(Adds details, background, analysts' reaction)
By Prashant Mehra and Hiral Vora
MUMBAI, Oct 16 (Reuters) - India's stock market watchdog
proposed on Tuesday urgent curbs on the flow of foreign funds
into shares through instruments known as participatory notes, a
move analysts said aimed to cool the market and calm the rising
rupee.
A surge of foreign funds into Indian shares has helped send
the benchmark index <.BSESN> to its 18th record in 19 straight
sessions and driven the rupee 12.5 percent up against the dollar
this year, complicating monetary policy and currency management.
The Securities and Exchange Board of India (SEBI) said on its
Web site that after consulting the government it was recommending
changes in policy on participatory note (PN) issuance and set a
deadline of Oct. 20 for any comments on the proposals.
"The year-on-year increase in offshore derivative instruments
(ODI), the anonymity that the ODI provides to the investors and
the copious inflows into the country from foreign investors has
been engaging the attention of the government and regulators," it
said.
Analysts said the move was to deter "hot money" flowing into
the world's fastest-growing major economy after China and the
proposals, announced after market hours, were likely to take the
steam out of the stock market when it opened on Wednesday.
"People are long and overbought, and this could result in
some unwinding of positions. The market could slip by 1,000-1,500 points, in the worst case," said Deven Choksey, head of KR
Choksey Shares & Securities.
The benchmark 30-share BSE index ended flat at 19,051.86 on
Tuesday after hitting a record of 19,174.45 in the session.
THE MEASURES
Foreign institutional investors (FIIs) registered in India
can buy Indian securities and then issue participatory notes to
foreign investors who are not registered with the regulator.
Foreign portfolio inflows to Indian shares have jumped $4.6
billion this month, taking the total in 2007 to a net $17.6
billion, well above a record $10.7 billion in the whole 2005.
SEBI said the number of FIIs and/or sub-accounts issuing
overseas derivative instruments had more than doubled to 34 from
14 in March 2004.
The notional value of PNs had rocketed to 3.5 trillion rupees
($89 billion) in August from 318.8 billion rupees in March 2004.
SEBI proposed that FII sub-accounts should stop issuing PNs
and should wind up their positions over 18 months.
FIIs themselves should immediately cease issuing or renewing
PNs on underlying derivatives. FIIs could continue to issue other
PNs but this would be limited by the value of notes outstanding
relative to their assets under custody in the country. See SEBI
text [ID:nBOM288709].
Participatory notes have provoked controversy in the past but
previous debates have not resulted in strong action.
The BSE index has risen 38 percent so far this year, gaining
21.6 percent since the U.S. Federal Reserve cut interest rates on
Sept. 18. The central bank has been intervening heavily in the
foreign exchange market to try to counter the upward pressure of
inflows on the rising rupee <INR=IN>.
"SEBI is attempting to bring some sanity into the market and
discourage short-term foreign money flowing into the country to
capitalise on an appreciating rupee," said Nikunj Doshi,
strategist at Envision Capital, an investment advisory firm.
"The biggest worry is rupee appreciation and SEBI is trying
to put a cap on all this hot money."
(Additional reporting by Himangshu Watts)
($1=39.35 rupees)
((Writing by Charlotte Cooper, editing by Ranjit Gangadharan;
Reuters Messaging: [email protected]))
Keywords: INDIA STOCKS/INFLOWS