The swine flew - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
The swine flew A  A  A
1 JUNE 2009

When you land in China, they send 2 teams of medical crew wearing spotless white attire from head to toe, looking a bit like astronauts heading towards the rocket for a lift-off.

The silent crew parade the aisles, examine your eyes and flash a beam on your forehead to check your temperature. They are looking for symptoms of swine flu.

Only after every passenger has been checked and approved, they allow the pilot to move the plane to the parking gate and offload the passengers.

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You land in India and we are back to Indian-ness: passengers coming down two escalators and one flight of stairs quickly fill up a make-shift queuing system. Within minutes, the continuous stream of people coming down the escalators cannot get off - the space ahead of them is a stationary wall of people. A lady on crutches falls - the escalator blades disappear from under her feet and she has nowhere to stand.
There is chaos.
The airport staff looked on - and did nothing.
I alert them. "We will tell the management" they respond with an accusing voice.

Once you get to the people behind the desk with your medical form, they stamp it - without even looking up. You then proceed to immigration. And soon you are cleared to officially enter India.

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If you had swine flu, the Chinese would catch you.
In India, the swine flu would catch us.

China, said a friend, has learnt from its mistakes.
He was referring to the SARS epidemic that reached frenzy in March, 2003. When the medical team from the World Health Organisation landed in China to inspect the patients, the hospital administrators bundled all the affected SARS patients in ambulances and made them circle the city.
The WHO inspectors found nothing in the hospitals.
China got a clean chit.
But the Chinese ended up living through the horror of SARS.

Do you think, my friend continued, it is a coincidence that WHO is the only international body that is now run by a Chinese? China really wanted their nominee as head of WHO - Dr. Margaret Chan. And, within China, there are only two ministries that are run by people who are not from the Communist Party: the Ministry of Health and the Ministry of Science & Technology.

Having made a mistake, the Chinese gulp a bit - and then go on to ensure it does not happen. So China will have fewer cases of swine flu, I guess.
India will have more cases of people’s clothes, shoes, and limbs stuck in escalators as they queue up to go through the motions of a useless medical "examination".

Pigs on the wing
But, no, this is not about swine flu - but really more about the people that flew out of the Indian stock markets in the year 2008.

The "P-Note" investors - the sub-set of foreign institutional investors (FIIs) who have caused havoc in the Indian stock markets on the way up in the year 2006 and 2007 - and on the way down in the year 2008.

And, no, "P" is not an abbreviation for "pig". J

Table 1: Foreign flows turn positive after the sell-off in CY 2008 - but most of it came in May
Period Foreign Activity
(US$ m)
Local Fund Activity
(US$ m)
(US$ m)
Change in BSE-30
TRI in that period (%)
CY 2003 6,940 93 7,033 +86.30%
CY 2004 8,958 -261 8,697 +23.10%
CY 2005 10,896 3,089 13,985 +42.20%
CY 2006 7,994 3,442 11,435 +53.30%
CY 2007 17,235 3,121 20,357 +68.50%
CY 2008 -13,136 2,037 -11,099 -60.70%
Cumulative 38,888 11,520 50,407 231.10%
2009 YTD 2009 4,000(est) 125 (est) -93 +56.78%
CY = Calendar Year;

These flows (Table 1 above) represent the total net foreign money entering the stock market. On average, the foreign money flows are 4x those of the money flows from the domestic mutual funds.

However, we don’t know what percentage of this foreign money flow belongs to "P-Notes".

The P-Notes are a strange animal in the Indian capital markets.

As an Indian, if you want to buy shares, the government wants to know everything about you.
As an Indian, if you wish to buy a mutual fund, the government wants to know everything about you.
If you are a US, European, Japanese pension fund; a university endowment; a charitable foundation; then the government wants to know a lot about you.

But if you are a P-Note holder, heck no one wants to know who you are!

