Sucheta Dalal :Participatory speculation (9 March 2003)
Sucheta Dalal

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Participatory speculation (9 March 2003)  

Media commentators continue to blame part of the post budget decline in stock prices on a discussion paper released by Sebi (Securities and Exchange Board of India) about a ‘code of conduct’ for foreign institutional investors.

The paper had discussed how to control and quantify the issue of Participatory Notes (PNs), which allow those who are otherwise ineligible to invest here to buy Indian stocks.

Nobody can argue that Sebi’s attempt to staunch the inflow of hot/black money via Participatory Notes (PNs) is bad for the Indian capital market. PNs are financial paper issued overseas which represent underlying investment in a basket of Indian stocks; and our regulators frown upon their issue. The investment in PNs is usually routed through multiple layers to hide the ultimate beneficiary.

Why should the regulation of PNs cause stock prices to tumble? Probably because powerful Indians who invest their unaccounted earnings in the stock market through PNs do not want a Sebi probe. It would seem that they are using the nervousness caused by war fears and a not-so-rosy-after-all Budget to stop Sebi from probing the PN racket.

Nightmare of 1992

FOR some small investors the nightmare of the 1992 Scam hasn’t ended. Last week a reader from Chennai wrote to ask where the Special Court, which has been trying the securities scam offences was located.

He had received summons asking his wife to be present in the Mumbai court ‘for failing to comply with a court order’ to transfer 50 bonus shares of Reliance to Fairgrowth Financial Services. The man had bought some shares in his wife’s name in 1991 and sold them subsequently. She received 50 bonus shares after selling the original holding. In September 2001, Fairgrowth, which had purchased the shares asked that they be sent to the custodian with a signed transfer deed; and she did. ‘Now I don’t know what the hell this (the summons) is about’, says the reader.

We tried to find out. But officials at the custodian’s office refused to come to a phone despite repeated calls; finally a peon rudely said that queries would only be answered in person. We had even better luck at Delhi with Dinesh Tyagi who is the custodian appointed by government.

He was polite, willing to help and agreed that small investors ought not to be harassed. Unfortunately, we don’t know how many small investors out there are terrified at the summons to appear in the Special Court on March 10 and unable to get any answers from the custodian’s office.

Iridium settles

Last Thursday, Motorola Inc of America agreed to settle several lawsuits filed against it by Chase Manhattan Bank in connection with Iridium — the global satellite company that went bust a few years ago.

The deal is that Motorola will pay $12 million against its guarantee of $300 million out of a $800 million loan to Iridium by a bank consortium. Although the suits filed by Iridium’s unsecured creditors in the US remain outstanding, nine Indian institutions would probably be unhappy at the low settlement.

These institutions had invested in Iridium through an Indian vehicle called Iridium India and have sued Motorola in India for over a hundred crore rupees. They hoped that Motorola, which has a big business in India would want a settlement, but a few of them were certainly hoping for a big settlement.

-- Sucheta Dalal