In the FIIs Thrall

In the FIIs' Thrall THE prolonged sluggishness in the secondary and primary segments of the capital market has brought up the question of the market's role in the economy. Unfortunately the authorities continue to generate exaggerated expectations from the share market by taking measures which only reinforce various distortions in the functioning of the financial system in general and the capita! market in particular. Wittingly or unwittingly, the financial sector reforms have meant a shift from a bank-based financial system to one based on the vagaries of the stock market. The development experiences of Japan, Germany and the east Asian economies on the one hand and the Anglo-Saxon countries on the other suggest that industrial finance provided by banks and financial institutions is more steady and assured than that coming from the capital market. Dependence on the capital market brings with it problems of sharp fluctuations in fund acting as real and psychological barriers to industrial investment, stiffening of the cost of capital, compulsion for companies to make high dividend pay-outs preventing sufficient plough-back and uncertainties arising from take-overs and mergers. Large corporate savings, which played an important part in the growth of the cast Asian economies, were possible because their manufacturing companies were not at the mercy of stock markets which provided only a small proportion of industrial finance in these countries.