So, Wednesday dawn was a dour day for the investors on Dalal Street with the days’ trading halted at both bourses BSE and NSE within minutes of opening, as index wide circuit filters were triggered by the steep fall.
When the trading was halted at 09:57 hours, the 30-share BSE Sensex was down at 1,743.96 points and the broader NSE Nifty was down 524.15 points.  In percentile terms, the meltdown in Sensex and Nifty were 9.15 per cent and 9.25 per cent respectively, thanks to Sebi’s late Tuesday proposals to pin down the Participatory Notes (PNs) to restrict foreign inflows.   Turnover on BSE was mere Rs 122.02 crore when trading was halted on the bourses. It was just Rs 48 crore on NSE, while NSE’s Futures and Options segment had clocked a turnover of Rs 4,347 crore by that time. 

No need for alarm
However, during the day, after clarifications by the market watchdog, as also assurances by Finance Minister P Chidambaram, that there is “no reason for alarm,” the indices recovered partially. When trading resumed, both Sensex and Nifty shot up by more than 1000 points and 500 points respectively from days low, to recover most of losses.

BSE’s bellwether index closed at 18,715.82 points, a decline of 336.94 points down 1.76 per cent from Tuesday’s close of 19,051.86, while Nifty closed at 5,559.30 as against previous close of 5,668.05, showing a fall of 108.75 points and in percentile terms 1.92 per cent.

Thus, jolted by the blighted bourses, both, the Centre and Sebi, moved in tandem to assuage investors’ fears saying there was no ban on Participatory Notes, a derivative instrument for foreign investment. Both Mr Chidamabaram and Sebi Chairman M Damodaran said the proposals related to offshore derivatives instruments (ODIs) were well-calibrated to check flow of anonymous funds into the stock market.

“Let me assure all investors what has been done is to moderate capital flows, which have become very copious. It is a culmination of long discussions between Sebi, RBI and government,” Mr Chidambaram said, adding Sebi’s proposals are just consultation paper, but would become regulations with or without some modifications. “We have only placed a cap on capital inflows by PNs. We welcome PNs to invest in India after they get registered with Sebi as FIIs”, Mr Chidambaram said.  Interestingly, the Sebi draft paper on the issue would become a regulation albeit “with or without modification” – as suggested by Mr Chidambaram, only from October 25.
Mr Chidambaram said the rules were aimed at capital inflows that had fueled a “very steep rise” in stocks and driven the rupee to 9 1/2-year high. The controls may stem a record flow of funds that lifted the value of country’s stock market 81 per cent this year to $1.47 trillion.

Cap on issuance
More than half of $17.7 billion of net purchases of Indian stocks this year may have been through use of derivatives known as participatory notes, according to JPMorgan Chase & Co estimates.  The notes, which change in value depending on performance of underlying securities, provide hedge funds anonymity in their investment. Sebi wants to limit issuance of additional p-notes and has proposed to cap the amount that can be issued by each broker. It proposes to set a limit of 40 per cent of assets under custody for issuance of new notes. Brokers who exceed the limit will need to pare their outstanding notes.

Brokers who have issued less than the limit may do so at an incremental rate of 5 per cent of their assets under custody, Sebi said.

Mr Chidambaram said if PN investors decided to invest as FIIs, they would be welcome. Later, the finance ministry said in a statement that measures proposed by Sebi “are in overall interest of the economy and of the market and investors.”

Mr Damodaran said a disproportionate amount of participatory notes were being issued by limited number of people. “A significant portion of that has Indian derivatives as the underlying, and we find that lot of leveraging has taken place on that,” he said.

“Clearly there are times in life of markets when you look at what happens, what systemic corrections are needed, and we believe this was a systematic correction that was waiting to happen and this was a good time to do that,” he added.