The claim, at first, was that restrictions on participatory notes (PNs) were motivated by a desire to reduce capital flows. But the government quickly recanted and sang another tune. It now claimed that PNs make things opaque and restrictions on PNs were necessary to increase transparency. This position betrays a lack of understanding of how global finance works. Its main focus is the business of slicing and repackaging risk so as to link up the needs of investors to the needs of firms. In every mature market economy, there is an active business which involves selling customised solutions. Global financial firms sell customised solutions, and then turn to the the stock markets to sell off their risk. This process of converting the raw materials from the public market into customised solutions is healthy and desirable for India. It constitutes a value-added service which ensures that India’s requirements for capital are served at lower costs.

The correct response, therefore, should have been to foster a domestic business of customisation which could try to compete against overseas providers in serving global needs. Instead, the heavy-handed response of over-regulating PNs has been preferred. Similarly, attempts at banning hedge funds display ignorance. Hedge funds are welcome in all globalised financial markets. All mature markets are able to handle customisation and hedge funds, and still deliver a well-regulated securities market. It is only in India that the government is hyper-sensitive about customisation and hedge funds. India needs to figure out the direction it is headed in. The steps taken and the statements made on PNs seem to suggest that the ambition to make India a high-growth, modern economy with a modern financial sector is an empty one.

... contd.