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Do we want foreign investment or speculators?

S. Balakrishnan

Proposed moves biased against genuine capital flows, retail investors

Among the basic tenets of regulation is that it should provide and create the conditions for a level playing field. It should not discriminate between domestic and foreign investors and institutions. Discretion, understandably in such situations, has generally been exercised to favour domestic investors and institutions, and, in particular, small investors.

We seem to be at odds with this general custom. It was startling to see recent reports that Foreign Institutional Investors (FIIs) would be allowed to short sell shares and retail investors subject to a lock-in period on their investments in Initial Public Offers (IPOs).

We already have a peculiar situation in which local banks and institutions cannot buy and sell stock futures and options even to hedge their investments.

The RBI, in its wisdom, has decided that this is too risky (or perhaps thinks it will turn banks into speculators, detracting from their main function of banking).

No curbs on FIIs

Yet, FIIs have no restrictions imposed on their using equity derivatives as a hedge. In short, a privilege available to foreign investors is denied to domestic banks.

The most charitable explanation must be that banks and FIIs are regulated by different entities - the RBI and SEBI - and this glaring anomaly has, therefore, escaped general attention.

Not that the banks do not know. They are probably too cowered by the Finance Ministry and the RBI to seriously protest the differentiation.

Pure speculation

Now comes the proposal to enable FIIs to sell shares they do not even own. It is important to be clear about the significance of this for it is nothing short of a licence for pure speculation.

No need for FIIs to be investors; they could just come and go opportunistically, trading for quick gains in the derivatives segment of the market.

It is amazing that when we are so wary of proxy investments through instruments such as Participatory Notes (PNs) - which all said and done are genuine capital inflows - we will allow free rein to fleeting players who do not bring any investments but will destabilise both the equity and forex markets with their swift operations.

Equally ill-advised is the move to bar retail investors from selling their IPO allotments immediately after listing as a quid pro quo for the retail quota in IPOs.

The irony is that this will not apply to institutions. The fetters will only enable big players to exit and run with their money before their lay brethren can even act.

It is difficult to think of anything which is more discriminatory between two classes of investors.

The measures negate the very policy of encouraging foreign portfolio investment and the professed pro-small investor stance of the regulatory authorities.

Also, will they stand the test of law? The sensible thing to do would be to drop them forthwith.

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