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.
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Today on The Daily Brief:
- Stock market scams
- Is the IPO gold rush over?
- Indian textile industry benefits because of Bangladesh
- When RBI sneezes, the industry catches cold
Stock market scams
While this topic is slightly different from our usual discussions, it’s a growing issue that we all need to be aware of.
Just last week, a massive online trading scam was uncovered in Assam, leading to the arrest of 38 individuals accused of swindling people out of a staggering 2,200 crore rupees. The scale of this fraud is staggering, but what’s even more alarming is that this is only the tip of the iceberg. This is the second major scam in Assam in just a few months. In August, police uncovered another investment scam worth ₹7,000 crore.
The latest scam, which operated for nearly three years, promised to double investors’ money in just 60 days. Some victims took out loans of ₹10 to ₹15 lakh to invest in this scheme. Initially, the scammers returned small amounts with high interest rates of 30-50%, enticing victims to invest more before vanishing with the funds. Shockingly, the alleged mastermind, Bishal Phukan, is only 22 years old.
Unfortunately, this isn’t an isolated case. Across India, we’re witnessing a surge in sophisticated investment scams, leading to investors losing thousands of crores. While the full extent of these scams may never be known due to underreporting, we have a general sense of the damage.
In just the first four months of 2024, Indians lost over ₹16,430 crore to trading and investment scams alone, not counting other types of fraud such as dating scams or loan frauds.
So, how are these scammers operating? They are becoming more sophisticated, often using social media and messaging apps to target victims. One common tactic is known as “pig butchering.”
Here’s how it works
Scammers pose as financial experts or impersonate well-known industry figures. They reach out to potential victims through platforms like WhatsApp, Telegram, or Facebook, offering “insider tips” or promising guaranteed investment returns.
To appear legitimate, they create elaborate fake profiles and set up entire fake investment groups on these platforms. Imagine scrolling through Facebook and coming across an ad from someone who looks like a credible financial advisor. You click, and suddenly, you’re in a WhatsApp group where people are sharing screenshots of massive profits they’ve supposedly made.
It’s all fake, but it’s convincing enough that many people fall for it. Scammers often use psychological tactics, creating a sense of urgency or exclusivity to pressure victims into making quick decisions.
One of the more alarming trends is the use of celebrity names and even deepfake videos to make these scams more believable. In Mumbai, for example, scammers used the name and likeness of a popular financial influencer. A 54-year-old real estate consultant saw what he believed were videos of this influencer giving stock tips, leading him to invest ₹2.25 lakh.
Perhaps one of the most shocking cases comes from Kerala, where a businessman was defrauded of more than ₹7 crore by scammers posing as representatives of reputable firms like Invesco Capital and Goldman Sachs.
These scams aren’t limited to India. Many operations have been traced to countries like Cambodia, Myanmar, Hong Kong, and even Dubai. There is also evidence of connections to China, with some fraudulent web applications written in Mandarin.
While the methods may vary, these scams exploit the same human desires—the hope for financial security and the temptation of quick wealth. Some focus on cryptocurrency, others on stock trading, and in some cases, victims are lured into fake training setups using repurposed videos from legitimate trading courses.
So how can we protect ourselves? First and foremost, be sceptical of any investment opportunity that seems too good to be true. Always verify the credentials of anyone offering financial advice or investment opportunities. Check if they are registered with official regulatory bodies like SEBI.
Be cautious of unsolicited investment advice, especially if it comes through social media or messaging apps. Never transfer money to personal bank accounts for investments—legitimate firms do not operate this way. If you’re using a trading app, ensure it’s downloaded from official app stores.
We recently published a video talking about this on Zero1:
Is the IPO gold rush over?
The IPO market has been on fire over the last 3-4 years, closely following the same upward trend as Nifty. After the COVID-19 pandemic, as Nifty rebounded from its lows and bullish sentiment took over, private companies rushed to go public, resulting in an IPO frenzy. From the financial year 2020-21 onwards, companies have raised over 3 lakh crore rupees through IPOs.
Source: IndiaDataHub
This is an enormous figure, and a significant part of the IPO boom can be attributed to the remarkable surge in retail investor interest in IPOs. You might be curious about the behavior of these IPO investors, but until recently, there was little data available on this. Fortunately, SEBI recently published a study titled Analysing Investor Behavior in IPOs , and it offers some fascinating insights.
Let’s take a look at some key highlights
While market experts often advise caution when it comes to blindly applying for IPOs, the fact is that IPO investors have performed quite well in recent years. Here’s a snapshot of the listing performance across different segments:
The market has experienced such a strong bull run that if you had participated in all IPOs over the past four years and secured allotments, it would have been nearly impossible to lose money.
However, the challenge lies in the fact that people often overlook one key point: there’s a higher chance of being allotted shares in an underperforming IPO compared to one expected to do well. So, unless you received shares in every single IPO, the high percentage of positive listings wouldn’t necessarily guarantee a net profit.
According to the SEBI study, 42.7% of retail investors sold their IPO allotments within just one week of listing. High-Networth Individuals (HNIs) and corporates sold off 63.3% of their shares, while banks exited 79.8% of their positions within the same timeframe.
