Finance minister P Chidambaram on Wednesday said that the government does not intend to ban participatory notes (PNs) that are used by foreign institutional investors (FIIs), but rather moderate the inflow of foreign capital in Indian bourses.
The finance minister’s remarks triggered a recovery in the stock markets that fallen into a tailspin immediately after trading commenced. Chidambaram was speaking to reporters a day after market regulator Securities and Exchange Board of India (SEBI), in a discussion paper, proposed a cap on investment through PNs in India. Expressing concern over the nature of the inflow and the sharp rise in share prices, the regulator had issued a three page discussion paper late Tuesday evening.
The markets reacted strongly and the 30-share Sensex, which reached a life-time high this week, crashed by over 10 per cent, resulting in the suspension of trading on the Bombay Stock Exchange (BSE) after it hit the lower circuit.
Chidambaram promptly clarified that the government was not considering a ban on PNs. “We are not in favour of banning PNs and we have not banned PN notes. We have simply placed a cap on the proportion of money coming through PN notes vis-a-vis the total assets under management and the total derivative position. It is a SEBI consultation paper,” he said.
He asserted, however, that the consultation paper would become law by the end of this month. “With or without some moderation, it will become a law from October 25,” Chidambaram said. A concerned market regulator has invited comments “in view of the urgency” on the contentious matter by October 20.
Chidambaram on Wednesday echoed similar views. “The decision of the SEBI is to moderate the capital inflows into India. I want to assure all investors that what has been done are steps to moderate the capital flows, which have become very copious and abundant. This is a culmination of a long discussion between the SEBI, RBI and the government. The SEBI's decisions are good and in the long-term interest of the investors, and good for the capital markets,” he said.