Humpty Dumpty sat on an wall.......

Sebi circular on PN's drives sensex crazy

In my previous post I was talking about what could make sensex fall from these levels and what I could find was that something related to FII's could be the possible driver...gosh....and what I feared came true....SEBI's draft circular on PN's came to a big jolt to the market sentiments as the markets feared that it would lead to withdrawal of money by these investors from the markets.

We saw a drastic opening which led the markets to shut down for 1 hour. Leading stocks were seen down ranging 20% to 15% at a wafer thin volumes. Yes, it took just few seconds for the markets to reach the level which lead to a shut down for 1 hour...nobody got a chance to react... Our finance minister had to come out for a statement, but came from it was that he backed the SEBI's move and according to him the move is beneficial for the markets as well as the participants.

Everybody as waiting for correction

yes, the recent rally had really stunned the investors as it didn't allow most of them to participate in it in a big way. Investors were in a confused state as at every high level , they knew correction might come, but didn't knew when it will come and the sensex kept them waiting an when it came came like a storm what's new....nothing has changed for small investors state of for sure this sharp jerk would now make them think if this is the right time to buy.....

Understanding the PN story

Most of the investors have heard that the fall is due to some sebi circular on PN which is related to FII's mode of investing. Let me give you some clarity on it in simple words. There are 34 FII's and their sub accounts which are registered with SEBI and which can issue Participatory notes to the investors abroad. Sebi is worried about the source of these funds entering the markets as it does not have visibility into who is investing. Also these investors have been using the leveraging available through the derivatives segment and hence SEBi was of view that the recent market upsurge is due to the hectic trading that was been done by these participants using the derivative leverage.

If we see the data , the investment through PN's have increased from 10 folds in last three years and lot of hedge funds are using this mode of investment in the Indian equity markets.

Now SEBI wants to control the inflow of money through this channel and proposes to put a cap of 5% of the asset under custody of the FII's as eligible for issue of PN's. Sebi also wants the FII's should wind up their current positions within 18 months.

Now this may lead to redemption of funds by these investors and the markets are reacting to this possibility.

We will discuss this more in the upcoming posts.

Where is the market headed now ?

Today's correction can be termed as blessing in disguise for investors as they were looking for opportunity to invest. However, the jerk was strong enough to shake investor's confidence on how much it will fall before going up again. Well, the real implication of the PN story will unfold in few days and I believe it will have more impact on stock where the PN investors had large exposure. Stocks where the FII' holding through PN was not significant should not be affected and hence any correction is such stocks could well be an opportunity to invest at lower levels.

The FII investment may see a brake and this could bring in more rationality in the markets going forward. I personally welcome the move of SEBI as it is very important that we do not become puppets in hands of FII and have sufficient checks in place to monitor the investments coming through FII's.


KB said...

Dear Rajesh,

nice update....
will look forward to update on
specific stocks jolted 'coz of
P notes.


Anonymous said...

Hi Rajesh

Which are the stocks worst hit by this P notes ?


Sumit said...

Hey rajesh,
Whats your take on Bartronics?


Not a bad reading.