Whose Money is it anyway?

There is too much dubious money in the economy that is playing havoc with its integrity and injecting inflationary tendencies. This is real bad news for middle-class ambitions

Hardnews Bureau Delhi

As Union finance minister in 1991, Manmohan Singh never lost sleep over the gyrations of the stock market. He probably realised that the stock market impacted such an infinitesimal section of the population of the country that there was no need to get too worked up over its mercurial conduct. Indeed, if Bombay Bull Harshad Mehta made merry with the funds of nationalised banks, it could be attributed to the somnolence of the financial administrators.

Similar equanimity was in short supply when the holders of participatory notes (PN) hammered the stock market on October 17 and brought down the Mumbai Sensex (MSE) by 1,743 points. This happened when they got to know that the Security and Exchanges Board of India (SEBI) was likely to ban the PNs.

Participatory notes are financial instruments used by investors or hedge funds that are not registered with the SEBI to invest in Indian securities. Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. It is difficult to establish the identity of the holders of these PNs who bring in substantial amount of funds to the Indian stock market.

SEBI's move stemmed from the fear that dubious funds of uncertain origin were coming to the Indian market that could undermine the country's economic stability and lead to undesirable appreciation of the Indian currency. SEBI woke up late on this issue — PNs have been actively used since 1996. SEBI did not realise that the anonymous investors would react so aggressively to their move.

A flustered Union Finance Minister, P Chidambaram, who was in Washington, tried to assuage the feelings of investors when he tried to explain the import of SEBI's move and how it was not meant to ban the PNs in entirety. He drew a fine distinction between those that would be banned and others that would be allowed to bring in their funds. He beseeched PN-holders to register as foreign institutional investors with the SEBI.

The bloodbath at the bourses forced a shutdown of the stock market on October 17. However, after Chidambaram's quick intervention, the market climbed up by a whopping 1,400 odd points — almost making up for all the points the Sensex had lost in the morning. A large part of the recovery was fuelled by heavy purchases by domestic Indian companies, which is a euphemism for financial institutions like LIC, IDBI and government banks. Evidently, the government did not want the Sensex to go down further after attaining a high of 19,000 plus.

The finance minister's statement drew a lot of flak from the BJP which demanded a joint parliamentary committee probe on what was going on. Former BJP MP from Mumbai, Kirit Somaiya, complained to the chief vigilance commissioner, comptroller and auditor general (CAG) and the SEBI. His complaint was that the SEBI changed the memo on PNs after Chidambaram's statement and that the finance minister tried to “talk up” the revival of the Sensex. Somaiya accused Chidambaram of knowing that the FII were buying shares at a time when no trading was taking place. He wanted to know: how did the finance minister know about this?