‘You can’t always want what you get’

It was in 1969 that Mick Jagger of the Rolling Stones belted his classic song titled above. Last week, we discovered the obverse. You can’t always want what you get! There are unintended and unforeseen consequences to any action, sometimes unpleasant. More so when a decision is taken with a single focal point, instead of a holistic approach.

SEBI announced, as advised by a panel set up for the purpose, a set of new rules for foreign fund ownership. Its focal point was to avoid Indians round-tripping their money. This is done by sending tax-evaded money abroad, and then bringing it back to India, through funds dedicated for investment in India, and disguised in different forms (P-Notes, Sub-Accounts, etc).

To avoid this, it sought to mandate that fund managers of Indian origin, whether residents, NRIs, OCIs, or others, would need to limit their holding in the funds they manage or in the AMCs managing them. Some players opined that $75 billion would flow out if these rules are brought into force. The unforeseen consequence was a fall in the stock market.

Poorly thought-out

The SEBI diktat was poorly thought-out. Global investors want to know how much of their own money the fund manager has put into his fund. A lower exposure, directed by SEBI, discourages inflow of FII money.

Secondly, whilst in days of yore, it was easier for Indians to round-trip their money, because bankers, searching for deposits, winked at KYC (know your customer) regulations, today bankers are very strict. It is extremely difficult to round-trip funds without a thorough KYC being done.

Had SEBI taken views before the announcement, it would not later have to ‘relax’ the rules, as has now been done, a few days after the initial announcement. Such fast backtracking does not inspire confidence in the regulator, which is the bedrock of FII inflows.

You can’t always want what you get.

Why should this be an issue?

Domestic investors have diverted large parts of their savings into equity. Mutual funds get over ₹7,500 crore every month, which has helped push the Sensex over 38,000, despite selling by FIIs.

If, for any reason, this retail flow into equities slows down, and coincides with further FII outflow, then the stock market would fall sharply.

Today, India has a twin deficit problem. Both its current account and its capital account are running in deficit. The former mainly due to rising prices of crude oil not matched by a growth in exports. The latter because FIIs are selling, both debt and equity, as interest rates in the US rise, and as general elections in India loom closer, with resultant uncertainty.

Added to that is the effect of US sanctions on Iran, which is another unintended consequence of President Trump’s action. The action was meant to arm-twist Iran into re-negotiating the nuclear deal, but will, instead, result in a drop in Iranian crude coming to market, and a rise in crude oil prices.

A further rise in crude oil will further strain India’s twin deficits and, should something happen to worry retail investors, the stock markets can get badly affected.

With crude oil prices rising, US interest rates expected to rise, a trade war between the US and China, and a general election coming in 2019, investors may consider getting a bit light.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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