On the other hand, mutual funds took a different approach, selling only 3.3% of their allotted shares in the first week. This behavior, of course, varied depending on the performance of the IPO.
Unsurprisingly, investors were more likely to sell IPO shares that showed positive listing gains. For context, when returns exceeded 20%, individual investors sold 67.6% of their shares by value within a week. In contrast, when returns were negative, only 23.3% of shares were sold.
There has also been speculation that many new investors, who opened accounts post-COVID, did so primarily to participate in IPOs. SEBI’s study supports this, revealing that nearly half of the demat accounts used to apply for IPOs between April 2021 and December 2023 were opened after the pandemic began.
Previously, HNIs could take large loans from NBFCs to apply for IPOs, as shares were allocated to them on a pro-rata basis. This meant HNIs could receive shares in proportion to the size of their applications, giving those with larger bids an advantage.
However, in April 2022, the RBI imposed a 1 crore rupee cap on loans for IPO investments by HNIs. SEBI also changed the share allocation process from pro-rata to a lottery system, similar to the method used for retail investors. The lottery system randomly assigns shares, thus reducing the unfair advantage HNIs previously enjoyed.
The result of these changes has been overwhelmingly positive. It’s now less advantageous to apply for IPOs with large sums of money, leading to fewer big-ticket non-institutional investors and lower oversubscription rates. To give some perspective, oversubscription in the non-institutional investor category dropped from 38 times to 17 times.
Moreover, the exit rate of these investors within one week, which had been a major concern for SEBI, fell from 70% in 2021-22 to just 25% in 2022-23.
Overall, these regulatory changes have successfully balanced market excitement with more prudent investment practices, which is a positive development for the markets.
So, while many of these findings may seem obvious, we now have data to back them up.
Indian textile industry benefits because of Bangladesh
If you’ve been our reader for a while, you might recall how we’ve talked about the ripple effects of Bangladesh’s recent political crisis on several Indian companies and industries, particularly those with significant exposure to sectors like oil and gas, FMCG, and auto. Many were impacted by the turmoil. However, one industry seems to be benefiting from this situation—the Indian textile industry.
Before diving into the details, let’s first understand Bangladesh and India’s position in the global textile market. According to a report by CareEdge, the worldwide Ready-Made Garment (RMG) industry was valued at $550 billion in 2023. China, for a long time, has been the dominant player in this massive market, holding over 30% of the market share. But what’s interesting is that China’s share has been gradually declining, creating opportunities for other countries.
This shift is driven by global efforts to reduce dependence on China due to geopolitical tensions, trade wars, rising labor costs, and stricter environmental regulations. Additionally, the COVID-19 pandemic exposed vulnerabilities in relying too heavily on a single source, pushing global exporters to diversify their supply chains.
Bangladesh, with about 8.5% of the market share, was well-positioned to capitalize on China’s decline. However, the political turmoil in Bangladesh is causing significant challenges in fulfilling international orders, straining its long-standing relationships with global brands and exporters. If this crisis persists for a few more quarters, global buyers may start looking for more stable suppliers elsewhere. This is where India has an opportunity to step in and capture some of the shifting market share.
Source: CareEdge
Sunil Kataria, CEO of Raymond Lifestyle Limited, summed it up well:
“The ‘China plus one’ strategy and ‘Bangladesh plus one’ strategy, where global brands diversify their manufacturing bases, are now playing in India’s favour.”
To explain briefly, these strategies involve global brands diversifying their manufacturing beyond China and Bangladesh to mitigate risks and ensure stability in their supply chains, often turning to countries like India.
The Indian government is also seizing this opportunity by expanding the Production Linked Incentive (PLI) scheme to the textile sector. Companies can now receive additional monetary incentives based on the volume of textiles they produce, encouraging domestic production. Initially, the scheme had an outlay of around ₹10,000 crore and was limited to specific types of fabrics, but it has now been expanded to include manufacturers of all materials.
Furthermore, the government recently introduced the PM MITRA scheme, which aims to create large-scale textile parks across India. This initiative could attract up to ₹70,000 crore in investments and create 20 lakh new jobs. The incentives are significant, with the government offering up to ₹500 crore in development support per park.
The early signs of success are already visible. For example, the Tirupur textile hub in Tamil Nadu recently secured ₹450 crore worth of orders from major European brands for the upcoming Christmas season, as reported by the president of the Tirupur Exporters Association. Similarly, the Apparel Export Cluster in Noida experienced a 15% increase in orders from fashion giant Zara compared to last year.
However, we must temper this optimism. Bangladesh is likely to recover soon, and India’s short-term gains may be fleeting. Moreover, Vietnam, another strong contender in the global textile market, presents serious competition. Vietnam has an advantage due to its skilled yet low-cost workforce and sustainable manufacturing practices. According to Dragon Sourcing, Vietnam’s labor costs remain lower than China’s, despite wage increases, which is a significant factor in attracting global textile orders.
