An evening with Mr Sudip Bandyopadhyay
Introduction
On Friday, April 12, we had an engaging session by Mr. Sudip Bandyopadhyay, Group Chairman, Inditrade Group of Companies. Mr. Bandyopadhyay delved into the rapid progress of the Indian Capital Markets over the last 15 years, and explained how they are closely intertwined with the nation's economic advancement. He explained the transformative initiatives undertaken by the Government for the development of the economy. Mr. Bandyopadhyay also offered insights into how the bond markets can be strengthened and the path ahead for Indian financial markets in the coming years.
About Mr Sudip Bandyopadhyay
Mr Sudip Bandyopadhyay is a distinguished Chartered Accountant and Cost Accountant, with a remarkable career spanning over 35 years. A Gold Medalist from Calcutta University, Mr Bandyopadhyay's journey commenced with Hindustan Lever.
During his impactful 16-year tenure at ITC Ltd Mr Bandyopadhyay held pivotal roles, including Head of Treasury and Strategic Investments. He managed substantial investments exceeding $1.5 billion and oversaw all treasury operations, including capital, currency, and money markets. Mr Bandyopadhyay also spearheaded strategic acquisitions.
At Reliance Money as Managing Director, Mr Sudip played a pivotal role in diversifying Reliance Anil Dhirubhai Ambani Group's portfolio, leading initiatives in Financial Products Distribution, Commodity Exchanges, Money Changing, and Money Transfer. Under his leadership, Reliance Money saw expansive growth across India and globally, including the landmark acquisition of AMP Sanmar. This acquisition facilitated Reliance's foray into the life insurance sector.
Subsequently, as the Managing Director and CEO of Destimoney, Mr Bandyopadhyay continued to pioneer innovation in financial services. He partnered with New Silk Route, a prominent Asia-focused private equity firm.
Currently, Mr Bandyopadhyay is serving as the Group Chairman of Inditrade (JRG) Group of Companies. The group has a significant presence in Agri Commodity Financing, Micro Finance, and MSME lending.
Mr Bandyopadhyay holds board positions in numerous listed and unlisted domestic companies. He has been leveraging his extensive industry insights to contribute as Chairman of Audit Committees for key corporations. Mr Bandyopadhyay’s influence extends beyond traditional finance, with investments in Fintech and other technology ventures. He is a thought leader and makes regular contributions to the business media.
Indian economy and capital markets
In recent years, there have been many positive developments in India. But we probably do not fully appreciate what is happening.
Infrastructure
Infrastructure is closely related to economic development. India’s infrastructure has improved considerably in recent decades. Infrastructure development in the country was kicked off by the golden quadrilateral project. Today, roads, rail, ports, and airports are all being built in the country at an impressive pace. As the Economist recently reported, India has 149 airports, double the number a decade ago, and is adding 10,000 km of roads and 15 GW of solar-energy capacity a year.
- Air connectivity has significantly improved. Earlier, it would have taken quite a bit of effort and time to reach smaller towns in the country. But today, they are connected by air. India built 74 airports in the first 67 years after independence. This government has doubled that number in the last nine years.
- The railways have also made good progress be it stations, wagons, passenger coaches, electrification of tracks.
- Many ports have come up with large capacity and modern equipment.
- The road infrastructure has also improved with the construction of many expressways, flyovers, and bridges.
It is true that roads are still in bad shape in some parts of the country. But the momentum will continue irrespective of which government is in power. So, we can expect the infrastructure to keep improving. The country will be transformed in 5 years. We must be optimistic and have faith.
Note: The Golden Quadrilateral is a massive highway network in India that connects its four major metropolitan cities: Delhi, Kolkata, Mumbai, and Chennai. It forms a quadrilateral shape, hence the name, and stretches for about 6000 kilometres. It is the longest highway project in India and one of the longest in the world. The Golden Quadrilateral was built to enable faster movement of people and goods, reduce travel times, and provide better access to markets for smaller towns. Planned in 1999 and launched in 2001 by then Prime Minister Atal Bihari Vajpayee, the project was completed in January 2012. It consists of a network of two, four, and six-lane express highways.)
