P-Notes problem: BSE Sensex will touch 18,000 today

SEBI has finally taken necessary steps to halt current mad Bull Run in Indian share markets by proposing new rules to curb short term foreign inflows. SEBI proposals to curb indirect foreign investments by proposing new rules on P-Notes will create havoc in the stock markets. There will be a panic selling by FIIs (mainly hedge funds) which makes Sensex fall by 800-1000 points. P-notes are offshore derivative instruments issued by top brokerage houses for foreign investors. P-Notes protect identity of FIIs with easy entry/exit options and are generally short term investments which are responsible for recent Bull Run. Stocks like ICICI Bank, Reliance, Reliance Energy, L&T, RIIL, DLF etc will lose 4 -5% and this phase will continue for another 2-3 days. Hedge funds will withdraw their money by anticipating further curbs on foreign inflows. SEBI has done it; Let us wait for RBI steps.

Targets for Indian Stock Exchanges:

BSE Sensex:

CMP: 19,051.
Target: 18,000-18,200.
Short term target: 16,500-17,000.

NSE Nifty:

CMP: 5,668.
Target: 5,450-5,500.
Short term target: 5,000-5,200.

Why participatory notes (P-Notes) are dangerous for stock markets?

Direct FII investment is generally a long term investment like mutual funds and LIC etc. But investments by P-Notes (participatory notes) are generally a short term investment with easy entry and exit options. P-notes are offshore derivative instruments used by FIIs for investing in stock markets. 50% of foreign investments in Indian stocks are through P-Notes. Investment by P-Notes is not a serious investment and SEBI has taken correct step in the right direction to halt this unreasonable bull rally. Investors in Nifty derivatives will suffer unbelievable losses if don’t exit immediately. Manipulators will move away from Indian stock markets atleast in short term.

What investors need to do?

Investors should wait until clear picture emerges on this issue. Next week may provide ideal opportunity for fresh investments if political conditions are stable. BSE Sensex may touch 16,500-17,000 in this week. SEBI proposals on short term FII investments will once again link stock markets to economic performance.

Crucial note:

From now onwards, top brokerage houses may not even report P-Notes investments which may halt free fall in stock markets. It is better for normal investors not to make any fresh investments who don’t have enough knowledge on these issues.

Click here to read more about SEBI proposals on P-Notes.