As fear over stiff norms on the way for participatory notes (P-notes) spooked the markets, the finance ministry on Monday assured investors against any irrational action on these instruments, through which unregistered entities invest in the Indian markets.
Even so, the Sensex closed 550.93 points down at 27,561.38, lower by two per cent over Friday.
Market fears arose over the Special Investigative Team (SIT) into unaccounted money having recommended stricter norms for P-notes to identify ultimate beneficiaries.
"It is too early to say what view the government would take but it will certainly not act in a knee-jerk reaction," Finance Minister Jaitley told reporters. "No such step would be taken which could adversely impact investment sentiment."
Adding: "The government will apply its mind in due course, keeping in mind the investment environment and the objective behind the recommendations."
Since unregistered entities invest through P-notes, there has always been a problem in knowing the ultimate beneficiaries. So, the SIT had asked that the Securities and Exchange Board of India (Sebi) have regulations to help identify individuals holding these, beside additional steps to curb such money flows and tax evasion through the stock market route.
A similar recommendation in 2007 had triggered a major collapse in the stock market, prompting then Finance Minister P Chidambaram to announce no such measures would be taken. In between, though, Sebi had tightened the norms.
Investments through P-notes into the capital market had touched a seven-year high of Rs 2.85 lakh crore this May. It was Rs 2.75 lakh crore at the end of June. P-notes are 15-20 per cent of total foreign instituional investor money in India since 2009. It was 25-40 per cent in 2008 and as over 50 per cent at the peak of the stock bull run in 2007.
Revenue Secretary Shaktikanta Das also said there was no need to "panic" and that the ministry would take a view on the SIT suggestions only after consultation with Sebi, the Reserve Bank and other institutions. "There will be due stakeholder consultation and after that the government will take a decision. There is no reason to pre-judge which way the government is going to decide," he said.
Over the years, he said, tax havens had posed a challenge to tax authorities and the revenue department was identifying possible sources of black money generation and how to address these. He detailed some, such as recent treaties for exchange of information.
K V Karthik, senior director, Deloitte in India, said as P-notes were issued offshore by FIIs, these entities might further sell to others, adding layers of complexity in determining the ultimate beneficiary. This could complicate matters for regulators.