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Indian Indices Extend Losses; Capital Goods Sector Down 1.7%
Mon, 19 Feb 11:30 am | Monish Vora, TM Team

Indian share markets are presently trading on a negative note. Sectoral indices are trading in the red with stocks in the capital goods sector and metal sector witnessing maximum selling pressure.

The BSE Sensex is trading down 220 points (down 0.7%) and the NSE Nifty is trading down 61 points (down 0.6%). The BSE Mid Cap index is trading down by 0.9%, while the BSE Small Cap index is trading down by 0.8%. The rupee is trading at 64.53 to the US dollar.

In the news related to the PNB fraud case, the Central Bureau of Investigation (CBI) has filed a First Information Report (FIR) against the Mehul Choksi-run Gitanjali Group. The FIR is based on a fresh complaint made by Punjab National Bank (PNB) on February 13th.

This marks as the second FIR filed in the alleged fraud involving overseas payments to jeweler Nirav Modi, his uncle Choksi and entities belonging to them based on guarantees issued by PNB.

As for the Nirav Modi case, the Reserve Bank of India (RBI) said it has not asked PNB to pay counter-party banks against the letter of undertakings (LoUs). The central banks stated that it has begun its assessment and will take action as needed.

The PNB case involves bank employees issuing unauthorized LoUs to three companies and four people, including Nirav Modi and Mehul Choksi.

The fraud is essential that Nirav Modi did not pay the security deposit needed to raise an LoU. These LOUs were used to obtain short-term credit from overseas branches of other Indian banks.

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The detailed investigation found that Nirav Modi had not been putting in enough of security deposit since 2011; the value of LoUs without these deposits is now around Rs 114 billion.

The above scam has put the public-sector banks (PSB's) in the limelight for all the wrong reasons. PNB is defrauded to the tune of US $ 1.77 billion. That's the last thing these banks needed after the crisis they've had in the past few years.

This has reflected in their stock performance too. The returns of PSBs over the last five years have underperformed at the Sensex, as can be seen from the chart below. Barring State Bank of India, the margin of underperformance has been huge. This is despite the recent run in their stock prices post the government's announcement of the recapitalization plan.

PSB Underperformance vis a vis Sensex

The above banks have been the perfect example of a value trap. Even though valuations seemed inexpensive five years ago, they have failed to perform.

While their bad loans struggle has been going on since a decade, there are other issues that have recently cropped up adding to their pile of misery. Bureaucracy and a lack of autonomy have ensured the sub-optimal profitability and asset quality of these state-run banks.

That's the reason we've been wary of PSU banks since 2014. This was well before the market had caught a whiff of the NPA problem. We've recommended just two large PSU banks in StockSelect since then...and already successfully closed both of them.

In other news, as per an article in the Economic Times, US-based index provider MSCI Inc. has said that the joint decision by Indian exchanges to stop providing licenses and data to foreign bourses is anti-competitive.

The MSCI warned that this could impact India's weightage in their indices, which are used by overseas asset managers to construct exchange-traded funds (ETFs) and benchmark portfolios.

Also, experts are of the view that a reduction in India's weightage in the MSCI index could potentially lead to outflows due to exits by passive funds such as ETFs.

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