Paranoid Notes

Stock market gyrations, even a record one-day yo-yo, are not the point. The point is, ladies and gentlemen of the government and regulators, grow up. Don8217;t be scared of participatory notes PNs. PNs of course are in existence because of official rules. SEBI allows overseas participation only via foreign institutional investors FIIs. So many overseas investors 8212; hedge funds, for example 8212; interested in the Indian market use FIIs as a surrogate. PNs are what FIIs issue to overseas investors who are denied direct market participation. Now, SEBI and North Block have fretted about PNs almost from the time FIIs started issuing the notes. After Wednesday8217;s volatility, there are complaints again that PNs, among other things, allow entities like hedge funds to move money in and out 8216;too fast8217;.

What8217;s the message that8217;s being sent out? That a trillion-dollar economy hosting 1.4 trillion in stock market wealth is still not ready to integrate with modern financial systems. If the ostensible reason is to 8216;moderate8217; inflows into the Indian market, the government and regulators 8212; RBI was a party to the discussions and it wants to check inflows to keep the value of the rupee high; see our columnist8217;s argument 8212; are stepping beyond their brief. Their job is to see that markets function efficiently. That there is adequate transparency. That disclosure norms are satisfactory. That enforcement is strong. These should be permanent concerns. But, curiously, the PN debate springs forth usually when the market is high.

Policymakers must understand that how market participants choose to behave, the risks they wish to take, are not something they should fret about. If the Sensex has risen too high too fast, it is not for a regulator to bring it back to what in its perception is the right number. The Planning Commission for the market is the market 8212; institutions domestic and foreign, mutual funds, insurance companies, corporates, brokers, wealthy and retail investors. If there are specific issues about how PNs are structured 8212; FIIs already have to file monthly and quarterly reports on PN trades and holdings, by the way 8212; fix that. If the fear is that some PNs are being used to launder money, find the launderers. But paranoia about an entire class of investors is simply policy immaturity.