Sudhir Mulji: The fingerprint story revisited

In the new identification regime the discrimination between public and private firms is most galling.

It is an unhappy coincidence for the launch of the MAPIN-UIN system that in its first month there has been a sudden and sharp drop in foreign institutional investment in India.

Several good reasons have been cited. Both the gradual rise in interest rates in the US and the end-of-the-year requirement for funds for window-dressing probably slowed down capital flows to emerging markets including India in January.

It is hoped that the trend will soon be reversed. In any case no one even remotely believes that this is a consequence of Sebi's limited action of asking directors and promoters of companies trading in Indian securities to comply with MAPIN regulations

Nevertheless, it enables prejudiced critics like myself or Prakash Helbalkar (Business Standard, January 29, "Mapping the faults in MAPIN_UIN") an opportunity, however small, to renew our criticism of what we believe to be an egregiously dubious system.

Helbalkar considers it both superfluous and potentially capable of abuse by Sebi's employees, who might, even unwittingly, reveal sensitive information.

My concern (" Identifying by fingerprints," Business Standard, January 6) was to point out that fingerprinting is associated with criminal activities and would deter investors.

It is possible that Hebalkar and I exaggerate our apprehensions. After all, the deficiency of the Indian bureaucracy is scarcely a newsworthy item, whereas the criminal association with fingerprinting has been diluted by the US authorities demanding fingerprints from every visitor.

It is now less demeaning to establish the identity and presence of persons through their biometric data.

Even so it is still the task of writers to warn society of potential risks. Many a state has sought a particular form of identification and gone on to grossly misuse it.

In an admirable book The Coming of the Third Reich, Richard Evans has described seemingly innocent measures soon developing into sinister policies.

He recounts how racial anti-Semitism, originating from a general and vague association that Jews as a race bore the guilt of spilling the blood of Christ, was used by groups with different aims.

He gives the example of the revolutionary Eugen Duhring, who "equated capitalism with the Jews and argued that socialism had to be aimed chiefly at removing the Jews from political influence."

Nearly all classes of German society who deemed anti-Semitism backward and undemocratic greeted these racial overtones with dismay and contempt.

Nonetheless in the organised hands of the Nazi party anti-Semitism eventually became a slogan with devastating consequences.

Most readers will dismiss this analogy with Nazism and SEBI's Mapin regime as grotesque and meaningless. Yet they should reflect for a moment whether the identification of capitalism with Judaism is more unlikely than of private investment in stock markets with capitalism. If you choose to attack all forms of capitalism would not the UIN (unique identification number) list be a good beginning?

The difficulty with the new law is its comprehensive application; if its purpose is to protect innocent investors from the machinations of unscrupulous promoters of companies, it is difficult to understand why it should be necessary for every investor to obtain a UIN.

If the legislation has been brought to identify potential tax payers, the state already has their identity through the system of permanent account numbers, so a separate identification number must be superfluous.

It is the illogical character of the new system that has led to confusion and suspicion.

In this context it is relevant to note that while the MAPIN regulations will apply to all investors, it has however been clarified that those companies "wherever the President of India/Central Government/or State Government is a promoter, it is exempted from the requirement of obtaining a UIN under the regulation"; therefore, the regulations apply only to companies promoted or governed by the private sector.

It would seem that the system's purpose is to identify unscrupulous promoters who may then vanish into thin air.

Why then should those who govern the President's company not be required to provide their identification? All companies are supposed to be governed for the benefit of their shareholders, whether or not they are promoted by the President or by a private operator.

Why then is there a differentiation between publicly promoted companies and privately promoted companies?

And if the regulations or the exemption from them is based on the promotion of companies, why has it to be extended to all participants in the securities market? Most investors neither promote nor govern companies, they are just bystanders and innocent investors.

So why do need to obtain a UIN?

For, it is precisely this extension of the law to all investors, big and small, that raises apprehension about Sebi's intentions. Is the real purpose of the UIN unknown to us that justifies the German analogy mentioned above.

To avoid falling into that net, many who have other alternatives, for example, foreign investors, will prefer the alternative, not as a result of careful calculation but simply to avoid the bother of complying with rules that they do not understand.

After many years in the solitude of economic irrationality India has begun to normalise its economic policies to conform""in a very broad sense""to the world norms.

One way of doing so is to accept world systems, particularly in the workings of markets, that have become part of the paradigm in a world that preserves the anonymity of the investor, screened by a group of professionals who provide the sole links between investors and markets.

Sebi is attempting to break that anonymity and penetrate that camouflage. Perhaps it is right to do so in ascertaining the real authority but there is scope for great misuse.

Once the entire paraphernalia of the Sebi system comes into force, it is most likely either to be evaded or to frighten investors away from India.

Sebi believes that investment opportunities in India are so unique that regardless of their bureaucracy, or perhaps because of it, investors will flock to India.

They may prove to be sadly mistaken and this superfluous and egregious attempt of theirs may scare investors away as much as earlier attempts at controlling exchanges through Fera and Fema did.

In choosing to rely on biometric data as a new and scientific way of identifying crooked operators, Sebi may have gone one step too far. If it causes real anxiety among investors it is likely to harm the Indian securities market, much to the cost of the Indian economy.

It is an unnecessary novelty introduced in the Indian markets which no other market in the world practises. It draws attention to the potential of scams in the domestic market""not the best advertisement for attracting foreign fund flows""and it also reveals data to the authorities which will remain with them in perpetuity.

The belief that such is the attraction of the Indian market that all these changes from the procedures that investors are familiar with will be ignored for the joys of participating in the Indian market is a hallucination.

Investment is a voluntary activity adopted by those who seek a return. But there is no compulsion to it, not even the pleasure or need that tourists may enjoy visiting America.

(The views here are the author's only)

sjmulji@aol.com