Lord Desai Wants Legislation To Protect Investors

Financial liberalisation is sweeping across the world and any country that seeks to grow will have to open up its economy, or else, fall back in the race, Lord Meghnad Desai, director of London-based Center for the Study of Global Governance said here yesterday.

In his keynote address to a two-day symposium on ` Financial Liberalisation : Impact on the European Community and India, he said because of the sharp ideological divide, monetary and financial sectors were not given due prominence in the policy-making for economic growth in the Western capitalist countries. The changed international economic scenario has compelled a new look at the financial reforms, he said. The seminar is being jointly organised by the department of economics , University of Mumbai and British Council Division, Mumbai.

 

He said the old prejudice against market as the enemy of the poor is being fast replaced by a recognition the market has a vital role to play in regulating the flow of resources into the desired channels.

Financial liberalisation has broken the national boundaries and the flow of funds has become a global phenomenon. It is in this context that the need for the regulation of funds to protect investors interest assumes significance, he said.

Desai pointed out transparency, accountability and regulation have become important in financial liberalisation all over the world. In a deregulated financial market, it was necessary to adopt legislation to protect investors. In this respect, the US had a vast network of legislation, despite its being a free economy.

He drew on the examples from the UK and US models of financial regulation to show that regulation of the financial markets was necessary in order to avoid the occurrence of the Barings type of collapse or Morgan Grenfell bank type of insider trading.

Desai said in the case of the Barings collapse in Singapore, it was not the derivatives that were to blame but the inept management and lack of supervision.

Even in free market and financial deregulation, there was a need for a suitable structure of regulation that did not throttle competition.

He showed how the British model of deregulation evolved from the 1970s onwards to suit the changing needs of the economy. He was totally against insider trading and lamented the fact the Indian financial markets suffered from heavy insider trading.

These markets, he said, do not take into account shareholders as much as they should. Insider trading deprives the outsiders of free flow of information and generates illegitimate profits for a few. This is akin to the cartelisation in the private sector, Desai said.

Therefore, the new structures of regulation had to be hammered out that allow for transparency, accountability and competition. India has to choose between self-regulating organisation or statutory regulation. In India as elsewhere, vast sums of investors money were at stake.

He supported stiff penalties on any insider trading that sought to manipulate. Such fine was important for the reputation and credibility of the financial market.

Desai called for isolating of the financial failures to avoid systemic damage.

He pointed out in deregulated market structure, local financial markets, such as, Mumbai or Calcutta lost their importance. This was because of the spread of information technology that brought global markets closer and opened up an array of financial instruments to investors traded on the international, the local markets had to improve their functional efficiency, transparency and accountability.

Financial market is not a location but a service. Financial innovations also added to the pressure on the markets to improve transparency and accountability.

He dealt on the subject of sovereignty and was critical of the European Union for it being a protected region. He said the EU has to dismantle tariff structure and open up. Sovereignty was losing its importance in the changing world where people have a choice between currencies.

Desai felt governments have no right to debauch currency through exclusive sovereignty to its issuance. He deplored the fact that the Indian currency was heavily dependent on government. He was worried over the growing public debt in India. Health of a currency is no longer a matter of government choice alone. It is wrong to separate real from the monetary, or national from international economy, in a fast changing global scenario, he warned.

Professor P R Brahmananda released the C N Vakil commemorative volume` Macroeconomic Challenges and Development Issues (Himalaya Publishing) edited by Dilip M Nachane and M J Manohar Rao to mark the birth centenary of the late economist, C N Vakil.

Brahmananda showed how Vakil had foreseen the importance of the capital market and financial sector way back in the 1940s and 50s.

He said much of C N Vakils writings on currency and prices or value of the rupee carry relevance even today.

Brahmananda said monetarism had deeper roots in India than in the West. In this respect , Milton Friedman is a kid, he quipped.

Dilip Nachane focused on the closer trading ties between the European Union countries and India by pointing out that the EU was the largest trading partner.