By IANS
Mumbai/New Delhi : On a day of fast-paced developments, a key Indian market index crashed some 1,700 points early Wednesday on fears of a clampdown on participatory notes but staged a marked revival of some 1,400 points by close following assurances from Finance Minister P. Chidambaram.
Trading had to be stopped for an hour after the sensitive index (Sensex) of the Bombay Stock Exchange crashed 1,743.96 points or 9.15 percent in the first hour due to panic after market watchdog Securities and Exchange Board of India (SEBI) said it was mulling a clampdown on the participatory notes of foreign funds to curb excessive speculation.
This was the steepest ever fall of the index and came just two days after the Sensex had scaled an all-time peak of 19,000 points – making the journey from the 18,000 level in just four sessions.
But the markets began staging a recovery after Chidambaram said participatory notes were still welcome, even though the country needed to moderate excessive inflows of speculative portfolio investment.
The 30-share Sensex finally closed at 18,715.82 points, with a loss of 336.04 points or 1.76 percent, against the previous close at 19,051.86 points.
Twenty-five of the 30 shares that make up the basket of Sensex scrips ended in the red, while five managed to buck the trend, data available with the exchange showed.
The panic started early as SEBI said late Tuesday it could ask foreign funds to immediately cease issuing or renewing participatory notes to their clients for investing in stocks or derivatives.
“They are required to wind up their current positions (in participatory notes) over 18 months during which period the regulator will review the position from time to time,” a SEBI note put up on its site for suggestions said.
Participatory notes are used by overseas investors not registered with the regulator to buy shares through registered foreign funds. They are seen by the regulator as a means for backdoor entry for speculative and anonymous trading.
SEBI found that the notional value of participatory notes issued by the 34 foreign funds constituted 51.6 percent of all the assets under the custody of foreign institutional investors.
It subsequently took the finance minister to assuage investors’ feelings during a hurriedly-called press conference – coinciding with the time trading had been suspended – where he said the markets watchdog was merely making a proposal.
“We are not in favour of banning participatory notes. We have not banned them. We have simply placed a cap on the proportion of money coming through participatory notes vis-à-vis overall assets,” he said.
Chidambaram said the system put in place by the markets watchdog was good for Indian stock markets in the long run and added there was no cause for alarm.
“The fundamentals of Indian economy have not changed from yesterday to this morning. Corporates are announcing their results for the second quarter and profits are still very handsome,” he added.
Wednesday’s losers among the Sensex stocks included Reliance Energy, Reliance Communications, ICICI Bank, NTPC Ltd, Bharat Heavy Electricals Ltd, Reliance Industries and Associated Cement Companies.