BY Mr. GOPALAKRISHNAN V, MONEY AVENUES
Equity
markets are slipping into one crisis after the other. The issue of Participatory Notes (P - Notes) is back to haunt the
equity markets, yet again.
The
issue cropped up few years back very seriously, unsettling the markets and the
government during that time.
On
October 16, 2007, Securities and Exchange Board of India (SEBI( put out a discussion paper that proposed curbs on
P-notes based on derivatives, and prohibiting sub-accounts of Foreign institutional investors (FIIs) from issuing
P-notes.
The
stock market crashed over the next three days with the Sensex diving almost 9%
on October 17 leading to trades being halted for an hour. The finance ministry
rushed to clarify, which led to a rebound that day.
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| GOPALAKRISHNAN V, MONEY AVENUES. |
But,
the market fell again on October 18 & 19. Markets had a big reason to worry
then because P-note holdings had risen to almost 50% of FIIs’ assets
under custody.
Now
the issue is back again after the Supreme Court appointed Special Investigation
Team (SIT) entrusted with the task of suggesting measures to curb black money
recommended to SEBI, that it should do more to identify real owners of P-notes
and restrict their transfers.
SEBI
has the powers to seek information from the broker on who is it issuing. But,
in some layered transactions, the end beneficiary could be different from the
first P-note buyer.
The
committee suspects that savvy tax evaders from India are using this route to
deploy their black money into Indian securities. In the past, there have been
concerns over Indian promoters using P-notes to bet on their own companies.
Why equity markets are reacting in
panicky manner?
Because
of the large exposure through P notes.
The
positions held through P-notes are worth about Rs. 2,75,500 crore or / roughly
nearly 11.5% of the assets under custody of foreign portfolio investors, which
is Rs. 23,86,500 crore. Though nowhere close to their high of Rs 4.50 Lakh
crores during the peak of the previous bull markets in October 2007, the
government and SEBI will worry that remarks on restrictions on P-notes can
spook investors. Clamp down on transfer of P-notes could result in a fall in
foreign portfolio inflows.
Finance
Minister, Mr Arun Jaitley has clarified that it’s too
early for the government to decide on this issue, nevertheless has assured no
decision will be taken which can affect the investor sentiment and investment
environment in India.
What’s the way forward?
The
issue has to be seen with 2 eyes.
(1)
on
the issue of national interest
(2)
on
the issue of practicality. To a large extent it’s
believable and true that P notes launder black money into the Indian equities
through various investment vehicles registered in various tax haven countries.
Government needs to clean up the dirty money in the Indian financial markets.
On
the other hand, if P notes are banned or restricted in a harsh manner all of a
sudden, that can send negative signals to the foreign portfolio investors. And
the selling in the markets will intensify even more. Government will in all
likelihood take a middle path in addressing this issue by finding practical
solutions.
As
far as, for markets, every such opportunity is taken as an opportunity for
profit booking. After all, Nifty moved up from the recent lows of 7900 to the
levels of 8600 in few weeks time, after the Greece issue fizzled out.
For
investors / or traders NIFTY cracking below 8400 levels will be crucial for the
future direction of the markets in the current scenario.
For more details
GOPALAKRISHNAN
V
FOUNDER
& CEO
MONEY
AVENUES
Email id : askgopal@gmail.com
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