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Indian stocks recoup losses after crash

Soon after opening the Sensex, a 30-share-sensitive index of the Bombay Stock Exchange, tumbled to 17,307.90 — down 1,743.96 points or 9.15 per cent — before staging a recovery to 18,715.82 at the close of the day.

The steep drop triggered circuit breakers resulting in stopping trading for one hour, a National Stock Exchange official said.

The Sensex tumble is being attributed to urgent curbs on the inflow of foreign funds into the Indian share market proposed by the market regulatory authority, the Securities and Exchange Board of India (SEBI).

SEBI on Tuesday announced proposals to clamp down on participatory notes from foreign funds in a bid to curb excessive speculation which had resulted in regular sharp rises in the market indexes. On Monday, the Sensex touched an all-time high of 19,000 in the fastest 1000-point rally in the bourse’s history.

The SEBI proposal is aimed at regulating and, thereby identifying, foreign investors and countering sudden, huge inflows which policymakers fear may lead to an overheating of the economy.

“The proposals have been drawn up after long discussions between RBI (India’s federal bank), SEBI and the government and are aimed at moderating capital inflows,” India’s Finance Minister P Chidambaram said. “This will be good in the long term for investors and the Indian economy.”

The market recovery came after Chidambaram clarified that the government was not in favour of banning participatory notes (PNs). ”We have not banned PNs. We have simply placed a cap on proportion of money coming through PNs,” he said.

“If an investor wishes to register in India as an FII and invest, he or she is most welcome,” the finance minister said.

Participatory notes are bilateral contracts between foreign institutional investors (FIIs) and overseas financial intermediaries that allow the former to buy stocks in the Indian market without registering themselves with SEBI. This helps to hide the identity of the investors.

About 51 per cent of current investment by FIIs in the Indian market is estimated to be through participatory notes, according to SEBI. FII investments in 2007 have already crossed 16 billion dollars. It was 10.8 billion dollars for the whole of 2006. Of the total FII investment for 2007, 10 billion dollars is estimated to have come through participatory notes.

The SEBI posted a discussion paper on offshore derivative instruments on its web site on Tuesday inviting comments by market experts by Friday after which it would be taking a final decision.

The paper proposes: “FIIs and their sub-accounts shall not issue or renew offshore derivative instruments (ODIs) with immediate effect. They are required to wind up the current position within 18 months, during which period the SEBI will review the position from time to time.”

“It’s a positive move in the long term though it may adversely impact the stock market in the short term,” Ravi Sharma, a stock market analyst based in India’s financial hub Mumbai said. “It will regulate unchecked money from pouring into the market.”