On the 16th of October, 2007, SEBI (Securities & Exchange Board of India) proposed curbs on participatory notes which accounted for roughly 50% of FII investment in 2007. SEBI was not happy with P-Notes because it is not possible to know who owns the underlying securities and hedge funds acting through PNs might therefore cause volatility in the Indian markets.[1]
However the proposals of SEBI were not clear and this led to a knee-jerk crash when the markets opened on the following day (October 17, 2007). Within a minute of opening trade, the Sensex crashed by 1744 points or about 9% of its value - the biggest intra-day fall in Indian stock-markets in absolute terms. This led to automatic suspension of trade for 1 hour. Finance Minister P.Chidambaram issued clarifications, in the meantime, that the government was not against FIIs and was not immediately banning PNs. After the markets opened at 10:55 am, they staged a remarkable comeback and ended the day at 18715.82, down just 336.04 from Tuesday’s close after tumbling to a day’s low of 17307.90.
This was, however not the end of the volatility. The next day (October 18, 2007), the Sensex tumbled by 717.43 points — 3.83 per cent — to 17998.39, its second biggest fall. The slide continued the next day when the Sensex fell 438.41 points to settle at 17559.98 at the end of the week, after touching the lowest level of that week at 17226.18 during the day.
The SEBI chief, M.Damodaran held an hour long conference on the 22nd of October to clear the air on the proposals to curb PNs where he announced that funds investing through PNs were most welcome to register as FIIs, whose registration process would be made faster and more streamlined. The markets welcomed the clarifications with an 879-point gain — its biggest single-day surge — on October23, thus signalling the end of the PN crisis. SEBI issued the fresh rules regarding PNs on the 25th of October, 2007 which said that FIIs cannot issue fresh P-Notes and existing exposures were to be wound up within 18 months. The Sensex gave a thumbs up the next day - Friday, 26 October by re-crossing the 19,000 barrier with a 428 point surge. The coming Monday (October 29, 2007) history was created when the Sensex leaped 734.5 points to cross the hallowed 20,000 mark.