Sucheta Dalal :Stock exchanges and security fears
Sucheta Dalal

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Stock exchanges and security fears  

Feb 19, 2007

The media went into a tizzy over National Security Advisor (NSA), MK Narayanan’s Munich speech last week. The stock market, however, ignored it, and the Sensex reversed a four-day, 642-point correction to shoot up 345 points. Meanwhile, journalists trying to figure out what the NSA meant drew a blank.

For the record, Mr Narayanan told a conference on Security Policy that, “Isolated instances of terrorist outfits manipulating the stock markets to raise funds for their operations have been reported. Stock Exchanges in Mumbai and Chennai have, on occasion, reported that fictitious or notional companies were engaging in stock-market operations. Some of these companies were later traced to terrorist outfits.”

But the Chennai exchange is defunct and only trades through a brokerage subsidiary that is a member of the Bombay Stock Exchange (BSE). Almost all of India’s stock market activity occurs through Mumbai’s two national exchanges, and price manipulation remains rampant despite the market regulator’s newly installed Integrated Market Surveillance System (IMSS).

What exactly did the NSA mean by “fictitious or notional companies”? Indian company law allows the proliferation of notional (or shell) companies that often exist only to hide trails to a variety of investment companies. There are also scores of virtual shell companies that are listed on the BSE which are often used as tools for ‘reverse mergers’ that allow privately-held companies to be listed without disclosure requirements mandated for public issues. There are also the low-cap companies, which are easily and profitably ramped up during every big bull run. If any of these were found to have links to terrorist groups, then the Securities and Exchange Board of India (Sebi) is keeping it a big secret.

If the government had found even a single instance of terrorist links, it ought to have been publicly prosecuted to establish the credibility of India’s intelligence agencies
Maybe what the NSA had in mind were the dubious $10 capital Overseas Corporate Bodies (OCB) registered in tax havens that pumped money into India stocks during the 2000 scam. Many had post-box addresses in Gulf countries, but there is no public evidence of any serious investigation into their links with Indian scamsters, let alone terror groups. On the contrary, OCBs were banned from the market after the scam, but the government still allows billions of dollars of non-transparent portfolio funds into the market by way of Participatory Notes (these are derivatives issued abroad). There is plenty of anecdotal evidence linking foreign portfolio money to dubious market operators. But the government has refused to ban or restrict such inflows. It also ignores the obvious inequity of forcing multiple identification rules and Know Your Customer norms on Indian citizens, while the beneficial ownership of large chunks of foreign portfolio money remains unknown. This hardly squares with the government’s alleged concern over terrorist manipulators. If the government had found even a single instance of such terrorist links, it ought to have been publicly prosecuted in order to establish that India’s intelligence agencies are capable of cutting through the fog to identify the real beneficiaries. This would have sent a strong deterrent signal. Instead, top Sebi sources seem just as flummoxed at the Munich speech as everyone else.

Overseas intelligence agencies had once speculated that Al Qaeda profited from shortselling in the run up to 9/11, but they too have found no conclusive evidence to back this. This does not mean that market manipulation to fund anti-national activity is not a possibility. It is. In fact, intelligence agencies ought to pay a lot more attention to the antecedents of companies that have been awarded sensitive contracts to digitise and automate voter cards, driving licenses and so on. Many of them have been indicted in various capital market scams or worse; they also been given the job without any clarity about regulation, inspection and supervision. Their ability to cause havoc through data tampering should worry us all.

-- Sucheta Dalal