CII''s prescription for markets

Mumbai: On 16 September 2001, the government decided to raise the foreign investment limit in the shares of Indian companies from 49 per cent to 74 per cent. But the Confederation of Indian Industry (CII) has suggested that the government should consider increasing the same to 100 per cent.

Allowing foreign institutional investors (FIIs), overseas corporate bodies (OCBs) and NRIs to invest up to 100 per cent in the equity of any listed company will go a long way in improving the sentiments on the bourses, CII feels.

In a statement, CII said: Eliminating the 49-per cent limit and allowing FIIs, OCBs and the NRIs up to 100 per cent in the equity will go a long way in lifting the Sensex from its present level. There can be a cap of 10 per cent to 15 per cent on any one single entity.

CII feels the demand for Indian stocks will rise as this one single step will increase the free-float of Indian scrips and will raise India's weightage as an investment destination. CII has submitted to the government a four-pronged strategy to boost the secondary market. In addition to the above, the others are:
1) evolving a safe system of financing margin trading;
2) encouraging banks to lend to market intermediaries against shares as collaterals;
3) removing margin requirements for FIs and FIIs;
CII says the ban on badla and other deferral products resulted in a crisis of liquidity and a sharp drop in volumes, which, coupled with a slowdown in the economy and the freeze in US-64 unit sale, led to the crash in the markets. Options and futures trading in their current form will not be enough to provide the much-needed liquidity to the system.

Commenting on creating a safe system of margin-trading, CII says: "The system should exclude badlas negative features. The key for such a system to succeed is to ensure that financiers of margin trading such as banks, mutual funds and private investors should not possess stocks except in the event of default so that they cannot use hypothecated stocks for short-selling.

About lending against shares as collateral, CII has suggested: The RBI should allow lending only against A group and B1 group shares on a mark-to-market basis, keeping the margin limit at 25 per cent to those intermediaries which are adequately capitalised. In case of values falling, banks should immediately sell the shares as is done in international markets.