Mumbai, July 27 (IANS): This is not the first time that the issue of participatory notes or P-Notes has rocked Indian stock markets. Precisely, seven years, nine months and ten days ago, a similar issue had sent key indices tumbling. A recall:

On the evening of Oct 16, 2007, after the trading hours, markets watchdog Securities and Exchange Board of India had sought to regulate the use of P-Notes -- the most preferred route or instrument -- to invest in Indian stock markets.

Neither the then United Progressive Alliance (UPA) government nor the watchdog had liked the idea of anonymity of an investor. They felt if P-Notes were left unregulated, such investments -- particularly those with hedge funds -- could create unwanted volatility in the markets.

The next day, the investor reaction was something the policy-makers wouldn't have anticipated. The sensitive index (Sensex) of the Bombay Stock Exchange (BSE) opened as much as 1,013.96 points lower on Oct 17, 2007 at 18,037.90 points, over the previous close at 19,051.86 points.

Within a minute or so, it crashed further to 17,307.90 points -- that is a loss of 1,743.96 points or 9.15 percent, over the previous day's close, which was the biggest fall in absolute terms and among the steepest in percentage terms.

Automatically, trading was suspended for an hour.

After due consultations with officials, including the markets watchdog, then finance minister P. Chidambaram issued some clarifications. An official note also followed:

"In consultation with the Reserve Bank of India and the Securities and Exchange Board of India, the government proposed to take certain measures to moderate capital inflows. These measures are in the overall interest of the economy and of the market and investors," it said.

"Proposed measures include some restrictions on the issue of offshore derivative instruments by foreign institutional investors and their sub-accounts in relation to their exposure in market. Neither do these suggest nor is there any intention to ban issue of such instruments," it added.

When the markets re-opened, there was a significant rebound. The Sensex rose 1,533.39 points (the day's low) to the day's high of 18,841.29 points, and it eventually closed at 18,715.82 -- with a somewhat lower loss of 336.04 points, or 1.76 percent.

But the story of the crash and the rebound did not end there. The next day, the mood continued to be sullen, resulting in a loss of 717.43 points, followed by a fall of another 438.41 points the day after, which was a Friday.

Once trading began on Monday, after a two-day holiday, the markets started reacting positively after some initial hiccups, ending with a marginal gain of 54.01 points. The next trading day, however, marked a smart recovery of 878.85 points.

Over the next two days, the Sensex rose -- by 20.07 points and again by an impressive 878.85 points -- to close on Thursday at 18,770.89 points, by which time all the losses incurred over a six-day period, beginning Oct 17, had been recovered.

The market rally continued on Friday with a gain of another 472.28 points, and by Monday, the Sensex had breached the psycologically-important 20,000-point level -- all these developments within the matter of just nine trading days.

But what are these P-Notes in financial jargon, that have have come to haunt Indian equities once again? What are the government's concerns and why have they evoked such strong reactions from investors?

P-Notes, or just PNs, are financial instruments used by foreign funds to invest in the Indian stock markets on behalf of their overseas clients who do not wish to register themselves with the markets regulator.

There are hordes of clients who wish to invest in Indian equities, but not directly as enrolled entities with the regulator but in an informal manner through their India-based brokerages, who issue participatory notes for the shares bought on their behalf.

In the process, the anonymity of the clients is maintained. Accordingly, some large funds, notably those who hedge their investments across markets, are able to invest in a discreet manner without evoking much market attention.

For such clients, trading through PNs is not only easier, as they can be freely transferred like a contract note, but also help them avail of tax benefits that are available in some tax havens, like Mauritius.

What's the concern now? A special probe team on black money, set up at the behest of the apex court, has suggested that these need to be regulated. For, they are perceived as a major instrument for unaccounted money sent abroad through hawala to be routed back discreetly.

For the moment, Finance Minister Arun Jaitley has sought to assuage the feelings.

"No step will be taken that can adversely impact investment sentiment. The government will certainly not take any such action in a knee-jerk fashion, particularly one which has any adverse impact on investment environment," he told reporters here on Monday.

But the markets respond in their own way!