Pradhan Mantri Jan-Dhan Yojana
The objective of Pradhan Mantri Jan-Dhan Yojana (PMJDY) is ensuring access to various financial services like a basic savings bank account, need based credit, remittances, insurance and pension to the weaker sections and low income groups. PMJDY envisages universal access to banking facilities with at least one basic banking account for every household. The plan also envisages channelling all Government benefits (from Centre / State / Local Body) directly to the accounts of beneficiaries. This is enabled by Aadhar.
The JAM (Jan Dhan-Aadhaar-Mobile) trinity refers to the government of India initiative to link Jan Dhan accounts, mobile numbers and Aadhaar cards of Indians to plug the leakages of government subsidies. JAM has indeed been a game changer.
Note: As the Economist recently reported, some 520 mn bank accounts have been opened since 2014, and they now hold $28bn. This has helped to transform India’s masses into savers, providers of capital and, possibly, entrepreneurs. Some 300 million Indians use UPI every month. Since the accounts are linked to UPI and Adhaar, they are records that can be used to evaluate and grant credit. This might be the reason for the recent increase in lending to small businesses. Some of the recently introduced digital initiatives, such as the Open Network for Digital Commerce (ONDC) and Account Aggregator framework, will open up further avenues for e-commerce market access and credit availability for smaller businesses and strengthen the expected economic growth in the medium term.
Note: India has won international acclaim for developing a world-class digital public infrastructure (DPI). The India Stack consists of three different layers—unique identity (Aadhaar), complimentary payments systems (Unified Payments Interface, Aadhaar Payments Bridge, Aadhaar Enabled Payment Service), and data exchange (DigiLocker and Account Aggregator). Together they enable online digital access to a variety of public and private services while safeguarding privacy.
Corporate Tax simplification
Corporate taxes have been simplified and the rates significantly lowered. Today, the country’s corporate tax rate is one of the lowest in the world. In fact, it is lower than the individual tax rate.
Manufacturing
For creation of jobs, the manufacturing sector must grow.
Production Linked Incentives (PLI): The government has taken various initiatives to boost the sector. Probably, the most important of them is the country's PLI scheme, launched in 2020 which currently targets 14 sectors. According to a Reuter’s report in Sep 2023, India is planning to offer incentives of up to Rs 18,000 crores ($2.2 billion) to spur local manufacturing in six new sectors including chemicals, shipping containers and inputs for vaccines.
Single window clearance: Another initiative is single window clearance which enables investment proposals to be approved faster.
The China factor
Geopolitical factors and a degree of uncertainty are prompting foreign investors to look beyond China. India has a major opportunity in view of the self-goals scored by China. More so as in the last two years, China’s polices have confused investors.
Note: China Plus One is the strategy of MNCs to avoid investing only in China or to channel investments into manufacturing in other promising developing economies such as India. For the last 20 years, western companies have invested mainly in China, attracted by the low production costs, and enormous domestic consumer markets. Now they are looking at other countries to reduce the concentration of business interests in China and also for geopolitical reasons.
China has been traditionally the manufacturing base for Apple. Now the company is looking seriously at India. With a production target of 20 million iPhones a year, 50,000 new jobs will be created by one such project alone.
Similarly, when it comes to military-grade technology used for space launches, there is greater confidence in India than China. To take another example, chipmaker, Micron Technology, has announced plans to build a new assembly and test facility, as part of moves to diversify beyond China. Thus, India can cash in on the growing trend of companies seeking to reduce their massive dependence on China.
Liquidity
Since 2008 and more recently following the pandemic, liquidity has significantly increased across the world. There is a lot of money available for investment. No other large economy is growing as fast as India. This excess liquidity can be attracted to India. Long term investors are looking at India seriously.
