the time of going to press the markets had recovered to 18364.
the flow of hot money into the country has side effects. Bulls discovered this
to their cost, when market regulator SEBI placed limits on participatory notes.
Ashwin Tombat reports
India''s stock market benchmark Sensex
crashed by 1,743 points within the first few minutes of opening this morning (17
October 2007), prompting the suspension of trade for an hour. The BSE announced
trading would be suspended for the day if the fall reached 15 per cent The National
Stock Exchange''s (NSE''s) wide-based index Nifty also plunged 9.25 per cent to
This is fallout of market regulator Securities and Exchange
Board of India (SEBI) clamping down on anonymous participatory notes (PNs) to
arrest the flood of foreign inflows. The fall came just days after finance minister
P Chidambaram expressed surprise at shooting stock prices - the Sensex had shot
up by 5,000 points in less than two months - and hoped that things would cool
Soon after the stock markets closed on hitting the down-circuit, Chidambaram
said in a live telecast that the government was neither against PNs, nor was it
banning them. Proposals to moderate portfolio investment by foreign investors
were part of a series of steps to moderate capital inflows, he emphasised.
said foreign investors were still welcome to invest in India through participatory
notes, but it was important to moderate inflows at present and the decision was
good for markets in the long term.
The finance minister reiterated that
the basic fundamentals of the economy were strong, and said that the systems put
in place by SEBI have worked.
The markets reopened after one hour of closure
at the down circuit, after which both the Sensex and the Nifty recovered marginally
as some amount of buying was seen. However, all the indices remained in the red
and the market breadth was extremely negative.
As trades resumed at 11.10
am, the Sensex had recovered but was still down 1,283 points or 6.74 per cent
at 17767, and the Nifty was down 320 points or 5.65 per cent at 5347. About 776
scrips had advanced, 2,209 had declined, and 64 were unchanged.
on Tuesday, SEBI proposed partial restrictions on investment through offshore
derivative instruments, including participatory notes (PNs), equity linked notes
and capped return notes - all used by foreign institutional investors (FIIs) to
invest in Indian stocks.
SEBI issued a discussion paper suggesting that
FIIs and their sub-accounts should not issue or renew offshore derivative instruments
(ODIs) with underlying derivatives, with immediate effect. "They are required
to wind up the current position over 18 months, during which period SEBI will
review the position from time to time," the paper said, inviting comments
from the public about the new proposals.
FIIs currently issuing ODIs the
with notional value of PNs outstanding (excluding derivatives) as a percentage
of their assets under custody (AUC) in India of less than 40 per cent should be
allowed to issue further ODIs only at an incremental rate of 5 per cent of their
AUC in India.
Those FIIs with a notional value of PNs outstanding (excluding
derivatives) as a percentage of their AUC in India of more than 40 per cent should
issue PNs only against cancellation or redemption or closing out of the existing
PNs of at least equivalent amount.
Though only a proposal, the SEBI move
effectively halted the FII-led rally. FIIs invested over $5.45 billion in October
alone, taking their total investment for 2007 to $17.69 billion.
inflows have pushed up the value of the rupee against the dollar. The year-on-year
increase in ODIs, the anonymity that it provides to investors, and the copious
inflows into the country from foreign investors have been areas of concern for
the government and regulators like the Reserve Bank of India (RBI) and SEBI.
the High Level Committee on Capital Markets (HLCC), as well as various committees
set up by the government and regulators had made recommendations that included
issuing of PNs only to regulated entities subject to know-your-customer (KYC)
Main causes for concern
- The notional value of
PNs outstanding, which was Rs31,875 crore (20 per cent of AUC) in March 2004 has
grown over 10 times to Rs3,53,484 crore (51.6 per cent of AUC) by August 2007
value of outstanding ODIs with underlying derivatives is Rs1,17,071 crore - about
30 per cent of total PNs outstanding
- The notional value of outstanding
PNs - excluding those with underlying derivatives - as a percentage of the AUC
was 34.5 per cent in August 2007
- At present, 34 FIIs and sub-accounts
issue offshore derivative instruments (ODIs), against 14 in March 2004
discussion paper''s recommendations in summary
- FIIs and their sub-accounts
should not issue or renew ODIs with underlying derivatives. They should wind up
their present positions in 18 months
- The further issue of ODIs by FII
sub-accounts to be discontinued. Current positions to be wound up over 18 months
issuing ODIs with notional value of PNs outstanding (excluding derivatives) less
than 40 per cent of AUC can issue ODIs only at an incremental rate of 5 per cent
- FIIs with notional value of PNs outstanding (excluding derivatives)
more than 40 per cent of AUC can issue PNs only against cancellation or redemption
of existing PNs