Four days after a Supreme court-appointed special investigation team submitted a report warning that participatory notes were one of the biggest reasons for generation of black money in India, the stock market collapsed on July 27 on fear that the government might act on the recommendation of the committee to scrutinize the ownership details of the P-notes. With Sensex nose-diving 550.93 points to settle at 27,561.38 and NIFTY plummeting by 160.55 pts to reach the level of 8,361.0, the Government indicated it was not going to take any action on P-notes that could hurt the investor sentiment.
“It is too early to say what view the government would take, but it will certainly not take any such action in a knee-jerk reaction, particularly one which has any adverse impact on investment environment…”
– Finance Minister Arun Jaitley, speaking to reporters
The SIT headed by Justice (retd.) M B Shah had disclosed that that about Rs.85,000 crores ($13.27 billion) came in through P-notes from Cayman Islands, which has a total population of about 54,000. “It does not appear possible for the final beneficial owner of P-notes originating from the Cayman Islands,” it said.
It said that the Security and Exchange Board of India (SEBI) should scrutinize ownership details of P-note holders and cases of unusual rise in stock prices and inform other agencies like Central Board of Direct Taxes (CBDT) and Financial Intelligence Unit (FIU) for action.
Trying to soothe the nerves of the investors at a time when the market is already battling with a series of negative results from companies across various sectors, Jaitley said the Government will take a considered view on the recommendation of the SIT to identify the owners of the P-Notes to check black money.
Echoing Jaitley’s views, Revenue Secretary Shaktikanta Das said panic in the stock market was unwarranted as the Finance Ministry will decide its course of action in consultation with Security and Exchange Board of India, Reserve Bank of India (RBI) and other institutions.
“At the moment there is no need to panic. We will take views after consultation with stakeholders including SEBI, RBI, and related institutions… There is no need for markets to react in any particular manner,” he said.
India has seen a massive investment through P-notes over the years. Such investments into the capital market reached a seven-year high of Rs.285,000 crores ($44.5 billion) in May and then came down a notch to Rs.275,000 crores ($43 billion) at the end of June this year.
However, due to stringent measures taken by the SEBI, the P-notes mode of investment has seen sustained decline during the last eight years. While P-notes used to account for nearly 50% of the investment in 2007, it declined to the level of 25-50% in 2008 and then to 15-20% of the total FII investment in India since 2009.
This is not the first time that P-note issue has created mayhem in the market. In 2007, the stock market has collapsed after a similar recommendation, forcing the government to declare no such measure was being contemplated.
Experts feel that P-note issue alone did not spook the market. They feel that apprehension regarding a Fed rate hike and the collapse of the commodity prices impacted global equities – the Shanghai Composite Index crashed by 8.5% today, the biggest single-day fall since 2007 – which in turn pulled down the Indian markets. While there maybe a short term hit to the market, this recommendation of SIT, if implemented will actually stabilize the Indian markets in the long run as it will start reflecting the true value of scrips.
1. The conversion rate used in this article is 1 US Dollar = 64.06 Rupees.
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