Mumbai/New Delhi, Oct. 17: Stocks plunged almost 10 per cent on a day of market mayhem before bourses snapped trading for one hour and finance minister P. Chidambaram stepped in to soothe fears about a sudden pullout by foreign investors.
The bloodbath on the markets had been anticipated after Sebi’s sudden clampdown late Tuesday on the issue of participatory notes (or P-notes) — a derivative instrument used by global hedge funds and overseas investors who wish to conceal their identities.
The sensex initially plunged a record 1743.96 points — its biggest intra-day fall — but staged a dramatic recovery later in the day after Chidambaram said foreign investors were welcome to invest in India and that the government had no intention of banning the derivative instrument.
“We have simply placed a cap on the proportion of money coming through P-notes. This is part of a series of steps to moderate capital inflows into the country,” Chidambaram told reporters in Delhi during the one hour trading suspension — a market-calming device that was previously used on May 22 last year.
Under the existing rules, any movement of around 10 per cent in the key market indices before 1 pm would trigger a one-hour halt in trading.
The P-note — an instrument that foreign investors have used to route almost half of the $17.7 billion of net purchases of Indian equities this year — has been blamed for the irrational exuberance in the market. It has been under scrutiny for a very long time but it’s only now that the market regulator has decided to act.
Sebi has floated a discussion paper that articulated its concern and outlined four measures it intended to take to ensure discipline in the market.
“The new rules will be introduced on October 25 with or without some modifications,” Chidambaram said.
Chidambaram proved today he could move the market both ways: last Friday, the sensex tumbled 500 points after he articulated his concern about the way the market had been surging; today, he talked it up 1400 points.
The sensex closed at 18715.82, down 336.04 from Tuesday’s close after tumbling to a day’s low of 17307.90.
The market regulator also stepped in with a clarification to calm the market.
It said P-notes that had been issued would remain in force for its full tenure and would not cease if the underlying futures contract expired earlier.
Today’s crash wiped out Rs 1,01,674 crore worth of shareholder wealth.
“Many investors lost money during the day. Though the markets showed some strength, I don’t know if it will last,” said V. K. Sharma, head of research at Anagram Stock Broking.