Market to tumble as Sebi action

The market is expected to see severe unwinding as the Securities and Exchange Board of India (Sebi) on Tuesday after market hours, 16 October 2007, proposed a number of restrictions that will effectively spell doom for the thriving participatory note (PN) activity in the stock market. All this was done to slam brakes on the flows of anonymous foreign capital. Also the volatility is expected to be intense.

PNs are financial instruments used by investors or hedge funds that are not registered with Sebi, to invest in Indian shares. FIIs and their sub-accounts buy Indian securities and then issue PNs to foreign investors with these securities as the underlying.

Once the Sebi proposals are operationalised, only FIIs whose outstanding notes do not exceed 40% of their total asset holding in India will be allowed to issue fresh ones. As per market talks, a lot of politicians’ monies, and those of promoters often find their way back through PNs in India. For instruments already issued, Sebi has given a window of 18 months to wind up existing positions.

As per reports, the notional value of investments through PN’s route grew almost ten times to Rs3.53 lakh crore at the end of August 2007 from just Rs 31, 875 crore three years ago.

Asian markets were trading lower today, 17 October 2007. Japan's Nikkei (down 1.05% at 16,958.40), Hong Kong's Hang Seng (down 0.62% at 28,774.79), South Korea's Seoul Composite (down 1.77% at 1,970.33), Singapore's Straits Times (down 0.78% at 3,780.81) and Taiwan's Taiwan Weighted (down 0.24% at 9,569.92) edged lower.

US stocks slipped on Tuesday, 16 October 2007, as oil prices rallied to record highs amid heightened tensions between Turkey's government and Kurdish rebels located in northern Iraq. The Dow Jones Industrial Average declined 71.86 points or 0.51% at 13,912.94. The Nasdaq Composite slid 16.14 points or 0.58% to 2,763.91 while the broad-market Standard & Poor's 500 index fell 10.18 points or 0.66% to a close of 1,538.53.

As per provisional data, foreign institutional investors (FIIs) sold shares worth a net Rs 234.32 crore, while domestic institutional investors (DIIs) were net sellers of shares worth Rs 10.05 crore on Tuesday, 16 October 2007. They have turned net sellers for the first time since the US federal reserve cut its funds and discount rates by 50 basis points on 18, September 2007.

The BSE 30-share Sensex declined 6.81 points, or 0.04%, to 19,051.86. It hit all-time high of 19,174.45, in intra-day trade. The broader based S&P CNX Nifty was down 2.35 points, or 0.04%, to 5,668.05. It hit all-time high of 5,708.35 in early trade.

The Sensex has surged 22.88% in one month to 19,051.86 on 16 October 2007.

The index-based market-wide circuit breaker market that currently exist applies at three stages: when the index moves up or down by 10%, 15% and 20%. When triggered, these circuit breakers bring all buying and selling of shares in the country to a halt. In case of a 20% movement of the index (at whatever time), trading is halted for the rest of the day.