This recommendation was probably made in the midst of the monster Bull run that took the benchmark Sensex soaring past 12,000. At that time, room for a contrary view may have cooled the fervour and reduced the savageness of the subsequent correction that chopped a couple of thousand points from the Sensex. Is it still a good idea when the market is volatile and prices continue to drift downwards?

The Reserve Bank of India (RBI) has long expressed concern over short-selling on the grounds that application of Know Your Customer (KYC) norms is difficult in connection with FIIs. This is a fact. Large chunks of FII investment is really Indian money stashed abroad coming back through hedge funds. Many of these hedge funds are managed from Singapore and London by discredited stock brokers and fund managers.

Although Sebi rules demand disclosure of beneficial ownership by FIIs, anecdotal reports suggest that the regulator has no clue about the billions of dollars of tax-evaded Indian money that is invested in the Indian market as tax-free FII investment. Many of these investors are interested in maximising profits and it remains to be seen if they will exploit the short-selling rules to manipulate markets.

Also, the role of hedge funds is a worry around the world. Charlie Munger, partner of the legendary Warren Buffet is another critic of hedge fund managers. Last week, he called hedge funds a ‘‘ghastly culture’’, accused hedge fund managers ‘‘of doing anything and everything to keep fees high and profits flowing’’ and warned that ‘‘there will be a terrible scandal in due course’’.

... contd.