The stock markets have bounced back after the carnage last week, but the unprecedented volatility has raised several questions. Foremost among these is the handling of the entire issue of participatory notes. |
The market had been rocked by rumours that the Securities and Exchange Board of India was in the process of banning the issue of participatory notes, rumours that bear operators lost no time in exploiting for their own ends. |
In the circumstances, Sebi should have come out with a statement clarifying the position much earlier, instead of letting the uncertainty trigger a panic. |
The entire episode shows that there is a pressing need for the market regulator to become more sensitive to the market. |
At a time when several large issues, including government divestments, are to hit the markets, the regulator needs to be careful not to rock the boat. |
Having said that, there's no doubt that Sebi's solution to the participatory notes issue has been a mature one. |
Market participants seem to believe that the rather ambivalent wording of the Sebi circular on participatory notes is deliberate, the reference to any "relevant regulatory authority" providing wide latitude to entities such as hedge funds. |
Moreover, by making its decision effective from February 3, and by stating that investments already made have to be wound down over five years, the regulator has also given ample time to P-Note investors, thereby avoiding panic. |
Sebi's intention seems to be merely to ensure that "know your customer" procedures are followed, and, in case of any wrongdoing, they can trace these investors. That is unexceptionable. |
The other question raised by last week's events is of the health of the futures and options markets. This is a highly leveraged market, and many market operators had built up large positions in it, expecting the one-way bull run to continue. |
The sudden downturn caught them unawares, leading to a flurry of margin calls and prompting large scale liquidation. Outstandings in the derivatives segment came down dramatically, showing the extent of unwinding of positions. |
Players in the derivatives segment then resorted to selling off their investments in the cash market, in order to fund their losses. |
Thankfully, Sebi has been extremely pro-active in ensuring that procedures are tightened up and margins are met, and its efforts have clearly paid off, as evident from the ease with which the market absorbed the wave of selling without a single default. |
The system has been tried and tested and it has come out with flying colours. |
As usual, the market correction has led to many of the weaker players exiting, and the fact that foreign institutional investors have been net buyers during the worst days of the sell-off shows that they continue to buy the India story. |
True, FII selling has been higher this month, perhaps a fallout of the P-Note controversy or plain profit booking, but this seems to have been offset by new investments and new FII registrations. |
Local mutual funds have also turned net buyers of late, indicating that retail investors too have arrived at the party, albeit rather late. |
Nevertheless, it needs to be remembered that the initial tremor in the market was felt because FIIs turned net sellers for a few days, which goes to show how dependent the market continues to be on foreign inflows. |