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April 18, 2000

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The Rediff Business Interview/Raman Sidhu

'FIIs are most active, but they aren't the major players'

When income-tax officials slapped notices against certain foreign institutional investors early this month, for evading taxes under the Mauritius double-tax avoidance treaty, the stock market went into a panic. The Sensitive Index of the Bombay Stock Exchange plunged to record its second biggest fall ever of 363 points. HSBC, which operates a $ 250 million fund, told its investors that it was suspending its operations.

On April 5, government came out with a clarification that ended the controversy. Raman Sidhu, director, HSBC Securities India, spoke to Rajesh A on the controversial tax issue and other things. Excerpts.

HSBC has been among the first foreign institutional investors to come out officially against the tax authorities' notices on the avoidance of double taxation issue. Your comments.

As far as the Mauritius issue is concerned, we have read the reports coming in the press on government's clarification. We are formally waiting for an official communication from the government. If the clarification is in line with what we have been hearing and reading in the press, then I am quite sure that HSBC will review the situation. We are yet to see a formal clarification by the Central Board of Direct Taxes and if the clarification is in line with the government's official position, within 24 hours of receiving the official clarification, we will restore the fund. The fund's operations stand suspended.

You mean to say the fund has not resumed the operations even after government's official stand?

That's right, the fund has suspended the operations. Whatever we have read in the newspapers are encouraging.

There is a view that the FIIs are holding the government to ransom by pulling down the market the way they did after the tax authorities sent notices to a few FIIs...

I am not competent enough to speak on behalf of other FIIs. But, whatever our reactions were, they were based on a considered view. HSBC group has been in India longer than any other financial services and banking group in this country. We have been here for more than 146 years. We have taken a long-term view. We have been expanding our operations in India from the beginning.

Do you subscribe to the view that Indian stock markets are heavily dependent on the FIIs, especially after the way the stock markets behaved on "Black Tuesday (April 4, 2000)"?

m I do not believe that FIIs are major players on Indian stock markets. They are certainly the most active players. FIIs are relatively smaller players vis--vis domestic institutions.

Given the fact that FIIs are not the major players in the market, how does one explain the huge fall in share prices on Black Tuesday?

The crash was the result of a combination of factors. We had the issue of Microsoft (anti-trust case). The market was expecting a compromise settlement.

There were clear indications that there would be a compromise settlement (in the Microsoft case). That didn't happen. There has been a revaluation of infotech stocks, particularly those listed on tech-heavy NASDAQ. That also had an effect on the market and the stock prices plunged on NASDAQ the previous day. And, of course, the notices by tax authorities on FIIs also had an effect in India.

Indian stock markets have been driven up in the last few months basically on the rally by Indian stocks listed on NASDAQ. If there is a fall in stocks listed on NASDAQ, it has to have a ripple-down effect on the Indian stock markets. I think, too much is being read into the whole issue (of FIIs creating panic on the bourses).

HSBC had forecast correctly that the BSE Sensex would touch 6000-points by March. What is your forecast for the next few months?

Yes, we had forecast the index to touch 6000-points. We will review our outlook every quarter.

How do you think the Indian economy is doing?

As I told you, we have been here for the last 146 years. As a group per se, we remain extremely bullish on India. India happens to be one of the ten top regions in the world for HSBC. We are looking at the US, Canada and Hong Kong in the top 10 regions. Fundamentals are strong in India. We believe that the capital goods industry has turned the corner. Cyclicals are looking good. Balance of Payments and currency reserves are healthy enough. There seems to be optimism all around.

Do you think India is going in the right direction as far as liberalisation is concerned? Four former prime ministers have termed the divestment programme as unbridled privatisation.

Ever since India undertook liberalisation programme under the then prime minister Narasimha Rao in 1991, there has been a consensus on the opening up of the economy. All governments that came to power since then have been moving ahead with liberalisation.

Yes, as far as divestment or privatisation is concerned, we are concerned that it is not going at the pace it should have. We were enthused that a new divestment department was set up by the government. We were also enthused by the fact that other steps were also taken to strengthen the hands of the divestment department. But actions speak louder than all words.

At the end of the day, the privatisation programme will be judged by how many success stories the department produces on the day. Modern Foods was a very small company. Its good thing that it happened. But we are still waiting for IPCL, we are still waiting for ITDC. A former prime minister of the country had gone on record on the floor of Parliament saying 76 per cent stake in ITDC should go out of government hands. It still hasn't happened.

But, bear in mind that ours is a democracy. There is a coalition government at the Centre. It has to carry the partners. The British privatisation programme is the most successful example today. It has taken them 21 years. They have privatised practically everything including nuclear energy. There are only very few sectors left to be privatised like the post-offices. But even the post-office, the bits of the business are being privatised. That's taken them over 21 years. So let's not get worried over the issue too quickly.

Why do you think that divestment process is being dealt with in a slow manner?

Lack of some political will. Besides, we don't have a clear-cut exit policy (for employees). There have been delays in the past because government was offering less than 51 per cent stake in some of the less profitable or loss-making PSUs. If you are a prospective buyer, will you takeover all the downside without having any control over the business? I don't think any commercially minded businessmen will do that.

HSBC was given the mandate to find a strategic buyer for ITDC. Midway through, you were changed and now government has appointed Lazard Capital to oversee ITDC sell-off. Does this cause concern to you?

Yes. In fact, we regret that this has happened. We thought that our combine, HSBC and HVS (Hospitality Valuation Service), which values hotels and leisure business globally, would do the job. We were shortlisted and given the mandate. Then, the Disinvestment Commission said that this should not be so as they had already given recommendation on the ITDC sell-off.

The commission said the global advisors should be appointed only to implement its recommendations. So, it was felt that there was a change in terms of recommendations. Fresh bids were called and we bid again. We were shortlisted for the ITDC mandate. But we could not get the mandate as the changed government policy meant that the lowest bidder will get the mandate.

Ours was not the lowest bid. It is interesting that even in the case of Hotel Corporation of India, we were shortlised. That means, in all the three cases (ITDC, ITDC-2 and Hotel Corporation), they felt there is a very strong combine which could work in the best interests of the companies.

Because of this, we could not get the mandates. HSBC was the only one firm shortlisted on all three occasions. We can bid only at a price at which we could make some profits.

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