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Dirty Money And Indian Stock Markets
Foreign exchange reserves continue to soar. By October 29, 2007 they stood at US $ 261 billion and sensex had crossed
the magic figure of 20,000. Now it’s open secret that upheavels in the stock market are caused by non-other than foreign institutional investors (FIIs). A journey from 13765.46 in May 2007 to 20238 on October 30, 2007 cannot be explained by any logic except the jungle raj for FIIs.
The Government has constantly been pursuing the policy of attracting foreign investments irrespective of its form, including FIIs. In the process when foreign investors found that it is easy to channelise their funds through FIIs thereby escaping from the conditions getting them registered with the regulators including SEBI, RBI etc. This was being done by way of offshore derivative instruments (ODI), also called participatory notes (PNs) – the financial instruments used by foreign investors to play and invest in the Indian stock markets.
The Modus Operandi
As a part of policy of FDI, India allowed investments by Foreign Institutional Investors (FIIs) directly into stock markets, provided these FIIs register with SEBI and be subjected to its rules and regulations. To escape these rules FIIs used to issue participatory notes (PNs) to foreign investors (individuals of corporates) who want exposure to Indian equities but do not want to register with SEBI. Further, FIIs are not allowed to issue PNs to Indian nationals, Persons of Indian Origin or Overseas Corporate Bodies (a majority of which are controlled by NRIs). Thus it is a contract between a foreign institution and a foreigner for investing into the Indian stock market.
Linkages with Terrorism
While speaking to 43rd Munich conference on security in February 2007 Mr. M.. K. Narayanan hinted at links of terrorist with the stock market when he said "Isolated instances to terrorist outfits manipulating the stock markets to raise funds for their operations have been reported"; This raised many eyebrows. In fact Mr. Narayanan clearly hinted at Dawood & other terrorist groups who found an easy way to route their dirty money into Indian stock market by way of participatory notes, as FIIs are not bound to reveal the names of PN holders. This routing of terrorist money is further encouraged by lax regulatory framework in India. This should be seen in light of Indo-Mauritius DTAA, which ensures that even short term capital gain are tax free both in India & Mauritius, a benefit denied to resident Indians.
SEBI Proposes FM Disposes
There are various theories of origin of money flowing into India via participatory notes. Some express suspicion that politicians’ money move out through hawala route and then its Indian stock markets through PN route and in the process in advantage taken of the tax breaks provided by the Indo-Mauritius DTAA. While others link the same with terror money. Sensing the gravity of the situation SEBI decided to do away with the system of participatory notes according to the note issued by SEBI "FIIs to issue/renew ODIs with immediate effect", "are required to wind up their current position (issued PNs) over 18 months, during which period SEBI will review the position form time to time".
Moment these proposals were made by SEBI, the impact was immediately reflected by the stock market the following day, when the Sensex index fell a massive 1,700 points, or 9%. Then comes Mr. Finance Minister, who issues a clarification next day after SEBI''s announcement about the measures to curb PNs and says "What was announced by SEBI yesterday is a part of the series of steps that it have been taking to moderate the capital inflows into India", and he further adds "Investors through participatory notes are certainly welcome to invest in India; but for the present, it is important to moderates these capital flows. And therefore, SEBI has proposed a number of measures that will moderate these pital flows."
Large scale holding of Indian companies'' equity by foreigners
On October 19, 2007, holdings of equities of Indian corporate by FIIs etc. stood at 193 billion US $, which comes to 22% of the total capitalisation of all Indian corporates. This is in sharp contrast with holdings by Indian public, which is only 10%. It''s not that, they want to stop at 22%.The reality is that they can not go beyond it, given the sectoral cap and other conditions on holding by FIIs. In 105 Companies FIIs holding has reached 100%, in 53 Companies it has reached 49% and in 17 Companies it has reached sectoral cap of 100% and in one Company 74%.
What the government is waiting for?
When Finance Minister says that doors are still open for foreign investors, even through the dirty route of PNs, it seems that government does not have any objection to hand over the command of Indian economy to those foreigners who don''t want even their names to be revealed. It seems the government is taking the economy towards is situation of no return. Time is still there to stop Dawood and party to take over the economy. Write your abstract here.
Published: January 13, 2008
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