India grapples with terrorist
bulls By Indrajit Basu
KOLKATA - Revelations that terrorist
groups are playing the stock markets in India have
exposed the country's weak market surveillance
system and raised fears of manipulation hurting
the economy. About half of the money foreign
institutional investors (FIIs) pumped into the
bourses out of a total of US$10 billion in 2006
was not adequately supervised.
National
Security Adviser M K Narayanan said recently that
"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 gave no figures.
In
addition to terror groups using the stock markets
to raise funds, officials are more concerned that
they may in addition be manipulating the markets,
which could obviously destabilize the economy. "If
terrorist organizations earn money from the stock
markets just like any investor, it does not really
harm the markets or the economy, although that
could be a serious issue to authorities like the
government, the enforcement agencies, the central
bank, and the likes," said Anil Khemka, a
stockbroker in the Bombay Stock Exchange.
"But if NSA [national security adviser]
allegations of terrorist outfits manipulating the
markets are true, it is a cause of concern for us
because price manipulation is still a rampant
practice in the Indian markets, despite newly
installed mechanisms like the integrated market
surveillance system," said Khemka.
India's
foreign-investment policies make it easy for
"shady" outfits to use the stock markets. For
instance, in its pursuit to attract maximum
investment, "the government still allows billions
of dollars of non-transparent portfolio funds into
the market by way of participatory notes", or PNs,
said Sucheta Dalal, a stock-market commentator.
"And there is plenty of anecdotal evidence linking
foreign portfolio money to dubious market
operators."
Over the past three years, the
country's central bank, the Reserve Bank of India
(RBI), and intelligence agencies have highlighted
the security implications of allowing the free use
of PNs. These are contract notes issued by FIIs to
clients based outside India. Often they don't want
their identities known, and they could easily be
front companies or individuals with links to
terrorist groups. They buy PNs from an FII by
depositing funds in an FII's account outside of
India. The FIIs, registered in India, then buy
stock in India on behalf of these investors and
pass on any benefit to the PN holders.
Some of these FIIs even "net off"
transactions. This is when one PN client sells his
or her note to another privately. This use of PNs
makes it impossible for the RBI or intelligence
agencies to track the flow of funds. Despite
several attempts, India has been unable to ban or
restrict PN inflows, which make up almost 50% of
FII investment in Indian stock markets.
"This also ignores the obvious inequity of
forcing multiple identification rules and 'know
your customer' norms on Indian citizens, while the
beneficial ownership of large chunks of
foreign-portfolio money remains unknown," said
Dalal.
Various investor and political
groups have already called on the government to
review the use PNs and the Securities and Exchange
Board of India has started to gather more
information on the instrument.
The NSA
also pointed the finger at groups using regular
businesses to raise or launder money. "Terrorist
outfits like the LTTE have a very well-established
network of legitimate business which provides both
funds as well as logistics for their activities.
Jihadi terrorist organizations have begun to
follow suit."
The LTTE or Liberation
Tigers of Tamil Eelam, also known as the Tamil
Tigers, is a politico-military organization with a
strong base in India that has been waging a
secessionist campaign against the Sri Lankan
government since the 1970s to secure a separate
state for the Tamil-majority regions in Sri Lanka.
Several jihadist and non-jihadist
organizations with a presence in India, such as
the Lashkar-e-Toiba, the Hizbul Mujahideen and
al-Badr, are primarily involved in the struggle
over Kashmir and are believed to have links to
al-Qaeda.
The NSA said that "important
sources of funds to jihadi terrorist outfits
includes legitimate business enterprises like
restaurants, real estate, shipping and the likes
from which part of the proceeds are siphoned off
for terrorist activities".
Another
important source of funds is religious charities,
said the NSA. "Sincere believers contributing to
charities are perhaps unaware that a sizable
portion of the funds go to fund terrorist
activities and terrorist outfits. Many of the
charities are already designated as 'terrorist
front organizations', yet most continue to operate
under new labels."
Al-Rashid Trust, which
went through several changes in name, and the
banned International Islamic Relief that morphed
into the Sanabil al-Khir Foundation are "conduits
through which such funds find their way to
terrorist organizations, include established
banking channels such as the Habib Bank in
Pakistan", said the NSA. "A tentative estimate of
funds made available to such terrorist outfits
annually is in the region of a few million
dollars."
According to the NSA, even
though India has specific legislation - such as
the Foreign Exchange Management Act and the
Prevention of Money Laundering Act - "the
globalization of terror and the ability of
terrorists to exploit state-of-the-art technology
has enhanced their ability to move hot money
across international borders".
For this
reason the NSA has called for international
cooperation "as countries command larger resources
than any terrorist group", and "pooling of
strengths could prove critical to defeat terrorism
worldwide".
India, said the NSA, has
already joined the International Convention for
the Suppression of Financing of Terrorism and has
established the necessary legal, regulatory and
administrative framework for combating
money-laundering and the financing of terrorism.
For instance, a Financial Intelligence Unit is
already in operation and will be the nodal agency
responsible for receiving, processing, analyzing
and disseminating information relating to suspect
financial transactions to intelligence and
enforcement agencies.
But hinting at
Pakistan, the NSA said such efforts can only be
effective if certain states "refrain from
organizing, instigating, facilitating,
participating in, financing, encouraging or
tolerating terrorist activities".
Meanwhile, the Indian government, too,
will have to take another look at the manner in
which unsupervised money can flow into the
country.
Indrajit Basu is a
Kolkata-based journalist.
(Copyright
2007 Asia Times Online Ltd. All rights reserved.
Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
