Foreign inflow won't rely on P-notes

“There will be no change in the outlook of foreign investors. People were worried and took extreme steps,” Arun Kejriwal of Kejriwal Investment Securities said of Wednesday’s steep fall in equities.

Securities and Exchange Board of India’s discussion paper on participatory notes, seeking to clampdown on the foreign funds inflows into the country, saw the stock market buckle down early today.

The Sensex, which gained over 1,000 points in four sessions to scale 19,000, lost over 1,700 points in a few minutes of trade opening. The Nifty lost over 500 points from 5,600 levels.

However, the steep fall was on thin volumes. One shouldn’t read much in the fall and recovery as the fall, Kejriwal said.

Volumes were negligible due to lack of participation. Turnover in BSE cash market was Rs 122 crore before trade was suspended while that on NSE was Rs 48 crore.

The fall was more due to lack of clarity among investors over the future of foreign fund inflows which have been driving the Indian markets to new highs recently.

“Retail investors could not obviously quantify the effect of SEBI’s clampdown on P-notes but they knew that something adverse would happen. So they decided to book profits. FIIs, on the other hand, were going to be affected by the clampdown, so until they could get a good grasp of the effect, they would have sold a bit,” said Vinay Bhandari, options trader with trading firm Olam International.

“The crash in the morning would have been on very thin volumes, which is why it eventually recovered,” Bhandari said.

As the indices hit lower circuit filters, trading was suspended for an hour till 10:55 am. And as traders waited for the market to open fearing the worst, relief came from Finance Minister P Chidambaram, who said SEBI’s move was aimed at “moderating the copious capital inflows” into the country and had not banned participatory notes.

“Investors, through participatory notes are certainly welcome to invest in India, but for the present it is important to moderate these capital inflows. If some investor wishes to register in India as an FII and invest, he is most welcome,” the finance minister said.

Chairman M Damodaran also sought to allay fears of a ban on P-notes, saying that authorities did not want to ban foreign funds coming into the country, but wanted transparent flows through registration of investors.

“...there is no proposed bar on overseas derivatives instruments contracts, expiring this month or in the following months, being renewed provided the renewal does not go beyond 18 months,” SEBI said in a statement.

Damodaran said a disproportionate amount of participatory notes were being issued by a limited number of people.

These statements and the hour’s break helped control the damage done, and the indices rebounded with vengeance. The Sensex recovered nearly 1,400 points and Nifty rebounded 450 points.

Going ahead, experts said capital inflows won’t depend on P-notes but on the economy. As long as economy is strong inflows will continue.

“FIIs will not change their outlook on Indian markets since the regulatory framework for foreign investments will not affect the fundamentals of the growth story,” said Bhandari of Olam International.