India has witnessed an amazing boom in the stock market. Even the most optimistic would not have expected the Sensex to cross 20,000 so fast. Millions of people made gains hitherto unimagined. Millions of newspaper readers and media watchers felt proud as stock exchanges behaved like those in China.

The vertical climb was unique as compared to international markets which may have done equally well or even better but not in such a short time. The short duration in which the Indian market has achieved what it has makes it special. It took 20 years for the Sensex to cross 10,000 but the next 10,000 points were gained in just 20 months.

The total market capitalisation of Indian Companies' shares touched Rs 62,16,907 crore. If one asked an economist what was happening in the stock market, he would explain that the fundamentals of Indian economy are very strong, that nine to 10 per cent growth of India's GDP is second only to China; that the size of the Indian economy is ranked third in the world, that the credibility of Indian banks in the international arena is more than that of China, so on and so forth.

If one goes through the regional newspapers the real face of Indian economy comes out. The miserable conditions become visible. People live without food, habitation, sanitation, potable water and education. The conditions are pitiable. The islands of prosperity and success stories of Indian economy may portray a different picture. Both profiles of the Indian people are real.

Let us examine the reality of that dazzling profile. Why Foreign Direct Investment (FDI) is storming the Indian market? Experts say that there is little scope of proper return to investments in the developed countries. Compared to that, the Indian market gives more than satisfactory returns to investors. For them China, too, is a good investment destination.

But is it the entire truth? For that, we will have to go a little deeper. Almost a decade back, similar growth in market capitalisation was reported in Thailand, Malaysia and Singapore. It was termed as the East Asian crisis. A spark in the country's stock market in June 1997 in Thailand triggered the flight of capital from Thailand to America and Europe. The same happened to other countries like Singapore and the Philippines. It resulted in big disaster in economy of these countries and it took them years to regain their financial health.

George Soros in his book Crisis of Capitalism explained that during economic boom capital flowing from the center to periphery, has a tendency to return to its source. That resulted in collapse of these economies. A number of analysts have recalled that East Asian crisis at the time of FDI storming the Indian markets.

The present FDI inflow has a component of over 50 per cent in the form of P notes. What are these notes? It is investments by Foreign Institutional Investor (FII) through off shore derivatives such as participatory notes, equity linked notes, capped return notes and participatory return notes. A few things must be understood about P notes. In India even if you put 10 shares, you have to fill numerous forms to satisfy the company's "know your customer" appetite. But in P notes the customer is invisible, only the company, which has issued the note, is known. Through this instrumentality billions of rupees have come. First, it is discriminatory and insulting the Indians. Second, it gives all types of unscrupulous investors to play in our stock market, including ill-gotten money, terrorist money, drug money and black money laundered to foreign destinations which again returns to India.

This is a very serious matter. We can recall National Security Adviser MK Narayanan cautioning SEBI and stock exchanges to guard against such and other similar money taking the stock exchange route. On February 14, 2007 he said that manipulating of stock exchanges is the new modus operandi used by terrorists to raise funds for their operations. "Isolated instances of terrorist outfits manipulating the stock markets to raise funds for their operations have been reported. Stock exchanges in Mumbai and Chennai have, on occasions, reported that fictitious or notional companies were engaging in stock market operations," he said

Narayanan is not an ordinary man. He does not open his mouth unless he has credible information.

Delayed responses of Finance Ministry, SEBI and the stock exchanges might have already jeopardised India's security. Even the steps taken to regulate P notes look half-hearted, as it will continue to play in the markets for 18 months though no new P notes will be allowed. As the quantum of funds is so huge even a fraction of it might be big enough for terrorist activities.

Courtesy: www.dailypioneer.com, November 05, 2007