The Hindu : Market interdependence: Relevance of U.S. example

Online edition of India's National Newspaper
Saturday, Aug 10, 2002

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Business

Market interdependence: Relevance of U.S. example

By C. R. L. Narasimhan

The current bearish phase in the Indian stock markets is attributable to domestic as well as external factors. Of the former, the realisation that the monsoons have been sub-normal has pushed an already lacklustre market lower. By the middle of last week the Sensex had fallen to below 3000. Even earlier both the benchmark indices — the NSE's Nifty is the other one — had fallen to their seven month lows.

The Finance Minister, Jaswant Singh, who has been trying to improve the sentiment announced a package including tax measures that modify albeit ever so slightly his predecessor's comparatively harsh stance on the income-tax payers. The last budget of Yashwant Sinha was not received favourably by the middle-class. The withdrawal of several tax rebates and the 3 per cent surcharge on income-tax disappointed the salaried class which at the same time found that the yields of the administered savings schemes had shrunk.

It is a moot point as to whether the disillusionment of the middle-class coincided with or aggravated the decline in market levels. In fact, no study has established the connection that those savers who invest in instruments such as PPF, NSC and even bank deposits also have a say in the share market. At least in recent times every indication is that the salaried class which would count as small investors did not invest directly in share markets, but probably chose the mutual funds route. Even that has been a big disappointment. Any case, the sentiment among all kinds of investors has been negative. Mr. Singh has quite correctly aimed at mollifying them although with limited success in these early days.

In relation to the stock markets one other ingredient of the Finance Minister's package has a great relevance. The move to set up a serious frauds office under the Department of Company Affairs (now part of the Finance Ministry) is as welcome as it is topical. Expected to be patterned on the models obtaining in the U.S. and the U.K. the new body will target corporate offenders. Considering the less than satisfactory record of the Department of Company Affairs even in matters on which it has a say — for example, the various transgressions of NBFCs and their promoters — there is an understandable cynicism on what the new body from the same stable can do. The answer lies in incorporating it on sound lines and manning it with experienced people who will also pay attention to market intelligence.

The move has come not a day soon. In the U.S. and the developed markets investors' trust in the corporate system has all but evaporated in the wake of the numerous highly visible shenanigans. Everywhere it has been a season of discontent for the investors, a large part attributable to the spectacular corporate failures. The U.S. Government and the regulators have realised the need to give top priority to fighting corporate fraud. On July 30, the U.S. President signed a bill that considerably enhances the fraud fighting capabilities of the regulators. Interestingly, there has been a political consensus on the provisions of the new law: exemplary punishments, a watchdog for the accounting industry and streamlining the audit profession are some of its key provisions. It is expected that other countries in the developed West will emulate the American model. However, it has to be realised that none of these measures, welcome as they are in the long run, can immediately restore the trust lost.

Clearly for us in India there are many more lessons to be learnt from the corporate debacle in America and specifically the ways in which it has caused havoc in the financial markets everywhere. That the Indian stock markets have been looking to the lead of the U.S. stock exchanges, especially the Nasdaq, is a fact. In the heady days of the new economy boom Nasdaq's movements were closely tracked in India although only a very small number of Indian software companies listed there or had the wherewithal for a listing. Probably the wrong notion that a scrutiny volatility of the Nasdaq index helped in gauging the fortunes of the global tech industry had something to do with the fixation. Now that the boom has gone bust the downside of the fixation is there for all to see. Therefore the attempts in the U.S. and Europe to punish the guilty and equally importantly lay new ground rules for corporate behaviour have plenty of relevance here. The Joint Parliamentary Committee probing the securities transactions is yet to submit its report. However, portions of the report were leaked out and created a sensation in that it "named'' a few individuals. The JPC has disowned the report. Hopefully, the one that is going to be submitted to Parliament will attempt to fix the system rather than a few individuals.

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