Politicians And Shares

The committee wants to strengthen the financial institutions role in the capital market, whatever that means; UTI and LIC are already quite active in the market. It also wants to ban insurance companies and pension funds from entering the primary market, unmindful of the fact that even if the primary market is inherently more risky, a company with a good track record making an initial public offering is still a safe bet. Would the committee argue that insurance companies and pension funds be denied any opportunity to invest in an IPO from one of the Tata or Reliance companies?

Not all the suggestions are bad, of course. Some do make sense, such as the ones about reducing long-term capital gains tax for Indians to the level applicable to foreign institutional investors (10 per cent) and stricter entry norms into the market. On the whole, however, the committee needs to re-examine its recommendations. While doing so, it would do well to bear in mind the fact that it is not always a good idea to take a political view of everything. There is no need for what ought to be a set of technical recommendations regarding the stock market to keep in view their (often imaginary) political ramifications. There will always be pressure on MPs to protect their constituents, most of whom would fall under the small investor category. But MPs should be willing to tell them that in such matters, the principle of buyer beware applies. The worst thing that MPs can do is to shoot off a letter to the finance minister, who then feels pressured to act or to insist on regulating the market with only the

interests of the small investor in mind. There are other players in the market whose interests may correspond more closely with considerations of market efficiency. Certainly, there should be no attempt to underwrite the greed to which the small investor so often succumbs during a bull phase. In this context, it might be a good idea for Sebi begin a procedure through whi-ch it educates legislators on the logic of the market and how it is supposed to function.