Reasons for Indian Stock Market's Biggest Crash of 1744 Points on 17th Aug, 2007

The 30-share index of the BSE (Bombay Stock Exchange,India), SENSEX; which reached a life-time high upto 18000, crashed 1744 points, after the SEBI put up its suggestion late on Tuesday evening. The market was closed for an hour. The p-Notes are said be behind the hugh surge in foreign inflows, which caused the latest market rally. "The steps taken by SEBI are in the right direction," the Finance Minister of India - P.Chidambaram said. The Securities and Exchange Board of India (SEBI) on Tuesday proposed to tighten the rules for purchase of shares and bonds in Indian companies through the participatory note (p-Note) route . The move is aimed at arresting the surge in foreign inflows through p-notes.

So, what are these p-notes? Why such a havoc about them? What makes them so special? P-Notes are financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India to invest in Indian securities. Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. Participatory notes are like contract notes. These are issued by FIIs to entities that want to invest in the Indian stock market but do not want to register themselves with the SEBI. SEBI was not very happy about participatory notes because they have no way to know who owns the underlying securities, it feared that hedge funds acting through participatory notes will cause economic volatility in India's exchanges.