By Research Desk
about 10 years ago


By Ruma Dubey

Agreed that sentiments are buoyed, US is slowly doing better and elections are round the corner, which means things on the economic front will surely see a change, irrespective of whichever Govt comes to power.

Yet, nothing justifies the rise of the Sensex to a new life time high today at above 22,500 and Nifty too hit a record high at 6763. Are people like you and me buying stocks? The retail investor has totally disappeared, so for us this euphoria, more than sour grapes, is a reason to wonder. Are we missing something which the FIIs are seeing? More importantly, how come the FIIs have gone all gung-ho when even two months ago, when all economic parameters were the same as what we have today existed, the very same FIIs were not-so-bullish?  How come this sudden jump from cold shoulder to hot, hot, hot?

Yesterday, FIIs remained net buyers of Indian stocks, buying shares worth a net Rs 3856 crore. As against this, the DIIs yesterday sold shares to the tune of Rs.248 crore. FIIs net purchases till end of March stood at Rs.25,619 crore while that of DIIs, which is sell, stood at Rs.13,357 crore.

Consumer and technology shares yesterday pushed US’s Standard & Poor's 500 Index to an all-time high, after an increase in a manufacturing index boosted optimism the economy withstood severe winter weather.

Simultaneously, the Rupee is trading currently at 59.70/71 levesl, compared to Friday’s close of 59.91/92 as bunched-up dollar inflows and record high domestic shares aid sentiment. The rupee rose to as high as 59.60, its strongest since July 30.

On the other hand, a quick read of the RBI Governor’s policy statement yesterday will reveal that things remain queasy on the economic front. Today, the IMD, along with predictions by rest of the world, agreed that monsoon could play truant this year due to the El Nino effect. How come this data has no relevance?

This entire “new- high” of the market is worrying. With US Fed announcing another $10 billion cut back in QE, money should be slowly getting tight coming from the FIIs into the emerging markets. Yet, the FIIs are buying like as though India is on the brink of major growth. Yes, the new Govt will come in place and all hopes are on Modi. But he is no God; he cannot change the economic scenario overnight. And if he does not come? So riding high on this hope seems very juvenile that too for a matured lot like the FIIs.

What exactly is then driving these FIIs? Actually, the rumble on the streets, which many believe is a well known secret is that it is the black money, coming into India through P-Notes which is driving the markets. These Participatory Notes or P-notes are the investment route for FIIs, also a route used by HNIs and hedge funds to invest in domestic markets through unregistered FII accounts. Currently, it is said that P-notes is being used by many Indians to reinvest or ‘whiten’ their black money. The investment in P-note is such that identity of the ‘real’ investor is anonymous, while the face of the investor will be the FIIs. Though the responsibility of keeping a track on the identity of the P-note investor lay on the FII, many a times, they do not adhere to the rule or simply do not know the ultimate identity of the P-note buyer.

The watchdog, SEBI has always known this is a problem area and so does the Govt of India. A white paper on black money was presented in the Parliament and it clearly mentions P-notes as a routinely used route. P-Notes are typically issued through multiple layers and this makes the rule of SEBI, which seems like a ineffective tool of KYC, completely meaningless. In January 2014, SEBI did bare its teeth and barred unregulated FIIs from dealing in offshore derivative instruments. But looks like the teeth were not scary enough…

The Central Economic Intelligence Bureau has traced illegal flow of money through Private Placement Programme, which involves offering of securities to select individuals or groups, upto 50 in numbers. It has also zeroed in on investment done through P-Notes. In fact it put a staggering statistics -  investment in P-Notes has surged to the highest level at around Rs 1.73 lakh crore or Rs 1.73 trillion in February ’14.

India Today has put out a report stating that a Directorate of Revenue Intelligence stated that over the past 2-3 months, black money in the range of Rs.1500 to Rs.5000 crore has come into the country through the stock market. Money will be spent on elections activities over next two weeks.

Another very convincing strategy to explain rising black money has been explained by ‘Forsenci Auditor’, Vijay Jadhav, who uses compelling data to show how black money has already come into India. He has explained this using M3 which indicates aggregate monetary assets in the country and this data is put out by RBI. Jadhav explains that on 31/3/2000, M3 as percentage of GDP at market price was 51.06., it grew to 73.29 on 31/3/2012. And based on these trends, he assumes M3 to be around 55-60 or Rs.70,18,935 crore but it actually came, as at 21st Feb’14 at Rs.93,58,580 crore. This means a difference of Rs.23,39,645 crore and that, says Jadhav, is the amount of black money which has entered the country. Looks like what Subramaniam Swamy of BJP was right when he said that black money was no longer in Swiss bank accounts.

This is indeed the ‘Modi effect’ as there is fear that if he comes to power, he might come out a stringent law to bring back all black money from abroad. So yes, Modi is directly responsible for this illogical euphoric market!

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