Foreign investors who have a long term interest in investing in India - and by "long term" I mean a minimum 5 year time horizon (if not twenty and thirty year time horizon) - have not yet come into the Indian stock markets in a big way.
I know this because some of them are my clients.
And I meet many of these long term investors many times in a year.
They "genuine FIIs" (long term pools of capital) painstakingly fill in the FII application forms and sit on the plane as the Indian authorities check them to ensure they are sound people.

Can your paanwallah vouch for you?
The P-Note pool of money - hot, short term money - that gets India exposure via "Participatory Notes" does not even have to fill in that health examination form. Their broker fills it up and confirms they are good people!

Imagine an airline crew in Shanghai airport vouching that the passengers are not affected by swine flu - and signing the form on their behalf. The Chinese would take the crew out of the plane and shoot them or send them to the hinterland.

In India, we worship these unknown pools of capital - and shoot ourselves in the foot.

Finance Ministers of this country have, time and again, made trips to Tokyo, Hong Kong, Singapore, London and New York to pay homage to these great hedge fund and P-Note owners.

Rather than being suspicious of short-term money, India welcomes it. We don’t seem to understand that we need pension fund money to build India’s economy over the long term.

Our Indian ministers have probably never visited many of the pension funds. They generally don’t sit in exciting cities. And the brokers don’t really want those pension fund folks investing in India. Because they buy shares and hold them for 5 years or more, the brokerage commissions will collapse and the brokers will be out of jobs.

As was yesterday, so will be tomorrow
Unlike China, India is not willing to learn from its mistakes.

When questions are asked about P-Notes, the treatment is similar to that of the ambulance incident with the SARS affected patients.
We will ooh, and aah, and take the discussion to some Swiss Bank link or to a discussion on building a world-class and open capital market.

Our intellectuals mislead us and get caught in their own web.

After the election of the Congress-led coalition, many commentators and representatives of the intellectual community came on TV and said, "We hope this new government will allow higher foreign equity ownership in insurance companies".

Why? Pray, why?

Because, they said solemnly, India needs long term capital to sustain its development.

I was laughing - and crying.

It is true that India needs long term capital.
But by what magic will a Bharti-Axa insurance joint venture in which Axa owns, say, 51% or 76% (and not the existing 26%) change anything?
The insurance policy written by Bharti Axa (or any insurance company) is still sold in India to Indians.
Indians pay their premium in Indian Rupees.
It is this Indian Rupee premium income from our pockets that will come into the hands of the fund managers of Bharti-Axa (or any insurance company) month after month, for decades. It is this capital that can be used to build infrastructure.

If Axa owns 51% of the Indian joint venture - it only means that Axa will now get 51% of the profits of the joint venture. It has zero - yes, zero - impact on how much extra premium Bharti-Axa can collect from its Indian clients.

See how they have spread a lie with their constant TV chatter?

And then - this same set of people - go about saying that banning P-Notes is a bad idea.

On the one hand, they say India must have long term capital and yet - with a very straight face - they want the Indian stock markets to be reliant on short term capital via unknown pools of P-Notes.

Having seen the Indian election results, the P-Note owners are now ready to head back to India to ride the gravy train - and add their own flavour to it by sloshing around playfully with their gambling money.

P-Notes need to be banned.
The Reserve Bank of India wrote that in December, 2003.
They were finally in a limited ban and phase out by October 2007.

Dr Reddy was out of the RBI in September 2008.
By October 2008, P-Notes were back in action.

We are back to the future, and looking at an ugly past
India should only accept long term foreign capital via "genuine" FIIs.
This is not about making the markets a more "perfect" place and advocating "price discovery".
Unitech was quoted at Rs 550, then at Rs 20. All in one year. What was the benefit of that "price discovery"?
If there was no P-Note money maybe the price would have been Rs 300 at its peak and Rs 50 at its low. Maybe.

Maybe, but what difference does it make if speculators in their greed did not discover that Unitech can trade at Rs 550?
And those owners of long term capital took Unitech’s share price to "only" Rs. 300?
Or those speculators, in their fear, did not discover that Unitech can trade at Rs 20?

Speculation and price discovery is not an end in itself.
Markets are not gods to be worshipped.
They are created to help an economy reach its goal.

