The Securities and Exchange Board of India, or Sebi, has released its report on P-Notes, or participatory notes. It suggests that FIIs should not renew or issue PNs with underlying as derivatives.
It also wants sub-accounts to not issue PNs. The regulator has asked for comments on its paper by October 20.
So, what do experts have to make of Sebi's latest proposal?
R H Patil, Former MD, NSE, said, Sebi's proposed move is not a wholehearted step. "There is a bubble built up in markets and small investors have deserted. We should not have allowed this bubble to build up to such a level."
The regulator, he feels, should have taken a step on PNs earlier. "The markets would have imploded if Sebi's proposed move hadn't come. The proposed move is positive as 18,000-19,000 for the Sensex is unrealistic."
He doesn't feel the market is safe enough to enter. “Those who wanted to encash their investments have already encashed. “The tussle that is going on among big players and the huge amount of money that is coming in is a dangerous thing as it is resulting in an exchange rate appreciation in a big way.
The foreign investor, whether the fundamentals are good or not or whether he does a technical study or not, just brings in money and gets a safe return as the rupee is depreciating.”
SS Tarapore, Former Deputy Governor, RBI, said the Committee on Capital Account recommended a ban on PNs and within one-year allowed PNs to run-off. "Don't allow fresh PNs to be created."
Ambareesh Baliga of Karvy Stock Broking said the bubble in the markets wouldn't have built up if Sebi moved six months ago. "We could see a sell-off and this could be a sentimental sell-off. But there should be a much bigger sell-off once it becomes a directive."
Subodh Kumar, Chief Investment Strategist, Subodh Kumar & Associates, said international investors would not like such intervention. "The effect of Sebi's proposed move could be more violent in the short-term. A 10% correction in stock prices will not be a big deal. Long-term investments though are likely to remain."
Vallabh Bhansali, Chairman, Enam, expects an immediate knee-jerk reaction in the market. " What we may not be able to see in this guideline is that this has given the rupee strength. Given the rupee strength, the market is ready to move to a convertible structure."
At one level, Sebi just thought that if we have to get into the regime post P-Note, this is the best time to start because of the level of the market, he said. “This is a draft guideline.
They want to get reactions and want to allow time. This time the allowance business is seen in some features and not in others; it is not uniform. I do see the attitude of Sebi and that is let us allow some time and not disturb the market too much.
The market is ready to move to a more convertible kind of structure. May be I am an optimist. I see some positives also lurking in this. The markets have shown tremendous maturity and they work themselves out pretty fast. I think its healthy pause for the market.”
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