For almost 10 days, the sensex rode a rough rollercoaster all because of one thing: the uncertainty over use of participatory notes by foreign institutional investors (FIIs). The bellwether index fell from a high of 6130 on January 20, 2004, to a low of 5597 three days later, before gaining 222 points on SEBI's clarification that P-notes could continue to be issued, except to unregulated entities (read those based in countries with no recognised regulatory bodies). With the result, the Sensex closed at 5816.64 on January 23, and investors went on a three-day weekend feeling happy.

But what are P-notes? P-notes are derivative instruments issued to foreign investors against underlying Indian securities. Typically, the buyers are foreign investors who want to participate in Indian equities, but have not registered as an FII. P-notes differ from FII investment in that the choice of equities is made by the investor and not the FII. So, it was feared that entities barred from directly investing in Indian stockmarkets may use P-notes as a backdoor.

SEBI's move-made to strengthen its 'know-your-investor' regime-now makes it mandatory for FIIs who have issued P-notes to unregulated entities to wind down their exposure. Besides, the FIIs will have to refrain from issuing P-notes to more than one layer of investor.

Some marketmen were also scared because P-notes had begun to account for a large chunk of FII investment. For example, as on September 30, 2003, P-notes accounted for Rs 19,125 crore of the total outstanding FII equity investment of Rs 77,404 crore. But on November 30, 2003, the figure had risen to Rs 21,179 crore compared to FII investment of Rs 84,762 crore. But with SEBI directing FIIs to keep full details on investors and make it available on demand, the black money problem should get taken care of.

That means the quality of money coming into stockmarkets will only improve in the days to come, making the rally that much stronger. Besides, transparency may help bring the small investor back into the stockmarkets.

-Narendra Nathan

NEWSMAKER
M.V. Subbiah, 65

M.V. Subbiah: Setting the standard

When you are the Chairman of a family-owned business, it takes both courage and commitment to let go. Courage because it isn't easy cutting yourself off from a business that you have helped nurture, and commitment to abide by the decision once it is made. On both counts, M.V. Subbiah scores full marks. In April 2001, three years ahead of the due date, he stepped down as the Chairman of the Murugappa Group, making way for Infosys co-founder N.S. Raghavan, a non-family member, to head the Murugappa Corporate Board. And last fortnight, Subbiah once again demonstrated his commitment to the corporate governance rules that he himself introduced in the group in the late 90s, by deciding to retire from all group executive positions upon turning 65. Ever the knowledge-seeker, Subbiah intends to go on a sabbatical to study history of family businesses.

STREET WISE
Beyond The Mirage
The feel-good factor is real. Unfortunately it touches just the tip of Indian society.

Last fortnight, I met up with the Boston-based Partha S. Ghosh, once a partner with McKinsey, and now regarded as a "creative problem-solver". Ghosh was on a two-day whistle-stop tour of India, during which he gave a few lectures and met up with Indian head honchos. He also found time to tell me that free market capitalism isn't a perfect panacea for India (coming from an ex-McKinsey guy this sounded too cool!). His reasoning is simple: It works only when knowledge and capital can be easily accessed, and India isn't brimming over with either.

I ask him for his view on the feel-good factor. "Yes, there is a self-satisfied feeling in the top echelons of Delhi, Mumbai, Bangalore, Hyderabad. But it doesn't exist in other towns." The man then goes on to systematically chip away at the many illusions many of us cherish with respect to India Shining.

Sample 1: Becoming backoffice to the world is great, but just 2 per cent of the population benefits. Recent successes on that front could blind India to the "mega-possibilities of the future".

Ghosh advocates a brand of capitalism that's adaptable to the Indian market-he calls it "circular capitalism"-in which value-addition is circular, inclusive of all Indians, and revolving around its strengths, just one of which is agro-based industries.