Concluding remarks
In the next 5-10 years, we can expect to see rapid growth in all sectors of the economy. The capital markets which are leading indicators of economic growth can be expected to grow. Indeed, it is a great time for investors to participate in India’s growth. If they do not, they are missing a huge opportunity.
Note: The Economist recently reported, “Ten years ago, capitalisation of India’s stock markets was smaller than Spain’s. Now neck and neck with Hong Kong’s, only America’s, China’s and Japan’s surpass them.” The consulting firm BCG expects India to become the world’s second largest stock market by 2036.
Q&A
There are some underlying themes:
Politics: Political factors affect the sentiments of the capital markets. Political stability and continuity of policies enable the growth of the equity markets.
Prevailing interest rates and Govt benchmark yields: To thrive, equity markets should offer a significantly higher return than fixed income markets.
Fiscal situation: A high fiscal deficit can cause inflation which is bad for the economy and capital markets.
Frictions in settling transactions: The less the friction the better it is for the equity market. India is a global leader with talks already of implementing t + o settlement, i.e. settlement on the same day.
Globally, the fixed income markets are much bigger than the equity markets. In India, it is the other way around. As the Economist recently reported, “The bond market--- is still in an early stage of development. It ----is still run to finance the government and is largely unavailable for all but the largest firms. Even for them, the long-term debt that is best suited for the big capital investments --- must be obtained overseas, with additional costs.”
The fixed income markets in India are not well developed for various reasons.
In the early 1990s, the RBI removed intermediation from the bond market. Buying and selling of securities became difficult. The secondary market, where previously issued bonds are traded, is less active compared to the primary issuance market. This reduces liquidity and discourages some investors since there is no reliable way to exit their positions.
The fixed income derivative markets in India are also not so well developed. These markets are several times bigger than the cash markets in the developed countries. Derivative markets are needed to hedge risk taken in the cash markets.
Global investors want to take part but unfortunately the market is not efficient. Two positive developments are that JPMorgan and Bloomberg will soon be adding India to their government-bond index.
Today, India has one of the world’s best governed equity markets. Indian equity markets use advanced technology. Any manipulation can be easily detected by the regulator. So the chances of large scale manipulation are less. It is true that some circular trades and front running do happen. But compared with 10 years back and compared with other developed countries, we are doing quite well.
Note:
Circular Trading involves buy and sell orders for the same security placed at around the same time by the same person or group acting in concert. The intention is to create a false impression of trading activity and inflate the price (or trading volume) artificially.
Front Running involves a broker or trader illegitimately using their advance knowledge of client orders to execute their own trades first. For instance, a broker aware of a big buy order for a stock might buy some shares themselves first, then fulfil the client's order at the higher price the large purchase triggers.
China's relationship with its private sector has been in flux recently. Between late 2020 and early 2023, the tech sector bore the brunt, with giants like Alibaba and Didi facing hefty fines and stricter regulations. Other industries like gaming, education and finance also saw increased scrutiny. The government’s aim seems to be to curb the growing influence of private tycoons and tech companies. As a result, stock markets plummeted, investor confidence wavered, and some companies delisted from foreign exchanges.
China's crackdown on the gaming industry is a good example of how the government has come down heavily on the private sector. Strict limits have been placed on the amount of time minors can play online games. Games promoting violence, unhealthy competition, or content deemed inappropriate are discouraged. Restrictions have been imposed on how much money players can spend within games. The approval process for new games was paused for a period, further impacting the market. Companies like Tencent and NetEase saw their stock prices fall due to stricter regulations.
As Mr Bandyopadhyay pointed out, these new regulations are like changing the rules in the middle of the game. They have created considerable uncertainty in the minds of investors. It is quite conceivable that China will find it difficult to regain the confidence of investors.
