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Participatory notes and the individual investor

The RBI for one, and this columnist, for another, is a bit skeptical about the true identity of money behind the FII figures.

india Updated: Oct 14, 2007 19:56 IST
J Mulraj

In the first four days of the week gone by, foreign institutional investors pumped in Rs 8108 crores (over $2 billion) into Indian stockmarkets, driving the BSE Sensex up from last week's closing level of 17,773, to 18,814 and almost touching the 19K mark. On October 9 alone the Sensex vied with the proverbial cow that jumped over the moon, to vault a phenomenal 788 points! At the end of the week, it paused for breath and, thankfully, lost 395 points, to end the week at 18,419, up 646.

The top 5 contributors were L&T, Reliance Industries, ONGC, Reliance Communication and Bharti, which, combined, added 428 points. Infosys was the major drag, pulling down the Sensex 43. Given the weakness of the dollar, in which about 60 per cent of its billing happens, the increase in Q2 topline by 8.8 per cent and bottomline by 1.9 per cent, in rupee terms, was commendable, but not enough for investors wishing to see 6 sixes in an over from it!

Whilst FIIs were pumping in over $ 2billion, domestic mutual funds were net sellers. The RBI for one, and this columnist, for another, is a bit skeptical about the true identity of money behind the FII figures. Using Participatory Notes (PNs) it is possible for individuals to route funds through registered FIIs as scrutiny and verification are more benign than for domestic investors. Given, also, the fact that gains can be virtually free of tax, it is not surprising that the PN route becomes an attractive conduit for investment into favoured markets. The RBI is, rightly, worried, and wishes for a stop on fresh PNs, but the Finance Ministry is unwilling to do that.

Investors are also blasé about political crises, one that could lead to early elections and the sort of uncertainty that investors dread. The rally, of course, could have been a wonderful source of funding for such. It is only at the end of the week that the knees of

Congress leaders grew weaker than unformed jelly in confronting the Left. It gave higher weightage to political survival than to the long term energy security for the country. In the case of Indian politicians, long term is up to the tip of their nose!

This myopic view hits companies, and thus the economy. Oil marketing companies are first made to suffer losses by being forced to price petro products below what the market would pay. They are later partially compensated (42 per cent in this case) by issuance of oil bonds, which the Government did last week to the extent of Rs 23,500 crore. This is done with a view to artificially containing the fiscal deficit. Oil marketing companies such as IOC, HPCL and BPCL suffer the losses with practical silence; the government is, after all, the majority owner. Their stocks represent intrinsic value at beaten down prices, though when that value will be realised is anybody's guess. Political wimps will not be able to change such foolish policies.

In other news, the government is likely to formally approve the pricing for the KG gas. Yet, legal issues still remain to be sorted.

Reliance Industries has sought a 3-year drilling holiday in view of the severe shortage of oil rigs, which it ought to get. It, alongwith other exploration companies, have committed to conduct oil and gas recoveries at a certain pace which the shortage of rigs prohibits.

The market has been moving up on increased liquidity, part of it also liquidity diverted from lending in the sub-prime mortgage market to earn higher returns. The sectors that have driven the market are also facing different sets of problems. The IT sector is coping with a weakening dollar. The telecom sector is hampered by spectrum shortage. The auto sector faces higher interest costs on EMIs and tougher emission standards (rightly so). In the petroleum sector prices are controlled. The capital goods sector has little spare capacity.

Yes, the weekend correction was necessary and yes, should there be a continuation of it next week, as one hopes, it would make the market a healthier place. And yes, RBI is right and if, indeed, PNs are a source of concern, it is better to tackle the problem sooner rather than wait for the markets to reach such heights the fall from which would be far more damaging. RBI Governor YV Reddy is right to sound a caution. Is Chidambaram ready to look into it? Or will politics again prevent sensible action?