[‘Daily News Updates’ will provide you with a simplified understanding of the important economic/financial events across the country]
Adani shares fall as NSDL Freezes Foreign Fund’s Accounts
The shares of Adani Group Companies fell by 5%-20% as National Securities Depository Ltd. (NSDL) froze the accounts of three foreign funds (Albula Investment Fund, Cresta Fund, and APMS Investment Fund), which have an investment of Rs. 43,500 crores in Adani Group Companies. As reported by the Economic Times, the freeze could be because of ‘insufficient disclosure of information regarding beneficial ownership’ under the Prevention of Money Laundering Act (PMLA). The funds will not be able to buy new securities or sell existing ones.
In 2019, the SEBI (India’s Capital Markets Regulator) had changed the Know Your Customer (KYC) rules for Foreign Portfolio Investors (FPIs). Under these rules, FPIs were required to submit additional details such as disclosing beneficial ownership and personal details of the fund’s key members, etc. [Beneficial Owners are persons who own or control an FPI. They are identified based on their ownership interest and by way of control]. As per the rules, beneficial owners should be identified in accordance with the PMLA.
[Foreign Institutional Investment (FII) is when foreign institutional investors invest in the shares of an Indian company or bonds offered by an Indian company. So, if a foreign investor buys shares in Reliance, it is an FII.
Only institutional investors like Investment companies, Insurance funds, etc., are allowed to invest in the Indian stock market directly. Hence the term foreign institutional investor. These investors have to get a license from SEBI.
However, if foreign individuals want to invest in India’s markets, they have to get themselves registered as a sub-account of an FII. The FII will buy shares/ bonds from the Indian markets on their behalf.
A Qualified Foreign Investor (QFI) can invest in India without a sub-account. However, they have to open a Demat account and Trade account with a depository participant in India.
In the Indian context, FIIs (along with sub-accounts with FIIs) and QFIs can be collectively classified as Foreign Portfolio Investment (FPI)]
Source- TYPES OF FOREIGN INVESTMENT- DECODED- FDI, FII, FPI AND QFI
In a nutshell, the funds have been closed due to insufficient disclosure as per the new rules, but more details are awaited.
Why rising WPI isn’t a worry for policymakers?
In a previous edition of Daily News Updates, we noted that the Consumer Price Index (CPI) is well within the range set by the RBI’s Monetary Policy Committee (MPC), while the Wholesale Price Index (WPI) [This index measures the price level of goods traded in the wholesale market] is soaring, expected to touch the highest rate (13.3%) in three decades. Yet, the RBI kept key policy rates unchanged and did not go for inflation targeting, prioritising growth instead. [Read both the previous editions to understand the update better. Also read- Inflation Demystified].
Usually, a high WPI tends to spill over to the CPI, and consumer prices increase (which can be a politically sensitive matter). However, in the present case, the RBI doesn’t seem to be worried about this spill-over. Why? For this, we need to understand the two main causes of inflation.
The first is when the demand for goods increases. It is because people have more money to spend, i.e., the money supply in the economy increases, and so they start buying more goods and services. This leads to a price rise. This is also called demand-pull inflation.
RBI tries to reduce the rate of inflation by reducing demand. It increases interest rates. This leads to a reduction in borrowings because the cost of borrowing (interest rates) increases. It leads to a decrease in the money supply. People have less money in their hands, so they demand fewer goods and services. Hence, prices decrease.
The second is when the cost of production of goods increases, leading to an increase in price. The reasons for this could be excise duty/ other tax increase, wages increase, or raw materials price increase. This is also called cost-push inflation.
Cost-push inflation can also happen due to disruptions in the supply chain which decreases the supply of goods and services and push up the prices.
Source- Inflation Demystified
Currently, the increase in WPI is driven by disruptions in the supply chain due to the second wave of the pandemic and other factors such as global crude oil prices, which are high. The economy is still demand-deficient, i.e., a lack of demand for goods and services because of the uncertainty surrounding the second wave and a possible third wave of COVID-19. Thus, producers facing a high WPI (and consequently increased input costs) are not willing to pass the burden on to the consumers (by increasing prices), fearing they would lose even the little demand they have now. Sooner or later, as demand picks up, higher costs for producers will inevitably translate into higher prices for the consumers, and RBI will have to go for inflation targeting.
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