections for FY 2023-24 have crossed ?26,000 crore in just over five months, reaching 70% of the annual target.
• Lead prices are expected to rise due to increasing demand from the electric vehicle and energy storage sectors. However, global supply is projected to grow, which could ease prices in 2024 and 2025, according to the World Bank.
• The Bank of England maintained its interest rate at 5%, despite inflation rising to 2.2% in July. Concerns over persistent wage and service cost growth have kept the central bank cautious.

Thank you for reading. Do share this with your friends and make them as smart as you are ??

This post was first published on Substack.