Participatory Notes Muddle

We all know that the announcement by Sebi about banning Participatory Notes (PN) in India resulted in a large bear run on SENSEX (including the largest intra day fall in the history) and Sebi had to relax the earlier norms after a few days.

What is compelling is the fact that first Sebi did not think the implications properly in the first place and even misquoted the statement. As Prof. Jayant Varma mentioned in an article written in Business Standard that Sebi 's intention appears to be to ensure that a participatory note is backed by a cash market position and not a derivative position however the press release mentioned that PN that have a derivative as the underlying are not allowed anymore. One must note that the derivative as an underlying and derivative used for hedging are different things and a market regulator is expected to be more careful about the usage of the words.

Moreover, Sebi had to relax the announcements following the bear run and one can speculate that Finance Minister must have urged Sebi to do so. It is rather unfortunate the market regulator has to act according to the market sentiments under pressure from FinMin

More articles on PN can be found at Ajay Shah's blog