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CAPITAL MARKETS

India: PN rumour spooks market

India’s booming stock market was given a thorough hiding on October 17. Rumours had been swirling for days that the country’s market regulator, the Securities and Exchange Board of India (Sebi), was planning to ban the use of participatory notes (PNs), which allow any foreign institution to invest directly in India-listed stocks without having to be registered in the country as a foreign institution.

Sebi doesn’t like PNs for many reasons. As derivative products that buy underlying Indian shares and derivatives, such as futures and options, they are mostly used by foreign hedge funds to make short-term bets on India’s bourses, including the booming Sensex index.

In India, this short-term style of investing is widely considered to cause turbulence in both the local markets and in India’s currency. The rupee has gained 11% in value this year, a trend that has punished the country’s burgeoning information technology and business outsourcing industries, and again PNs take a lot of the blame for this rise from politicians of all hues.

Finally, India’s financial market overseers, from Sebi chairman M Damodaran to the country’s finance minister, P Chidambaram, seem determined to stem an inrush of foreign institutional investment into the Indian market – the capital source that provided the building blocks of India’s present bull run.

Understandably, the markets were spooked by the rumours, not least because PNs provide a welcome liquidity fillip to India’s equity markets. Indeed, some reckon that inflows through the PN route have accounted for $10 billion out of the roughly $17.5 billion invested by foreign institutional investors in India this year.

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