We indeed live in interesting times. The rich have never felt poorer. As a consequence, virtually every known posit in market capitalism is under review or challenge.
The high priests of free markets who preside over jurisdictions that have espoused free markets are now busy advocating statutory and regulatory intervention. The United States is actively considering the use of tax-payer money to bail out automobile companies from financial distress. The United Kingdom has used anti-terrorist laws to freeze assets held by Icelandic banks within the United Kingdom, in a reaction to the financial crisis in Iceland.
The French government, which was elected on an anti-socialist plank, is threatening French banks with nationalization if they did not lend to corporates. A court in Kuwait ordered the Kuwait Stock Exchange to be shut down since the government was not acting fast enough to stem the fall in stock prices.
When the affluent feel poor and powerless, worldwide, the law seems to react more swiftly and creatively. When the harbingers of capitalism bare their fangs spewing the might of the state and the treasury, the pressure on Indian regulators and government agencies to “do something” will truly mount to serious proportions.
Indian policy makers have been frantically asking for advice on what they could do to stem the sustained fall in stock markets. Indeed, free advice is available aplenty — of course, backed with the power of precedent emanating from the Mecca of capitalism, such as the use of taxpayer money to bail out automobile companies or housing finance companies.
This is a juncture where the Indian government and regulators should be really wary of the pressures that are brought to bear on them. India has for long been a sucker for concerted lobbying for regulatory intervention, and can be a meek victim of such short-sighted pressures.
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If France can threaten its banks with nationalisation in order to get funds to her corporates, India could be pushed into re-writing her “priority sector lending” norms – changing course from forcing banks to lend to the agricultural and rural development activities to funding Indian corporates. One cannot forget the CDR (corporate debt restructuring) system that helps bail out many an Indian corporate from dues owed to the banking system, and of course, the farmer loan bail-out announced by the current government. Indeed, the latter got a higher share of the “moral hazard” criticism.
If the United States could consider bailing out General Motors and Ford, arguably Indian tax payers could be called upon to bail out any credit crunch that may be faced by large Indian corporates that effected expensive international acquisitions to momentarily do the Indian nationalistic emotion proud.
Unlike the Kuwaiti writ court which stayed the functioning of the falling stock market, an Indian writ court would may not injunct the government from using taxpayer money to bail out Indian companies. One can only hope no Indian court is enthused enough to take a cue from their Kuwaiti counterpart and injunct trading and settlement on an Indian stock exchange.
Both the Reserve Bank of India and the Securities and Exchange Board of India (Sebi) are clothed with powers under the legislation they administer, which will enable them to achieve the equivalent of UK’s anti-terror laws being pressed into service against Iceland banks. They should guard against using their powers in a manner contrary to non-populist common sense.
To be fair, so far, Sebi has refrained from taking any extreme measures — short-selling has not been banned unlike in say, Australia and the UK, circuit filters on price discovery in the stock market have not been tinkered with, cash-settled derivatives continue to be traded, and in fact, the domestic stock lending and borrowing mechanism is being eased further.
The RBI on the other hand, indeed exposed a weak link by freezing all remittances from the Lehman entities in India to their overseas affiliates, even in relation to obligations legitimately contracted. However, it has not done much damage thereafter.
When historically-sane jurisdictions indulge in crazy measures, it is easy for jurisdictions that are known to be crazy to itch for zealous and populist regulatory measures.
Our regulators would do well to boringly and consistently focus on the safety of the market’s clearing and settlement systems, strive towards maintaining the integrity of price discovery in the market, and refrain from populist and seemingly appropriate measures that intervene in and distort the interplay of market forces.
Populism is best left to our politicians, who watch with bated breath on a mark-to-market basis their prospects in the fast-approaching Union elections.
The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own