In June 2022, Foreign Portfolio Investors (FPI) pulled out Rs 46,000 crore from the Indian bourses, totting up an aggregate net outflow of Rs 2.13 lakh crore in the first six months of 2022. Blame it on the Ukraine war or the Federal Reserve resolve to rein in inflation by sharply hiking interest rates in the US that have been soft in the last three decades – but the truth is that the Indian stock market and forex market have been held hostage by the FPI ever since they were allowed to trade on the Indian bourses. Sensex and forex (colourfully if loosely used for INR-dollar exchange rate) go up when FPI infuses funds into India, and vice versa.
In 1992 when the Narasimha Rao government with Dr Manmohan Singh as the finance minister allowed FPI for the first time, it was hailed by free market enthusiasts as a pathbreaking measure. Some of the expectations were: It will bring the much-needed foreign exchange, it will broaden and deepen our bourses resulting in better price discovery, and it will bring international best practices in our corporate governance.
Satyam happened in 2008 and was followed by the IL&FS and Yes Bank scams. Satyam was indeed the most audacious – its promoter Ramalinga Raju’s mea culpa, that he got fixed deposit receipts forged to inflate sales and profits, gives lie to the claim that the advent of FPI would discipline our marauding and buccaneering businessmen. IL&FS is a case study on how to loot and plunder through a maze of associate companies, and Yes Bank on the fence eating the crop. Of course, it cannot be denied that Indian companies seeking to mobilise equity in hard currencies from abroad through Global Depository Receipts (GDR) were constrained to recast their accounts under more exacting US accounting standards, but that has nothing to do with FPI. The point is, the claim that FPI has had a chastening effect on sharp accounting practices is pure hogwash.
Forex getting beefed up is also not true. FPI money is hot. It can come and go through the revolving door. India has chosen not to leash such footloose tendencies with a deterrent tax – breach of minimum lock-in period would attract a tax of, say, 10%. The debate over whether FDI or FPI is superior was settled long ago with a resounding vote in favour of the former. FPI merely makes the capital market more frenzied, whereas FDI brings in state-of-the-art technology, greater employment opportunities, world-class products for Indians, and greater tax collections for the government from the heightened economic activity, to enumerate a few advantages. The clincher is serious and permanent capital infusion. Alas, if only we could persuade Tesla to produce its electric vehicles in India. China as usual stole the thunder from us much earlier. Tesla now wants to do what every MNC wants to do – use its existing capacities to the hilt. It wants to export from its US and Chinese facilities to India. Let us face it, FDI bankrolls economic activity; FPI bankrolls speculative activity.
Venture capitalists of foreign vintage endowed with deep pockets were gung-ho about our start-ups but lately have started tightening their belts, suspecting exaggerated valuations and foul play. The BharatPe promoter getting ousted by venture capitalists from the company he founded should check the notion that start-ups can be an easy get-rich-quick scheme.
FPI has also opened opportunities for money-laundering, with black money stashed away abroad in tax havens (with banking secrecy laws thrown in) being brought back to India through the FPI route – more particularly its opaque subset Participatory Notes (PN) – without let or hindrance. This process is called round-tripping, a pernicious practice that not only mocks at our laws with Indian crooks smirking as they subvert them, but also facilitates insider trading and props up the shares of the companies promoted by the crooks whose shares are traded in NSE and BSE.
Against this grim backdrop, the news that domestic portfolio investors are digging in is heartening. They are tightening their grip on listed companies at a time when FPI are pruning their holdings due to global uncertainty and rising interest rates in the US. Significantly, the share of retail high net-worth investors and domestic institutional investors (DIIs) as a whole reached an all-time high of 23.34 per cent as on March 31, 2022, well above the FPI (foreign portfolio investors) share of 20.15 per cent.
It is one thing for desi institutional investors to give stiff competition to foreign investors, but altogether another to institute checks and balances to put paid to the notion that India is a revolving door for footloose foreign capital. It is time policy wonks got into a huddle and thought through the entire FPI indulgence dispassionately. We pamper them with a soft 10% capital gains tax on long term capital gains from the Indian bourses. Of course, even Indian residents and domestic institutional investors are similarly pampered, but there has to be a mechanism to make them stay put and not rock the stock and currency markets with their untrammelled entry and exit. The author hopes that he has kickstarted the process of intense, intensive and dispassionate debate on this sensitive issue.
(The author is a freelance columnist for various publications and writes on economics, business, legal, and taxation issues.)
