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The Hindu Business Line

Of tax havens and P-notes


It is certainly difficult to spin a racy tome out of such dry subjects as participatory notes, foreign exchange management and the convoluted workings of international tax treaties. That's probably why Chartered Accountant M.R Venkatesh, when penning this book christened it "Sense, Sensex and Sentiments", tagging on the provocative subtitle - "The Failure of India's Financial Sentinels".

Despite its title, this is not a book about the behavioural quirks of the Indian stock market. Nor does it reveal secrets that indict Indian regulators. Instead, much of this book is devoted to chronicling how offshore tax havens provide a convenient parking ground for the large pool of black money from India and how FII investments into Indian stocks through the Participatory Note (PN) route, may allow such illicit funds to round-trip back into the country. Such flows, the author argues, create multiple evils. First, flight of capital deprives the country of funds that could be deployed in developmental work. The money leaving the shores may be diverted to drug-dealing, criminal or even terrorist activities. And finally, if it returns masquerading as volatile "FII'' flows, the same money could destabilise financial markets, trigger wild swings in the Sensex and create huge forex management problems for the RBI.

Battle with PNs
The key takeaways for readers from this book lie in its candid account of controversial subjects — global laws on money laundering, the working of tax treaties, the hawala route and how the wealthy subvert international Know-Your-Client laws. Largely free of legalese, the book juicy anecdotes to keep the reader going.

The highlight is the painstaking account of unequal battle that Indian regulators have waged over the years with FIIs such as Goldman Sachs and UBS in their efforts to identify the anonymous investors who invest using PNs to funnel money into Indian stocks. It is clear that regulators have not managed to enforce even a reasonable degree of accountability on FIIs that issue PNs despite this. That PN-routed FII flows have survived, despite the dangers flagged by a Joint Parliamentary Committee (as far back as 2001) and later the Reserve Bank of India and the Securities and Exchange Board of India, are disturbing too. So is the discomfiting trend of SEBI's punitive actions being frequently overturned on appeal or being settled through consent orders.

The regulators did act
However, none of the above instances provides the justification to dub India's financial regulators as 'failures', as the book repeatedly does. After all, it is globally acknowledged that it was RBI's extreme conservatism on capital flows and interest rates that kept India's financial markets relatively insulated from the US credit crisis. And SEBI did take the very unpopular step of imposing a salutary ban on PNs in October 2007; only to be forced to revoke it in October 2008 as the liquidity crisis threatened to choke off capital flows to industry.

The tendency of the author to launch scathing attacks on various 'adversaries', without giving credit where it is due could give readers the impression that the book is not balanced.. Sample this from Chapter 6: "SEBI has been vested with enormous regulatory powers….Yet when it comes to direct action, SEBI invariably acts like a frightened fawn caught in front of dazzling headlights on a highway." This, in a chapter where many pages are devoted to SEBI's persistent attempts at nailing large FIIs, even as its wings were clipped at every turn by the Courts or the Securities Appellate Tribunal.

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