Is the SEBI getting populist??

Yes..it does seem so given the almost complete U turn on P notes restrictions just issued an year ago by the erstwhile renaissance man of SEBi Mr.Damodaran. The restrictions were placed in the first place to improve transparency and disclosure norms of FII's, hedge funds and other Overseas institutions wanting to participate in the Indian stock markets. This aim was to prevent re routing of black money/illegal money into India from the so called tax havens, improve tax compliance and to keep a tab on the nature and veracity of the "hot money" flowing in from across the shores. The KYC norms imposed were a blessing in disguise and comforted the regulatory agencies of the country over the fact that terrorist money would henceforth find it difficult to penetrate Indian markets. Though these P note restrictions, when imposed at a time in Oct 07 when equities were close to their peak, were considered draconian (on par with capital controls)by market men, it was a well thought out measure with long term positives for our markets. The aim of the then SEBI chief was to protect the lay retail investor from violent gyrations in the stock market on account of sudden outflows of hot money for reasons best left to the P note holder's conscience.

One year down the line, we are in Oct 08 and those restrictions are no more valid. The whole world has changed in a span of 12 months. Bulls have become violent bears resulting in wealth destruction across the world. Banks have collapsed, the financial system is in systemic crisis.Fund flows into emerging markets have dried out completely given the global liquidty crunch and risk aversion. Outflows to the tune of $12 billion have eloped with the FII's from the Indian shores in a span of 8-9 months. The dollar is reverting back to the US. No more carry trades, currency swaps or exotic derivatives. Deleveraging is the new universal mantra for fund managers.

Given this background, Indian markets have collapsed close to 50% and are back at 2005 valuations. With elections looming large, the politicians and market men alike needed a scapegoat. SEBI became their whipping boy. Though every man worth his salt knew the true reasons for this market collapse driven by the credit crisis, excessive valuations and leverage, no soothsayer foresaw the magnitude of this fall. Obviously the intensity of this fall has not spared anyone's portfolio. Therefore, a conjectured and concocted logic started doing the rounds that it was SEBI's P note measures implemented last year that led to a fall of this magnitude for an economy growing at 8%p.a. The restrictions required sub accounts of FII's to stop issuing fresh P notes and provided for existing P note transactions to be winded up within a timeframe of 18 months. Most FII's were long India in 2007 and therefore gave room to assumptions in certain sections of the market that these series of outflows witnessed now is on account of P note unwinding. This concocted logic maybe true but funds always flee during times of crisis with or without capital controls. All the emerging markets have fallen 40-50% along with India, therefore this logic doesnt hold good. Ironically its been the US that has outperformed other global markets even on the downside. The place that has been the foundation of greed has done well to limit its losses compared to emerging markets. Just goes to show how dependant emerging markets are on foreign fund flows. Clearly the dollar is going back to the US.

SEBI has failed to display regulatory forbearance. It has panicked and played to the gallery sacrificing the long term interests of investors. This act of SEBI is akin to a trader cutting down his positions on account of margin calls. SEBI too has become a momentum player