SENSEX FALL

Everybody must be thinking what triggered the market frenzy..what happened overnight that market lost its weight by more than 1300 pts in 2 days and seen volatility (market movement) of almost 2500 pts...

The short-term correction expectation was mounting as the Sensex moved northward with a phenomenal speed and the trigger for the correction finally came in the form of SEBI's draft paper on Participatory Notes (PN) which is part of Offshore derivative Instrument (ODI)released on 16th Oct night. On 17th Oct Sensex lost almost 1700 points (8%) and the NSE 9.5% before trading was shut for an hour. However, as the market reopened, the instant panic subsided as participants realized that there are 18 months to unwind existing positions and the Sensex recovered most of its losses, closing nearly 400 points down for the day.

Understanding Offshore Derivative Instruments (ODI)...
SEBI's proposed curbs on offshore derivative instruments (ODIs). ODI include PNs, equity-linked notes, capped return notes and participating return notes. PNs are financial instruments that help investors and institutions that are not registered with SEBI to invest in domestic securities. Registered FIIs buy the equities on behalf of such investors and issue them PNs. The owner of the underlying equities, therefore, remains anonymous. This makes PNs an attractive proposition as it protects the identity of the investors and give them easier entry and exit options.

More than approx 50% of FII investments are routed through PN's which is not very truested source, hence is the reason why Prime Minister office (PMO) intervened and asked SEBI to take some action against growing PNs.

SEBI Guidelines:
The intent is to regulate the entry of anonymous foreign money into the markets, and while the draft mentions the possibility of banning PN's entirely, the FM has clarified that as of now, only a cap on PN's is intended. Crucially, the report plans to allow use of PN's only to entities that follow the SEBI's Know Your Customer (KYC) regulations, thereby effectively shutting out all anonymous flows.

Possible Implications...
As expected..selling by FII in big way as they tend to perceive SEBIs instructions in negative manner (as always)...short term tumbling in SENSEX..long term fundamentals of the country still remain intact. Hence investors need not get swayed by short-term movements in the market.
SEBI will watch the market for next couple of days and then make any changes to the draft PN policy to control the market situation.

Hey Guys..in case you need any clarification on anything let me know..and also let me know your thoughts on the above article...happy reading..cheers