China's real estate market, once an engine of growth, is currently facing a multitude of challenges. Many developers financed rapid expansion with massive loans. With slowing sales, they are struggling to repay their loans. There are growing concerns about potential defaults. The government has tightened restrictions on lending to the real estate sector, making it harder for developers to access new funds. For the first time in years, property prices in some regions have started to decline. This has demolished the myth of a constantly rising market. With financial strains, developers may struggle to complete existing projects. This may result in stalled construction and buyer frustration.
The Indian equity markets lack depth. There are only about 50 large companies where foreign investors can put their money. So large investors have limited opportunities. It is because so much money is flowing into a few stocks that the P/E is so high.
It is important that the listing of PSUs is accelerated. Listing of large unlisted private sector companies should also be encouraged. The listing process should be greatly simplified. Companies must be able to file their prospectus and get SEBI approval. Then they can list as per the time of their convenience. The process of regulatory handholding of companies for listing can be a lot better. Listing still takes a lot of time. There is also considerable uncertainty.
Delisting should also become easier. Corporate governance rules need to be harmonised across the public and private sector companies.
Some believe that we are growing at only 4-5% and not 8%. It is possible that we are not growing at 8%. But 4-5% is a pessimistic figure. The government is spending a lot on infrastructure. This spending is happening in a targeted way unlike the past. So, there is a multiplier effect. But it is true that private capex will pick up only if consumption expenditure picks up. For a sustained 8% + growth, we need government spending on infra, private capex and consumption expenditure to grow together.
Job creation
Growth will have a trickledown effect. But growth by itself will not solve all our problems. We need more jobs. For jobs to be generated, we also need the manufacturing sector to do well. Also, we should focus on per capita income and not just the GDP.
Note: As the Economist recently reported, out of a working-age population of 1bn in the country, only 100 mn or so have formal jobs. The others are stuck in casual work or joblessness.
Derailers
While we are on a strong wicket as far as growth is concerned, there could be derailers like an oil price increase. We are heavily dependent on oil imports. If oil prices remain under control and there are no unforeseen calamities, the Indian economy and the capital markets can be expected to boom in the coming years. However, making predictions on what value the Sensex will reach in say 3 years, is hazardous.
It is also not easy to say when India will become the largest economy in the world. While we are growing fast, other economies like USA and China are not standing still. Moreover, as our GDP increases, the base on which the growth is calculated will also increase.
Finance is the lifeline of companies. Without finance, businesses cannot run. The world is the playground for qualified finance professionals. There are exciting opportunities for CFAs and MBAs.
We should read journals and newspapers like Economic Times. Mr Bandyopadhyay has been reading the Financial Times for several years. Websites like Moneycontrol.com also provide useful information.
The London Inter-Bank Offered Rate (LIBOR) referred to an interest rate average calculated from estimates submitted by the leading banks in London. Each bank estimated what it would be charged were it to borrow from other banks. Due to multiple factors, including the Libor scandal, concerns about the rates' accuracy, and changes in how banks do business, the decision was made to phase out Libor. LIBOR was discontinued in the summer of 2023. The last rates were published on 30 June 2023 before 12:00 pm UK time. The 1 month, 3 month, 6 month and 12 month Secured Overnight Financing Rate (SOFR) is its replacement.
Mr Bandyopadhyay is not a great believer in crypto. Any currency without the backing of a sovereign lacks credibility.
Participation in the equity markets is the way forward. The Indian economy is growing at about 7%. If inflation is 5%, the nominal growth is 12%. While debt instruments will yield only say 7%, equity markets can give us 12% +. Young people who are new to the stock markets can enter through the mutual funds route. Once they gain experience, they can directly invest in stocks. They can also take the help of consultants and financial advisors.
Gold is a store of value. Gold is one of the traditional investment vehicles. Even central banks keep buying gold. We do not need to buy physical gold. We can buy gold bonds. We will get a small interest along with capital appreciation. In the case of gold ETFs, we will get only capital appreciation. We will also have to pay fees. It is always a good time to buy gold.