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Stocks Boom: POLL FUNDING BONANZA, By Shivaji Sarkar, 4 April 2014 Print E-mail

Economic Highlights

New Delhi, 4 April 2014

Stocks Boom

POLL FUNDING BONANZA

By Shivaji Sarkar

 

India is in for a pleasant surprise in the midst of no sign of economic recovery and circumspection in the industry. Its stock market has started booming. The foreign institutional investors (FII) have been pouring in as much as they can in the stocks “sensing recovery” taking the Sensex beyond 22000.

 

The facts, however, may be different and not cheerful. It is election time. The candidates need money. With the Election Commission swooping down on all cash movements, it is possibly coming through the equity route. At least that is the hint the Reserve Bank has given recently. It wants to check participatory notes (P-Notes), a route that gives option for anonymous investment. There has, of late, been a surge in investment through the P-notes.

 

There is yet another way. It is known as private placement programme (PPP). This involves offering shares or bonds to groups of individuals. It also involves preferential allotment of securities. The operation is simple. It can be done by a donor to help an election contestant or deposits from a foreign bank could be routed to equities. Alternately, the contestant himself through hawala-like routes could send his money to an FII to invest in the stocks. The equities then are resold and money recovered. This is said to be an ongoing process, wherein detection is not easy. A number of transaction trails would have to be checked for a definite result.

 

In fact, the sporadic sensex boom through 2013 is attributed to this kind of transactions. Else why should FIIs risk their money in a sagging economy? This is what the Central Economic Intelligence Bureau (CEIB) is trying to unravel with the Directorate of Revenue Intelligence.

 

The preparations for elections had begun long back. The knowledgeable, be it political parties or key political players, manage finances through ingenious means to fund a high-cost campaign. The party treasurers and many wealthy candidates are assisted by financial experts to fund campaigns but keep off legal loopholes of the EC code of conduct or other laws.

 

Some fund managers accuse the low limit of poll expenses of a candiadte, now raised to Rs 70 lakh, for the malady. “Even if you send 5 lakh postcards to the voters it would cost Rs 25 lakh. Do you think anybody can contest an election in a constituency of over 10 lakh people for just Rs 70 lakh? In fact, some of the EC measures to include the cost of posters and banners in poll expenses force the candidates to look for devious methods. Just familiarizing the name of a candidate costs a lot. Transportation, voter slips, door-to-door and social media campaigns add to the costs. Unrealistic limits will create new dubious routes,” explains a party fund manager.

 

Mere white money and white expenses cannot fund elections. The rules, they say, have to be realistic and not just tailored by bureaucrats to suit public perception of morality. In fact, some of the largest chit fund operators, now facing the Supreme Court’s wrath, are said to have thrived with anonymous investments of some top politicians of UP and other States. Some of them have died and the operators have simply gobbled up that money.

 

It is not a new mechanism that the CEIB is trying to look at. The operators are much smarter than the bureaucrats. Those who know these operations closely say that while bureaucrats may detect the supposed “illegal” investments, it is they who suggest methods to legalise disproportionate assets of many a rag-to-riches politicians. In short, it is a pointer to the bureaucratic-politician nexus, which obviously comes for a price. Recall that it was perhaps this trail which made a Union minister, who reportedly lost the election in Tamil Nadu, be declared a winner eventually by a wafer-thin majority!

 

For the CEIB, 2013 had been quite significant. It detected Rs 2280 unaccounted income being allegedly routed through the PPP. Thus, P-notes and PPP are now being closely watched. The surge in such investments is undoubtedly for election purposes. Financial sleuths have detected 881 large suspicious transactions of Rs 10 lakh each through PPP. Besides, the Securities and Exchange Board of India (SEBI) is said to have increased surveillance.

 

A nation that has been vociferously debating curbing the black money trail has virtually ended up seeing more of it coming its way with each new vow to eliminate it. In 2010, US-based Global Financial Integrity, or GFI, estimated that $213 billion or about Rs 9.58 trillion (1 trillion equals 100,000 crore) had been siphoned out of India over a 60-year period ending 2008. But all that money is not lost, if one quotes Aam Aadmi Party chief Arvind Kejriwal, who says it shouldn’t be brought back lest it is misutilised by the Government.

 

He is wrong. Raymond W. Baker, Director of GFI, points out that the money “round trips”, or is laundered and brought back in the form of “investments”. And if there is one destination that is synonymous with the round trip, it is Mauritius, an island nation in the Indian Ocean that is the springboard for much of the capital inflows into India.

 

Unfortunately, the malaise is too deep-rooted. All the different sources point to an easy access of the stock market for either an entry or exit of big money. The small investors need to be wary of not only the stock market but also investments in instruments such as mutual funds (MF) of Aegon Religare type, an indirect route to equities. The National Pension Scheme (NPS) for government employees also is becoming another risky proposition for its direct linkage to the stock market. Most investments in MF and NPS have made losses. Each loss is a gain for an FII or benami (unaccounted) transactions.

 

It goes without saying that the stock market is turning people’s hard-earned money into black and putting the economy at risk. It is the people of the country who are suffering, as the stock market behaves in an awry manner. Possibly that also explains why inflation gallops despite numerous monetary measures by the RBI.

 

There is no easy solution. The nation needs to and in fact must discuss the entire election funding process. The propagators of Government funding must too realise that it is also not a solution. What is needed is simplification of many laws including those pertaining to the stock market, polls, income tax, highway tolls, FDI and a shift from penal taxation to a friendly system to prevent the white money from turning black. There should be no grey areas. ---INFA

 

(Copyright, India News and Feature Alliance)

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