The Reserve Bank of India's decision to let foreign institutional investors investing in debt to hedge their forex exposures is an example of excessive caution on the part of the central bank. The central bank knows very well that FII investment in debt has been marginal, and the impact of allowing hedging only in debt will have hardly any impact on the forward market.

If RBI really wanted to make an impact on the forward market, it should have allowed FIIs to hedge their equity exposures. That would have led to an increase in forward premia, helping exporters.

Reports indicate that there was a division of opinion within the central bank on the issue of allowing FIIs to hedge, and the decision to limit exposures to debt is a typical compromise. If the government is serious about encouraging foreign investment in the debt markets, withholding tax should be withdrawn.

So far as the decision to hedge debt exposures is concerned, a number of clarifications would be in order. Would the FII have the freedom to cancel forward bookings? For instance, if a debt fund is wound up, or if the amount invested is scaled down, the FII should be allowed to cancel the booking, just as an importer or exporter is allowed. Since the amount invested varies from day to day, this may require FIIs to be allowed to freely book and cancel.

Another practical requirement is that authorised dealers should be allowed to provide forward cover on the basis of the certificate by the FII, as it is impossible for the authorised dealer to know to what extent an FII is invested in debt on a day-to-day basis.

100% MNC trading firms

In a move that could have far reaching consequences for Indian companies, the government is reportedly contemplating allowing MNCs to set up 100 per cent trading firms in the country. This will be beneficial to the consumers, which is what liberalisation is all about.

Though the amount of foreign direct investment is likely to be negligible as trading firms operate with a very low capital base, consumers will now have access to new and quality products from multinationals.

There is however, a threat that companies already having a presence in the Indian market would hive off their high margin products to the 100 per cent subsidiary. Products that have been nurtured in the Indian market with public money can see their way into such subsidiaries.

MNCs like Smithkline Beecham have already made their intentions clear by charging a high royalty on Horlicks, soon after being disallowed to set up a 100 per cent subsidiary.

Similarly, Pfizer has transferred its largest selling brand -- Becousules to a Pune-based company which in turn is paying a heavy technical fee to Pfizer Inc. In other words, if the policy comes through there will be some major reshuffling in the MNCs product portfolios.

As for Indian companies, those in the chemical industry will be one of the worst hit. They are still licking the wounds of a 20 per cent reduction in import duties within a time span of eight months.

The cost of manufacturing chemicals and petrochemicals is believed to be almost half as much in developed countries and some of the developing countries. With MNCs setting up trading companies right under their nose, smaller and medium sized companies will have a tough time trying to survive.

Asian Paints

After waiting patiently for five years and ignoring any number of insider trading cases, Sebi is busy investigating HLL-Brooke Bond merger. Yet a somewhat similar event has been completely ignored. Sebi has been totally silent on the Asian Paints deal.

Consider the facts of the case. In the AGM held on August 8, the shareholders were told by the promoter that he had sold off his stake and that this move was on the cards for quite some time. The broker of the deal, DSP Merrill was approached on July 30 and the deal was concluded on July 31, 1997 (Thursday).

Without going into the controversy as to whether the buyer was aware of the identity of seller, the fact remains that the news of one of the promoters getting out was known only on Sunday, August 3. For at least two trading days, the price sensitive information that one of the promoters is selling its stake was known to a broking outfit.

The last trading day on BSE may be Friday but on NSE it is Tuesday. The price movement, once it was known as to who was getting out, is history.The insider trading law does not require a promoter to disclose his decision to sell his stake in the company beforehand.

The decision to get out of the company by a promoter can't be taken in a day. Good governance demands that shareholders are informed at least before concluding the deal.

It is difficult to believe that the other promoter groups were unaware of the developments and yet no communication was sent to shareholders. The shareholder awareness in India can be judged from the fact that in spite of a promoter selling his stake without informing shareholders, and thus the management composition of the company being changed, nobody expects that shareholders should be informed.

SEBI needs to put into place rules which state that all trades made by insiders should be reported to the market regulator immediately. When the change in shareholding involves a management change, prior intimation would be in order.

EMCEE (with contributions from Shishir Asthana and Urmik Chhaya)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.