Market experts said that the fall can largely be attributed to the SIT's report on tackling black money where it suggested cancelling of P-notes as a way to invest in the Indian markets.
Participatory notes, or P-notes, were the main reason why the Indian stock markets fell over 550 points on Monday, registering the biggest single-day drop in nearly two months.
The BSE Sensex fell below 28,000, shaving off nearly Rs 1.5 lakh crore in investor wealth in a single day.
Market experts said that the fall can largely be attributed to the SIT's report on tackling black money where it suggested cancelling of P-notes as a way to invest in the Indian markets.
So what are these P-notes?
P-notes are a way for foreigners to invest in the Indian markets without registering themselves with Securities and Exchange Board of India (Sebi).
Sebi is the capital markets regulator in India and anyone who wants to invest in Indian stock markets must register first with Sebi.
How does P-Notes work?
P-Notes are for individuals who do not want to disclose their identity for various reasons. Therefore, they put their money in foreign bank branches located outside India, which then issues participatory notes to them. The bank can then invest or bet in the Indian stock markets on behalf of those clients, without disclosing their identities to SEBI.
Why are P-notes in the news?
The Special Investigation Team (SIT) appointed by the Supreme Court came out with its report last week and said that Sebi must curb black money by identifying the people behind P-notes.
How does this affect Indian markets?
Clearly, the markets haven't taken the news well. On Monday, the BSE fell over 550 points and NSE's Nifty sank 161 points. Indian stock markets are led by foreign money through Foreign Institutional Investors (FIIs) and many choose to take the P-notes route to keep their identities a secret.
If the government approves the SIT view and asks SEBI to curb black money via a clamp down on P-Notes, then this FII money will leave the Indian markets. This is precisely what happened on Monday, where markets lost Rs 1.5 lakh crore in value.
Why so much focus on P-Notes?
According to Kotak, "the positions held through P-notes are worth Rs 2,75,436 crore or 11.5% of the assets under custody of foreign portfolio investors, which is Rs 23,86,457 crore. Though nowhere close to their high of Rs 4,49,613 crore during the peak of the previous bull run in October 2007, the government and Sebi worry that remarks on restrictions on P-notes can spook investors. A clamp down on transfer of P-notes could result in a fall in foreign portfolio inflows."
Why did SIT want P-notes to stop?
It is alleged that because the investors putting money in the Indian markets through P-notes do not have to disclose their identities, a lot of black money finds its way to the Indian stock markets through this route. SIT has suggested the move to cancel participation in the Indian markets by way of P-notes to tackle this very menace of P-notes.
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 "A man looking at the stock screen outside BSE in Mumbai")
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