India Economy

Stop worrying about market’s reaction

J Mulraj | Updated on January 23, 2018 Published on August 02, 2015



Domestic institutions are big enough to absorb any outflows in the event of curbs on P-notes

Last week, the Indian equity market was in jitters due to fears of a ban, or control, on P-notes or participatory notes, as recommended by a special investigative team (SIT) to control black money. SIT feels that P-notes are mainly used by Indians to launder their black money and to profit from stock market gains.

Just under a third of P-note investment, or ₹85,000 crore, came from Cayman Islands, which has a population of 55,000. It stretches credulity that each resident would invest over ₹1.5 crore in India.

What’s more, P-notes coming through Mauritius or Singapore do not even pay capital gains tax either.  Some animals, it appears, are more equal than others in this animal farm.

The P-note issue is not a new one; it has surfaced multiple times over the last 20 years. No Government has imposed a ban, or asked for proper identity disclosure. This lax attitude is ostensibly due to fears of a crash in stocks but it has clearly favoured the elite.

So it is amusing to read the Finance Minister’s comment that there would be no knee-jerk reaction on P-notes, since even the most arthritic knees would scarcely take 20 years to jerk.

The situation today makes it possible for Government to take action because the domestic pool of institutional money — mutual funds, insurance and pension funds — is larger and can absorb part of the outflow that would occur.

Stricter KYC norms will not affect genuine investors, who are always willing to reveal their identities, but will affect those who are misusing P-notes to round-trip their black money in a tax beneficial manner.

And given the attractiveness of the Indian market (more so when the Chinese one has fallen, and expected to fall further), FIIs will almost certainly be unable to resist a bargain if it falls sharply on P-note curbs. So the Finance Minister ought to be willing to jerk his knees.

Should action be taken on P-notes, the market would initially react negatively. At lower levels, FIIs would find the attractiveness of Indian stocks too strong to resist. The Finance Minister should not let the bogey of a market crash deter him.

Investors should watch for further Government action on P-notes. A subsequent fall would be a buying opportunity.

But the Government also needs to ensure that investors are protected from fraud. It has taken action in the Sahara case.

If Narendra Modi wants savers to save and invest, he must step in and listen to investor grievances in case of serious fraud.

The other concern of investors, albeit a smaller one, was the prospect of the US Fed raising interest rates as it has been threatening to, at its meeting on Wednesday. But Janet Yellen, the Fed Chairman, preferred to kick the can further down the road, despite a 2.3 per cent growth in Q2 2015 ,  and may do it at the Fed's September meet.

China worries

Last week, the Indian stock market joined the global markets in their fear of a stock market collapse in China. Sensex dropped 550 points, or 2 per cent in a day.

Global markets fell on concerns over the Chinese economy and hence the demand for commodities, and global economic growth, of which China remains a driver. It would also impact sales of foreign companies operating in China, as demand for goods would fall. Chinese authorities discovered, to their dismay, that a bear in a China shop can be as destructive as a bull.

They had valiantly, and incorrectly, tried to prevent a fall through diktat. But a free market is best left free to determine its course, unless there is an abuse of the system. The problem is not that the market has fallen 8.5 per cent in one day last week but that it had been allowed to rise, unchecked, as much as it did.

The writer is India Head, Euromoney Conferences

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Published on August 02, 2015
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