How P-Notes had rocked Indian share markets in 2007!

This is not the first time that the issue of participatory notes or P-Notes has rocked Indian stock markets. Precisely, seven years, nine months and ten days ago, a similar issue had sent key indices tumbling. A recall:

On the evening of Oct 16, 2007, after the trading hours, markets watchdog Securities and Exchange Board of India had sought to regulate the use of P-Notes -- the most preferred route or instrument -- to invest in Indian stock markets.

Neither the then United Progressive Alliance (UPA) government nor the watchdog had liked the idea of anonymity of an investor. They felt if P-Notes were left unregulated, such investments -- particularly those with hedge funds -- could create unwanted volatility in the markets.

The next day, the investor reaction was something the policy-makers wouldn't have anticipated. The sensitive index (Sensex) of the Bombay Stock Exchange (BSE) opened as much as 1,013.96 points lower on Oct 17, 2007 at 18,037.90 points, over the previous close at 19,051.86 points.

Within a minute or so, it crashed further to 17,307.90 points -- that is a loss of 1,743.96 points or 9.15 percent, over the previous day's close, which was the biggest fall in absolute terms and among the steepest in percentage terms.

Automatically, trading was suspended for an hour.

After due consultations with officials, including the markets watchdog, then finance minister P. Chidambaram issued some clarifications. An official note also followed:

"In consultation with the Reserve Bank of India and the Securities and Exchange Board of India, the government proposed to take certain measures to moderate capital inflows. These measures are in the overall interest of the economy and of the market and investors," it said.

"Proposed measures include some restrictions on the issue of offshore derivative instruments by foreign institutional investors and their sub-accounts in relation to their exposure in market. Neither do these suggest nor is there any intention to ban issue of such instruments," it added.

When the markets re-opened, there was a significant rebound. The Sensex rose 1,533.39 points (the day's low) to the day's high of 18,841.29 points, and it eventually closed at 18,715.82 -- with a somewhat lower loss of 336.04 points, or 1.76 percent.

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