Bear cartel suspected behind P-Notes bogey; trades under lens

A bear cartel is suspected to have been creating a bogey about regulatory clampdown against P-Notes with an aim to pull down the stock markets to make illicit gains, sources said today.

These bear operators are said to have created huge short positions in the stock market over the past few days, which means they were betting on a fall in the market values.

It is suspected that these operators could have been behind wide-spread rumours last week that authorities were all set to ban Participatory Notes (P-Notes), which are used by overseas HNIs, hedge funds and other foreign institutions to invest in Indian markets through registered overseas entities.

While there have been long-standing concerns about possible misuse of Offshore Derivative Instruments, or P-Notes, for money laundering and other such purposes, these instruments are also used widely by genuine investors looking to save on time and costs attached with direct investments.

While no clampdown has taken place against P-Notes, capital markets regulator Sebi on Monday reiterated its regulatory framework for such investments by stating that the foreign investors need to ensure compliance with all necessary norms before issuing such notes.

However, Sebi's move was taken as further regulatory tightening on P-Notes, resulting in a significant plunge in stock market indices on Tuesday.

Sources, however, said that a preliminary analysis of trade data for Tuesday, the first trading session after Sebi's latest circular, shows that the sale of shares were mostly conducted by domestic investors and not the foreign entities.

As per the provisional stock exchange data, the FPIs (Foreign Portfolio Investors) made gross purchase of shares worth over Rs 13,000 crore on Tuesday and were net buyers to the tune of about Rs 1,200 crore.

On the other hand, the large domestic investors were net sellers on the day to the tune of about Rs 1,000 crore.

While no conclusive evidence has so far come to the fore against any particular group of entities, the market authorities are in the process of analysing trade data for all short-positions over the past few days, while they are also tracking the trading pattern of some suspected bear operators.

As per the latest Sebi circular, which has no changes in the existing regulations that FPIs need to comply with while issuing ODIs, the existing ODI positions will be allowed to continue till expiry if they are not in compliance with the relevant provisions of FPI Regulations.

Any additional issuance, renewal or rollover of such non-compliant positions would not be permitted, Sebi had said. However, this provision also forms part of the existing norms that have already been in place, sources said, while adding that the latest circular was more in clarificatory in nature.

The investments through P-Notes rose to nearly seven-year high of over Rs 2.65 lakh crore at the end of October 2014.