Anxious Dalal Street hopes government won’t change rules on participatory notes

MUMBAI: Will the government accept the Supreme Court-appointed special investigation team’s proposal to tighten rules on participatory notes? That is what market participants are debating as they await reactions from the government and Securities & Exchange Board of India (Sebi).

While the SIT’s recommendations, released after trading hours on Friday, have triggered unease on Dalal Street, some brokers and fund managers said stocks are unlikely to react sharply. They don’t expect the government to change existing rules for participatory notes and unsettle the market. Top Sebi officials were tightlipped on the matter over the weekend.

The markets have been sensitive to earlier changes in rules on participatory notes, also known as PNotes, a popular offshore derivative instrument used by foreign investors to bet on India.

“I don’t expect any significant impact on markets because of the SIT report on P-Notes,” said Nirmal Jain, chairman of the IIFL Group, a financial services company.

The SIT, tasked with curbing black money, urged Sebi to ensure that it is able to track the actual beneficiary of the P-Note investments and called for restrictions on transfer of the instrument.

“I think markets will only react when some action will be taken based on the special investigation team report,” said Shankar Sharma, vice-chairman and joint managing director at securities house First Global. “Going forward, based on sensitivity of the news flows on P-Notes, there may be some impact on markets.”

What worries a section of traders is that bear operators may use the SIT report as an excuse to pound stocks. The BSE Sensex gained 1.6% over the past two trading weeks and closed at 28,112.31 on July 24.

A senior fund manager, who did not wanted to be identified, said select shares that are funded through P-Notes and have seen massive price appreciation in recent times may come under pressure on Monday. While there is no public data on P-Note positions in stocks, large brokers, mainly foreign, usually have an inkling of such bets.

FED MEETING

The outcome of the rate-setting meeting of the Federal Open Market Committee of the US Federal Reserve on July 28 and 29 will also determine the market’s direction.

While the US central bank is not expected to increase rates, investors will look for comments that may indicate when it will start the rate-tightening cycle.

“I don’t expect much of market volatility unless the US central bank announces something drastic,” said UR Bhat, managing director at Dalton Capital. Global investors expect the Fed to increase interest rates in September. Dipen Shah, head of private client group research at Kotak Securities, said a “strong US jobs report has increased the probability of an earlier-thanexpected interest rate hike.”

RESULTS AND PARLIAMENT

Investors will closely watch proceedings in Parliament regarding crucial reform bills and the first-quarter results of top companies in the week ahead. Shares of Reliance Industries could weaken after its first-quarter earnings, announced after trading hours on Friday, missed street estimates.

Companies including Larsen & Toubro, ITC, ICICI Bank, HDFC, Maruti Suzuki, Punjab National Bank and Dr Reddy’s Laboratories are scheduled to announce their results. Analysts said market volatility could heighten ahead of the expiry of the July series futures and options contracts.

“Nifty futures witnessed some closure in positions as the index has found pressure to move beyond 8,650,” said Amit Gupta, head of derivatives at ICICI Direct. “Volatility in markets during the past week has prompted traders to close positions. Major support for Nifty should be considered near 8,460.”