Source: WTO
India’s textile industry also faces challenges. Technology upgrades and sustainability improvements are critical if India hopes to capture a larger share of the global export market. These issues must be addressed quickly to maximize this opportunity.
That said, the potential is massive. If Bangladesh’s crisis continues, around 10% of its RMG exports could shift to other markets, including India. This could translate to a monthly export opportunity of $200-250 million in the short term and $300-350 million in the medium term. While this may seem small compared to India’s current $25 billion textile market, it could mark the beginning of bigger things for the industry.
Source: Texmin
Indian companies are already stepping up. Major names like Aditya Birla Fashion & Retail, Monte Carlo Fashions, and Pearl Global Industries are among the 64 companies selected for the PLI scheme, positioning themselves to capitalize on this growing opportunity.
In conclusion, while the political situation in Bangladesh is unfortunate, it’s opening up opportunities for India’s textile industry. With the right support from both the government and the private sector, India could significantly improve its standing in the global textile market. It’s a complex scenario with many factors at play, but it’s definitely something to keep an eye on in the coming months.
When RBI sneezes, the industry catches cold
Remember our discussion in late August about the RBI’s new guidelines shaking up the P2P lending sector? Well, the aftermath has arrived, and it’s not looking pretty.
A quick recap
Peer-to-peer (P2P) lending platforms started with the promise of being a fresh alternative to traditional banks, NBFCs, and informal moneylenders. Think of them like Amazon or Flipkart—but instead of connecting buyers and sellers, they connect lenders with borrowers.
Initially, the first generation of P2P platforms didn’t take off because they followed a simple model of connecting one lender to one borrower. This created significant risks for lenders, as defaults were high, and there was no effective way to assess borrower quality.
Then the industry pivoted. P2P platforms started splitting lenders’ money across hundreds of borrowers, significantly reducing default risk. They began marketing P2P lending as an investment product and an alternative to traditional options like fixed deposits and bonds. Some platforms even offered credit guarantees, claiming they would cover part of the losses. Over time, P2P lending became a fairly popular investment product, with mutual fund distributors promoting it due to its higher returns compared to debt mutual funds.
But last month, the RBI stepped in with new guidelines that essentially dismantled the current P2P lending model. Here’s a TL;DR of the situation:
The RBI issued new guidelines that could potentially put an end to most of these practices. Let’s break down what these new RBI guidelines say:
P2P platforms can’t provide any credit guarantees or enhancements. That means they can’t tell lenders that the platform will cover or insure their losses. If lenders lose money, they have to take the hit.
In the earlier model, if you, as a lender, invested Rs. 1 lakh, the platform would automatically split the loan among hundreds of borrowers. This required just one authorization. Now, the RBI says every loan has to be approved and an agreement signed. That means hundreds of OTPs, e-signs, etc., breaking the diversification benefits platforms provided.
As soon as a lender transfers the money, the platform has to send the money to the borrower within T+1 or else, it has to send the money back to the lender.
P2P platforms also cannot promote peer-to-peer lending as an investment product with features like tenure-linked assured minimum returns, liquidity options, etc.
These are big changes that will significantly impact the volumes and, more importantly, the business’s reputation. Will lenders think the RBI is imposing these actions because there’s something wrong with the platforms? Will they stop trusting P2P?
To show they meant business, just a week after the guidelines were issued, the RBI imposed a ₹4 crore fine on two of the largest P2P players for failing to meet disclosure requirements. This sent shockwaves through the industry.
As a result, many P2P platforms, fearing hefty penalties, stopped onboarding new customers while they try to understand the new guidelines. Those who didn’t pause have seen a staggering 90% drop in business.
It’s not just the platforms that are feeling the heat—customers are upset too. Many had been promised instant withdrawals, but due to the new regulations, that’s no longer possible. This has put P2P platforms in a difficult position, as they might be breaching their contracts with existing customers.
To make matters worse, there’s widespread uncertainty in the industry about whether existing agreements will be “grandfathered” in. In other words, will customers who signed up before the new rules still receive the services they were promised? No one knows yet, leaving both customers and platforms in limbo.
What’s Next?
The fallout from these developments has hit the P2P lending sector hard, damaging its reputation both as a borrowing option and as an investment product. With trust eroding, it’s uncertain whether the sector will ever return to its previous standing.
Source: Inc42
But that brings us to a crucial question: What happens now to the potential lenders and borrowers who could have benefited from P2P lending?
For lenders, P2P was once a way to earn attractive returns. Now, many will likely look elsewhere. However, with so many options on the market, there’s a risk they could turn to unregulated and riskier products like structured credit or invoice discounting.
As for borrowers, the picture is more complicated. These individuals are typically those who struggled to get loans from traditional institutions in the first place. While P2P lending represents a relatively small market—₹10,000-20,000 crore compared to the vast sums lent through credit cards, personal loans, and microfinance—the borrowers who relied on it will feel the impact.
Ultimately, the future of the P2P sector depends on how it responds to this regulatory blow. For now, all we can do is wait and see how things unfold, but it’s clear the industry has a challenging road ahead.
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