Mauled by the P-Notes in Oct 07.

Mauled by the P-Notes in Oct 07.
- Online Share Trading Guide - New Articles Section.
- By TP Gopinath, Oct 29, 2007

As my stock market stint is in its third year (commenced Dec 05) marred by ups and downs on the way, just like anything in life, let me update you on the latest developments.

An attack by the SEBI (Securities and Exchange Board of India - the regulator of the Indian stocks markets) with the blessings of MoF (Ministry of Finance) and RBI (Reserve Bank of India), sent shockwaves on a fine Wednesday. On October 17, 2007, SEBI moved to arrest the abundant and incessant inflow of foreign capital to Indian financial markets and to make sure that they know which foreign entity is pouring in money to Indian bourses.

Huge capital flow was devastating to the Indian export market and employees in the export related businesses were loosing jobs and small businesses in certain export connected sectors were closing down affected by the falling profits due to the the rising rupee.

On that day, SEBI released an announcement stating that they plan to control P-Notes. P-Notes (Participatory Notes) are instruments issued by registered foreign institutional investors to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India. SEBI and FM stated that they do not want anonymous investments in Indian markets and they want everyone registered as FIIs over an 18 months period.

For a period of approximately three weeks prior to this meltdown, I have witnessed one of the greatest uptrend and my portfolio was fattening well. This has happened since the US Fed (Federal Reserve) reduced interest rates to the tune of 50 bps in the US due to problems in the US market and economy, caused by problems in the subprime lending market.

However, SEBI may not have realised that their jolt through restricting P-Notes was great enough to cause a sudden loss of over 1,700 points which stabilised as that day progressed. Government and market regulator SEBI immediately moved in tandem to assuage investors' fears saying there was no ban on Participatory Notes, a derivative instrument for foreign investment. Later, on the same day, market recovered.

Prior to this debacle on Wednesday, market seemed to be on a rally that would never stop. Due to the subprime problems and credit crunch in the US and European markets, emerging markets were seeing a great rally in spite of the fact that US markets were doing very badly. In the past, it seemed like the Indian market was almost always synchronized with the US and world markets. However for the past three weeks prior to the Oct 17th, the rally was very frenzied and Indian market seemed to have decoupled in its movement from the US markets.

On Oct 23rd, just days after the great crash, market is again up 850 points and the rupee started to rise again. It is unclear where this kind of rally is taking us. On one hand it is a joy ride for participants but on the other hand, such rise stores ingredients of heavy and sudden fall into the precipice of big loss. No one knows exactly how the market will be tomorrow or the day after, though, expert predictions come and go. However, rupee is again set to rise back further and reach new heights soon. It is unclear what this P-Notes regulation came to achieve? but it is said to decrease volatility in the Indian market in the long term. Let us hope it does.

However, to me it looks, backed by the great Indian economic growth story approaching double digits growth, we have much more spectacle in store on the Indian market and that will take SENSEX to greater heights sooner than later. Hence, my readers, wish you happy investing! If you are not yet in the stock market, start small, but do start. Read our Online Share Trading Guide if that's the method you might like to chose.

Today as I continue to write this story, on Oct 28th (Sunday - market is closed), I can see the SENSEX standing proudly at 19,243 points. Who knows? Very likely, next week it might conquer peak 20,000!

Join the rally now; guys, make your dream come true. Go slowly but go steadily, over the long term stock markets can realise your dreams for sure. To be long term, you have to start early. In your 20s preferably, as you age, the frustration and the need for money would increase but your ability to earn might decrease. Stock markets are inherently more risky than other investment methods. However, your young age and ability to stay longer in the markets, would mitigate the risks for sure.