By Vishnu Makhijani, IANS
New Delhi : Unregistered foreign entities whose investments are believed to be significantly responsible for the dizzying heights the Indian stock market has zoomed to can’t be totally regulated and the bourses have to live with them, a US expert says.
“What we can say from looking at the experience of other emerging economies it is troubling to see the entry of foreign funds and even foreign acquirers to come into your domestic market and make a quick profit and leave again,” says Robert F. Bruner, an academic at the University of Virginia and co-author of a best-selling book on the lessons to be learnt from the stock market crash of 1907.
The activities of such entities that ride piggyback on registered foreign institutional investors (FIIs) can only be partially controlled since “markets will invent ways around regulations”, Bruner told IANS in an interview.
Bruner is the dean and Charles C. Abbot professor of business administration at the Darden Graduate School of Business Administration at the University of Virginia.
With Sean D. Carr, who also teaches at Darden, Bruner has co-authored “The Panic of 1907: Lessons Learned from the Market’s Perfect Storm” that appeared in September and became an instant bestseller. He has authored a total of 17 books.
In the midst of the controversy over “participatory notes”, the route used by unregistered foreign entities to invest in the Indian market, the sensitive index of the Bombay Stock Exchange (BSE) crossed the psychologically important 20,000 mark on Oct 29. The broader S&P CNX Nifty also hit an all time high of 6,000 points.
Then, the BSE recorded its single highest gain of 894 points in one trading session on Nov 14.
Market analysts point out that while FIIs and high net worth individuals and companies have pumped in enormous sums of money through the legitimate route, it is the activities of the unregistered foreign entities that is driving the market up.
As for regulations, Finance Minister P. Chidambaram has served notice that FIIs must square up the investments by these entities within 12-18 months, after which no additional investments will be permitted.
But, as Bruner pointed out: “You have to put up with the behaviour of the opportunists. That is part of what gets you the benefits of the market.”
“We see that in the United States as well. There are opportunistic buyers, they make profits and turn things around quickly. If you will, you must trust in the rationality of markets in the long run to allocate capital correctly.
“Eventually, the opportunists will lose. It is truly the patient money that will earn the sustainably higher rates of return,” Bruner pointed out.
“In fact, we see this in the US even. There are many, many bright people employed to do nothing but advise companies and investors on ways to relieve themselves from the burden of onerous regulations,” he maintained.
Posing the question why the private equity industry was so significant in the US today, Bruner replied: “I think it is in part that we have very tough regulations on the public companies in the United States since the founding of Sarbanes-Oxley.”
The Sarbanes-Oxley Act, also known as the Public Company Accounting Reform and Investor Protection Act, was signed into law on July 30, 2002, in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Peregrine Systems and WorldCom.
These scandals had resulted in a decline of public trust in accounting and reporting practices. Named after sponsors Senator Paul Sarbanes (Democrat) and Representative Michael G. Oxley (Republican), President George W. Bush signed it into law, saying it included “the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt.”
But then, as Bruner noted, no act is perfect.
“I think Sarbanes-Oxley has accomplished many good things but it discourages directors of companies from remaining on the boards, it discourages companies from remaining public.
“So you have this industry – private equity – that is appealing to the very instincts of executives and directors to go private to relieve themselves of the heavy burden of Sarbanes-Oxley and other regulations.
“So, markets will invent ways around regulations,” Bruner contended.