The Telegraph
Since 1st March, 1999
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Game plan to soothe markets

New Delhi, Oct. 20: The government is working on a strategy to ensure that the curbs on participatory notes (P-notes) do not lead to a further crash in the stock markets.

North Block officials said the curbs should be introduced in a phased manner to avoid sudden panic in the market. However, they insisted that the rules need to change and large investors who were playing through P-notes and whom the government wants to retain, should be registered quickly.

Foreign banks, who act as middlemen in the stock market for a large number of foreign investors, had developed the system of P-notes to allow investors to open an account with them within a day and invest in Indian stocks.

Companies took this route because the regulators took almost a year to register them as foreign investors.

“We want to bring these legitimate investors, who were forced to play in the Indian market through foreign institutional investors, on board. If we can do that by registering them as investors in their own rights, it will be a win-win situation for all of us. They can cut down transaction costs, and we will know whose money is coming in,” officials said.

The banks may not be pleased with the concept. Officials, however, said a gradual elimination of the middleman was the only way to ensure that the money flowing in has a face.

At present, it is difficult to regulate P-notes as they are offshore transactions.

Officials said what happened over the last few days was partly because of panic over the uncertainties which the market could face because of a change in rules and was partly a correction of “high prices which were achieved at too fast a pace”.

Market analysts said the stock markets were due to correct and the Sebi move was just an excuse which would allow foreign institutional investors to square up and count their cash profits.

However, the change cannot happen overnight and has to be done over a period of time or else it will only create uncertainty and panic among investors, they added.

Once a set of rules is notified and investors are told that these will come into force over a certain period of time, it will be more easily accepted, they said.

The time frame for the new rules is being worked out. One view is that a one-and-a-half-year period should be notified. At the same time, easier rules for registration of foreign investors is also necessary.

Officials said “know your customer” rules, which apply to normal banking transactions, may also be applied to P-notes.

The proposed rules are aimed at cooling down foreign institutional buying and curb the possibility of illegal money finding its way into the stock markets.

Huge fund inflows fuelled stocks to a record level and drove the rupee to a nine-and-a-half-year high.

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