The rumour was everywhere, especially among Indian and foreign fund managers. A maverick fund manager known for audacious investments which have an uncanny knack of shooting up after his purchase was in trouble. The exact nature of his transactions was unclear—some said it was commodity futures others insisted it was stock futures. But the losses were allegedly in the names of two investment companies—one named after a car and another after things old and valuable. A few calls revealed that he had been temporarily shunted out of Fund Management into a finance company of the same group. Sources say, news of the problem appears to have hit the market ‘‘because of an attempt to dump some of the losses on its mutual fund schemes’’. While it is not clear how this would be done, the Fund has clearly got into defensive mode. Overnight, the Fund manager was back in his seat and personally placing buy-sell orders to brokers—this unusual action to mark his return only caused more speculation. The Fund’s aggressive buying probably helped the spectacular pull-back of depressed stock prices last week.
The problem PNs
Since foreign funds seem to know more about this case than domestic brokers and investors, it once again draws attention to the opaqueness of ‘Know Your Customer’ rules in the context of foreign investors. In fact, Kirit Somaiya, ex-Member of Parliament, has written to the Finance Ministry to question the huge increase in investment through PNs in the last year. A large chunk of this is Indian money, round-tripping its way via tax havens like Mauritius to the capital market. Somiaya points out that the increase in FII investment through the PN route is ‘‘astonishing’’. From 15 to 20% of FII investment in 2002-03 it was as high as 52% at the end of March 2006. This means that far from unwinding investment through PNs in three years, as was promised by the government, this investment route is growing and flourishing. And although the capital market regulator demands several layers of disclosure, it is still inadequate. Only the RBI has been most vocal about discouraging and disallowing investment through PNs. The capital market regulator, on the other hand, would prefer to create disincentives to investing through PNs, rather than an outright ban. This disincentive could be in the form of a tax payable in India on PN investment. However, this may discourage genuine investors like hedge funds who like the anonymity of PNs, but it will not curb the inflow of hot money into the market.
When it comes to front running and other mischief, Foreign Funds are as willing to cut deals as the most notorious domestic fund managers. In fact, the bad eggs among them can teach a few tricks to the Indians. The most obvious one is a deal for front-running their big purchases. This means that chosen Indian brokers are asked to slowly mop up a particular stock, say XYZ Investments. When a sufficient quantity is purchased and the price is ramped up, the Fund picks up the entire lot of mopped up shares from the broker at the higher price. The broker is expected to share a significant chunk of the profit with the Fund Manager—sometimes the profit is evenly split. Often, this explains why prices begin to move up before the foreigners move into a particular stock. This front-running often causes the misleading assumption that FIIs are followers and not leaders in buying stocks. Although the volume of derivatives trades are huge, it is a moot question whether price formation, in the Indian context, takes place in the cash market or the derivatives segment.
Fly for sure
It needed Reserve Bank’s intervention to ensure that Deepak Banerjee will get to ‘‘Fly for Sure’’ to a destination of his choice under the much hyped scheme by Citibank cards. Deepak Banerjee and his wife separately qualified for free air tickets after spending a specified sum of money under Citibank’s credit card scheme. But their troubles began when they tried to redeem the prized free air tickets for a holiday of their choice. Citibank had apparently outsourced the implementation of the scheme to a third party who rejected all requests for specific destinations and dates. Worse, the agents were rude and constantly pressured the Banerjees to say they were giving up their claim for free tickets. After suffering much insolence and rudeness they decided to complain. On hearing from the Reserve Bank, Citibank blamed the mess on the vendors and has now agreed to provide the Banerjees with dates and destinations of their choice. The RBI intervention is welcome, but it will take a lot more to ensure that banks don’t leave customers to the mercy of third-party vendors in future contests that lure them to spend more money.