Now this is no bleeding heart story. There's plenty of money to be made for corporates willing to take that big leap (Ghosh himself has invested in a fuel cells company, and touts them as a possible answer to India's power problems). To the CEOs he meets, Ghosh suggests a "two-tier strategic management system" (the McKinsey touch!). The first tier involves maximising opportunities and profits. But at the same time they should also be looking to give birth to the next generation of services and industries.

Sample 2: Did you know, goes Ghosh, that ballet in Russia is a billion-dollar industry? My jaw drops, but I am left even more open-mouthed when the man tells me that India's culture-based industry could be worth $100 billion. "Baul music of Bengal, Bhangra from Punjab, can be packaged and promoted abroad." A pipedream? Perhaps. But Ghosh's concept of circular capitalism ever does show even the remotest signs of working, Dr Feelgood would have finally arrived.

-Brian Carvalho

Only Half Open
Not all easing of FDI is that.

FM Jaswant Singh: He's been on an overdrive

Since this is the season of feel good, all kinds of measures are masquerading as nifty reform without the bluff being called. Until now, that is. So, here we go. Let's start with the government's decision to up foreign direct investment (fdi) in private banks from 49 to 74 per cent. The catch? The voting right is capped at 10 per cent, which means any foreign investor who buys into a private bank will have little say in what the bank does. So, why would anybody want to invest? Here's another example of bureaucratic legerdemain: A 100 per cent foreign investment is allowed in the petroleum sector (as also in scientific and technical journals), but the much awaited relaxation of FDI limit in telecom from 49 per cent to 74 per cent has been shelved, for the third time, ostensibly in the interests of national security. Never mind that telecom is a capital- and technology-intensive industry where access to foreign equity capital may be important to fight fierce price wars. Worse, the sop was promised to GSM players who have been affected by the turning of limited mobility into full-blown mobility through unified licensing. The real reason why the move has been scuttled has nothing to do with concerns of national security, but everything to do with Sangh Parivar, or some corporate lobbies. How is the petroleum sector any less a strategic industry than telecom? We are still trying to figure that out.

-Sahad P.V.

What A Rush
Cairn Energy strikes black gold in Rajasthan.

Know why gold diggers rarely call it quits? Because the more you dig, the better your prospects of finding gold. Just ask Cairn Energy. Seven years ago, strategic investor in oil exploration venture in Rajasthan, Royal Dutch Shell, sold its 10 per cent stake to Cairn after failing to find any oil despite having spent Rs 200 crore over 10 long years. Circa 2004, it is Cairn that's laughing its way to the bank. On January 19, 2004, it announced that it had struck oil in the Barmer district of Rajasthan, with an estimated reserve of 450-1,150 million barrels of oil. Earlier, in February last year, Cairn had managed to hit another oil geyser, but with a smaller in-place reserve of 20 million tonnes. The January find promptly upped Cairns market value on the London Stock Exchange to £665 million (Rs 5,523.18 crore), and when BT went to press the Cairn stock was quoting at 632 pence (70 per cent higher than its pre-find level of 370 pence).

What does the discovery mean for India's oil-deficit economy? For one, it will cut the country's oil import bill of about Rs 84,400 crore. For another, as Petroleum Minister Ram Naik commented, it will help improve the "perception of hydrocarbon prospectivity in India". That means the investments in the 70 blocks given out under the New Exploration Licensing Policy (NELP) for exploration could be much higher than $3 billion (Rs 13,800 crore). "It could easily touch $7-8 billion (Rs 33,600 crore-Rs 36,800 crore)," says Avinash Chandra, Director General of Hydrocarbons.

But the greatest benefit would be in terms of exceeding the Tenth Plan target for the oil find. The targeted 180-200 million tonnes of oil and oil-equivalent gas now seems like a cinch. As for Cairns, it has already announced that it will make many more acquisitions in Asia, especially in India and Nepal. And as for the Shell executive who made the decision to sell, well...a good place to look for him may be Siberia.

-Ashish Gupta