And, yes, India should not change its foreign ownership limits of insurance companies - at least not with the false argument that it will help generate more long term pools of capital. Call a spade a spade and say that India should allow Axa to enjoy the fruits of its joint venture with Bharti.

But, in India, we will continue debating and discussing and throwing intellectually stimulating arguments to explain why what we did in the years 2006 and 2007 was not wrong - and therefore there is no need to learn from the past.

Because the "past mistake" was not a "mistake", it was just an event in time that occurred and had to do what it had to do.

I stand by what I said in October 2008 - and reiterated again after May 15th - one can make a case for the BSE-30 Index to head back to a new peak of 21,000 by June 2010.

A better economy, better company results - and higher FII flows are all positives for the market.
It could happen.

But if P-Notes are a part of that rise - god help us. Because some event in the US will frighten the owners of short-term capital and then we will see how pigs can flap their wings.

Swine flu or swine flew - I don’t know which one is more frightening.
But India is vulnerable - and could be attacked on two fronts.

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Quantum Long Term Equity Fund Quantum Gold Fund
Quantum Liquid Fund
Why you
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An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Note: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt Ltd and Quantum Asset Management Company Pvt Ltd.. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited. To write to Ajit, please click here.

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15 Responses to "The swine flew"


Jun 6, 2009

The media needs to use its influence to have this charade stopped at our airports. The staff who are supposed to check the passengers for flu do not even look up, they simply stamp the forms and stack them up. This is horrendous. Can we get this Great Indian Tamasha stopped somehow? That way, we would appear to be bold, and depending on the almighty to protect us; but this way we make ourselves look like jokers to everyone - ourselves and foreign.



Jun 4, 2009

read the article and the comments as well .what i feel is there is no point in putting the blame on the politicians .the most imp reason why our country is in a state of mess is becoz of us . the so called JANTA.
we are the ones who elect these politicians to the office .if each one of us takes up the responsibility of voting only for the deserving candidate than we very much can shape the future of our country which no doubt will be glorious. also i feel that people like Mr Dayal should come together as a group and not only make the AAM AADAMI aware of such things as P notes but should also let the people know how they can help the country in dealing with such matters as most of us are not at all aware of what we can do .



Jun 4, 2009

Great article. I enjoyed the last line a lot. I think that Jesus has said "Do not through Pearls before Swine". They would never appreciate the pearls. Telling the airport authorities about courtesy and concern may amount to the same thing.


Manoj Kumar Majumdar

Jun 4, 2009

Brilliant analysis, highly informative, must be read by our policymakers. It is time that we Indians wake up and realize that foreign investors do not come to here to contribute towards our growth, they just want to make profits out of their ill-gotton funds.



Jun 3, 2009

Your articles are indeed thought-provoking. If P-Notes are so dangerous, why don't you put in a PIL against them? Most people who read your articles do not have the resources, the financial knowledge or reach to actually do something. If you have, why not use it, instead of just informing us that we are being taken for a ride?



Jun 2, 2009

"I stand by what I said in October 2008 - and reiterated again after May 15th - one can make a case for the BSE-30 Index to head back to a new peak of 21,000 by June 2010."
I strongly feel that markets will begin to fall from july 2009. will come down below 8000 sensex. market will bounce back from March 2010 it will cross 60000 in the 2016.



Jun 2, 2009

I am at a loss to understand how P-Notes are again active when Chidambaran had given a date by which they had to get regulated. Kindly explain in some post what happened to the F.M's order.Was it rescinded?



Jun 2, 2009

Have we forgotten the Mexican flight of foreign capital emergency?


v. ganeshan

Jun 2, 2009






Jun 2, 2009

this is one of the best articles i have read.p-notes are also a security threat.they should be banned.
to put it bluntly we are a bunch of hypocrites
take the case of australian rascist attacks which is the hot topic now. but what about the Indian rascism against the dalits ( almiost all of them are of darker color apart from doing the most menial jobs) why the media is not agitated to the same extent.why as a society most of dont bother. in short we can practice rascism but others should not)

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