The stock market is heated up. Many theories abound for why it is at this high. That may need some investigation. For some, even a distant prospect of emergence of a "decisive" government is enough to justify a rally. For others, the distant prospect of emergence of a stable government is enough. For yet others, the very prospect of the current government leaving office is reason enough.
Whatever be the outcome of elections, it is likely that the market would crash after elections, running as it is to new highs every day. If any of these expectations is indeed what is driving prices up, it could only mean that the market has already factored these potential developments into pricing. Once realised, the market would have nowhere further to go and correction has to follow.
Market sentimentalists only need to find reasons for it: bad budget, failed expectations, FDI in retail, technical corrections - you can name the cause, but these folks would find a means to justify the fall. If all these expectations are dashed to the ground, then too the market could of course fall.
However, one element is certain in all scenarios. Whenever the market falls after a government is sworn in, finance ministers, regardless of political persuasion, take it as a personal affront. This is a secular trend. Investigations would follow. Regulators would be pressed into action. Specific periods of time in which the market "fell a lot" would be identified and the largest sellers would be asked why they sold. Those who sell in reaction to the fall would also be brought into the net for investigations. Cause would get confused for effect and effect for cause. Rudimentary appreciation of statistics would lead to "false positives" (google this term and an earlier edition of this column on the concept) being relied on as conclusive preponderance of circumstantial evidence to punish alleged defaulters.
Because there have been investigation reports, show cause notices would get issued. Because notices have been issued, penal interventions would follow.
If the facts do not lend themselves to justifiable penal action, "minor penalties" such as suspension of up to three months would be inflicted. Of course, generic powers to issue "such directions as may be considered necessary in the interests of the integrity of the securities market" would even enable keeping persons out of business for periods ranging from several years to indefinite periods. Some would appeal, others would cave in. Some appeals would be allowed and others rejected.
Before the rest of society can get any wiser about what assuredly constitutes compliant conduct (this could happen to anybody) it would be time for the next elections, the next bull run (regulators would do well to investigate this correlation and figure it out), the next crash and another round of investigations and penalties. Each of the elections in the past 10 years during the life of this column has seen this trend. Whichever form the new government of India takes, it would do well not to fall prey to the temptations of a knee-jerk reaction to a price crash after it is sworn in.
Whoever be the finance minister in the new government, she would do well not to pressure the regulators to shed some blood to quench the thirst for revenge against a fall in stock indices. A market fall is not necessarily an insult to the incumbent in that office. And regulators would do well to stand their ground and say no action is warranted, if nothing is indeed warranted. A decision of the European Court of Human Rights (ECHR) in Strasbourg, one of the last bastion of civil rights in the world would be instructive for our regulatory policy. Yes, in connection with securities laws. Dealing with an appeal in relation to a case where the Italian securities regulator imposed financial penalties of several million euros even while restraining some individuals from serving as corporate directors and practising law - all of this coupled with criminal prosecution on the very same facts. For anyone in the Indian securities market this is par for the course.
The ECHR has noted that the actions termed as "administrative" are in substance "criminal sanctions", particularly in the light of their harshness and their impact on the ability of the accused to be gainfully and honourably engaged in work. Therefore, the protection of human rights would need to follow.
The ECHR ruled that the Italian regulators could not sufficiently guarantee the right to defend oneself, and did not entail proper separation of the investigation and judicial functions of the regulator.
This is par for the course with Indian regulators where the "quasi-judicial" determination of proceedings are conducted partially behind the back of the noticees in private briefings and then for the record in a hearing, and inspection of the full record is routinely denied to suppress any material that could absolve the accused. Interestingly, the ECHR has also said that the capacity to criminally prosecute a person even while imposing quasi-criminal sanctions by "administrative" proceedings amounts to "double jeopardy" - a position opposed to the Indian Supreme Court's ruling on the subject long ago, which is now in dire need for review.
The ruling is in French and for many in our markets, it could well be Greek and Latin. However, even if one were to be a bit more circumspect before unleashing the power of the law every time the market falls, one would end up being fair and just to society. The finance minister would do well to steer clear of watching the Sensex and the Nifty every day, and instead nudge society to reviewing meaningful parameters such as level of employment, inflation, industrial production indicia, level of FDI, and of course, current account deficit, share of indirect taxes in total revenues, and GDP growth. Meanwhile, just let the markets be.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)
somasekhar@jsalaw.com
