• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• BL Club
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

K. Subramanian

October 6, 2008 will be remembered by historians as the darkest day in global financial markets. The storm of fear that had blown away Lehman Brothers was claiming more victims on its way. Asian markets felt the fear first and emerging markets dropped by their biggest margin in 20 years.

The BSE index lost half its value and continues to hover around 11,000 with little hope of early revival. Foreign institutional investors (FIIs) were indeed crushing the market with a bear hug. Prudence would have suggested that the Securities and Exchange Board of India (SEBI) shun the beast. But, sadly, it decided to dance with the bear.

The regulator reversed the restrictions imposed a year ago. It lifted the ban on issue of derivatives based on Indian stocks and rescinded the phase-out requirement for their holdings. Perhaps, the intention was to generate liquidity to boost the cash-starved market. If so, the hope was misplaced. Unfortunately, it had misread the market and misjudged the role of hedge funds.

It is natural that SEBI should have been concerned over the precipitous fall in stock values. It could, however, have taken note that this was not India-specific but was global.

Indeed, a neurosis had seized foreign investors, especially the FIIs which handled substantial amounts of hedge funds. If SEBI hoped that it could lure them back when they had just experienced a crisis that has been described as the “worst in a century”, its faith was misplaced. By mid August, FIIs had sold stocks worth $6.39 billion. Since then, there has been no end to their frenzied efforts to sell shares and assets and take them home for recapitalisation or other requirements.

At the core of the current crisis are hedge funds which have been acting as ‘shadow banks.’ They operated directly where possible and indirectly, as in India, through investment banks. The PNs were held and orchestrated on their behalf.

The happy days for hedge funds are over. Some funds have closed down due to heavy losses. Many others are in disarray and starved of capital. They face demands for redemptions which had never happened in the past.

That is one reason why they are selling stocks and taking capital away. Against these developments, it was unrealistic to expect that they would continue in India or bring more funds if the norms on Participatory Notes were liberalised.

This is borne out by the fact that FIIs continue to be net sellers and the market has to be feebly supported by Indian institutional investors. Even after the issue of SEBI orders, and till a week ago, the FIIs had sold assets to the tune of Rs 6,086 crore.

SEBI could have waited for some more time before reviewing the role of PNs. Globally, there is rethinking on hedge funds. It is realised that the financial system is destabilised by unregulated hedge funds. Given the current flux, it is unclear whether hedge funds would survive as an institution at all. In any case, in future, they are likely to be subject to some form of regulation, even in the US.

Furthermore, the days of easy credit — Greenspan flush — are over and the world may not witness the kind of portfolio flows witnessed in recent years. FIIs and PNs may well be the next victims of the current crisis and SEBI need not dance with the bear.

More Stories on : Stock Markets | Insight

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line