In the light of yesterday's drama on Dalal Street, a number of our readers have written in asking us about PNs and circuit breakers. So here's a quick briefing.
Offshore derivative instruments are investment vehicles that enable overseas investors get exposure to Indian equities or equity derivatives.
These investors have to approach a Foreign Institutional Investor (FII) registered with the market watchdog - the Securities and Exchange Board of India (SEBI). The FII then purchases on behalf of these investors. The ODI could either be stocks or equity derivatives like Nifty Futures.
Participatory Notes are a type of ODI. So, basically, PNs are instruments used by foreign investors not registered with SEBI to invest in the markets. PNs, which change in value depending on the performance of the underlying securities, provide hedge funds anonymity in their investment.
While money has been flowing in from abroad, it has been accelerated since September 18 after the US Federal Reserve cut interest rates. According to SBI estimates, PNs now account for a little over half of FII inflows from about a fifth in 2004. PN investments have gone up 51% to Rs 353,484 crore in the last 3 years.
Other categories of ODIs include equity linked notes, capped return notes and participating return notes.
This is a band imposed by the stock exchanges on price movement of stocks or the index. Since the index moved beyond the set price band (it could be on either side) trading is halted for a certain period. It automatically got triggered when the indices fell by more than 10%. In case of a 10% movement before 1pm, the market is halted for 1 hour. From 1pm to 2.30pm, it is a 30 minute halt. A 20% move leads to a shutdown for the day.
This has taken place just twice before, both times in the month of May (May 17, 2004 and May 22, 2006).