The Finance Minister is planning a “big bang approach to capital market reforms” including scrapping of FII (foreign institutional investor) registration and steps to make India the preferred option for India Inc to raise funds, this paper reported on Friday.

The move to smoothen the inflow of foreign portfolio funds into India ostensibly aims to encourage Indian companies to raise funds in the domestic market. But the large over-subscription numbers for domestic IPOs (initial public offerings) shows that decisions to list overseas have nothing to do with FII fund flows. Many issuers of FCCBs (foreign currency convertible bonds) merely use the instrument to bring back their own money stashed abroad and alternate markets like AIM of London have become popular because the listing process is quick, requires minimal disclosures and fetches better pricing.

This means that along with scrapping FII registration, the FM will also have to tell the Securities and Exchange Board of India (Sebi) to dispense with its “observations” (IPO clearance process) and allow companies to access the market without any checks. We can then return to the heady days of the early 1990s when an orgy of fund raising followed the scrapping of Control over Capital Issues and finally killed the primary market and caused widespread losses to investors.

I would have expected that the FM would at least examine the quality of FII investment in India before planning to scrap the registration process. There are indeed hundreds of good quality FIIs who look for serious investment opportunities, but there are also plenty of others who are profiting from dubious tactics such as front running, price manipulation and financing deals.

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