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Institutional Investors Manipulating Indian Market – NSE Chief

October 17, 2007

The architect of Modern Stock Trading and CEO of National Stock Exhcnage of India, R H Patil has said that Foreign Institutional Investors have Manipulated the Indian markets and in recommendations to the Finance Minsitry had ask to plug the holes. Mr. Patil said,

The market is being manipulated right now and a bubble was growing rapidly. Although the SEBI proposals are late, they would help avoid a greater disaster. It is very important to know the identity of foreign investors, who have been manipulating this market.

The Indian Markets have crashed this morning and trading has been halted for an hour. The BSE SENSEX was down 1,700 points.

What triggered the market crash ?
SEBI, in a draft guideline, said that foreign institutional investors and their sub-accounts cannot issue or renew participatory notes with underlying as derivatives with immediate effect. They have to unwind their current position within 18 months.

Participatory Notes – PNs are financial instruments used by investors or hedge funds that are not registered with Sebi, to invest in Indian shares. FIIs and their sub-accounts buy Indian securities and then issue PNs to foreign investors with these securities as the underlying.

Once the Sebi proposals are operationalised, only FIIs whose outstanding notes do not exceed 40% of their total asset holding in India will be allowed to issue fresh ones. For instruments already issued by FII sub-accounts, Sebi has given a window of 18 months to wind up existing positions.

As per reports, the notional value of investments through PN’s route grew almost ten times to Rs 3.53 lakh crore at the end of August 2007 from just Rs 31, 875 crore three years ago.

The Ministry of Finance should act immediately by using the Income Tax and Central Intelligence agencies to investigate and bring to book all those involved in the market manipulation.

Update from FM:
FM does a U-Turn and puts SEBI in a tight spot now. He said, We have not banned P Notes. SEBI to issue release to on P-Notes renewals. Move intended to moderate inflow of capital.

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