Stocks in India shudder amid curbs

The recent frenzy to get into the Indian stock market briefly turned into a frenzy to get out Wednesday, driving a key share index down more than 9% after the government moved to curb some foreign cash inflows.

The Sensex index on the Bombay Stock Exchange sank 1,744 points, or 9.2%, early in the session, then rebounded to close with a loss of 336 points, or 1.8%, at 18,715.82.

The Indian market, like many other emerging markets, still is up dramatically since late August as money has rushed back in after a sell-off in summer tied to the global credit crunch.

A new survey of global investment managers by Merrill Lynch & Co. showed that optimism about emerging markets remained high.

“There is a belief among investors that emerging markets are the only oasis for growth,” David Bowers, a consultant to Merrill, said at a news briefing in London on Wednesday.

But optimism gave way to fear early Wednesday in India after the government said it would take steps to rein in foreign investment made via so-called participatory notes.

The notes, which change in value depending on the performance of the underlying securities, provide hedge funds with anonymity in their investments.

Indian securities regulators, concerned about speculation in stocks, said late Tuesday that they wanted more transparency in the markets. So they proposed that investors who buy shares anonymously via participatory notes switch to investing directly in the shares within 18 months.

That triggered a plunge in the market early Wednesday and a one-hour trading halt. Stocks then recovered after the government said it didn’t intend to ban the notes entirely, and that foreign money still was welcome.

“The government was getting uncomfortable with the sharp run” in the market, said Jayesh Shroff, a money manager at SBI Funds Management.

The Sensex index is up 22% since the end of August and 36% year to date.

Some analysts said the government’s move could scare off foreign money.

“We’re talking about a direct restriction on the market, and that’s startling,” said Jo Dong Hyuk, who oversees $2 billion in global equities including Indian stocks at Korea Investment Trust Management in Seoul.

The planned clampdown also raises concern that other Asian securities regulators will consider restrictions to strengthen market oversight and head off investment bubbles that could end in ruin for their economies.

Hong Kong Monetary Authority Chairman Joseph Yam said Sept. 24 that he was displeased with the low level of disclosure by hedge funds compared with other investors.

The Hong Kong market is up 47% this year, including a 22% surge since the end of August.

Some global investors have poured into emerging markets since August, betting that those economies will continue to grow at a healthy pace even as housing-market woes weigh down the U.S. economy.

Merrill Lynch’s survey of 209 money managers worldwide this month showed that 52% were “overweight” emerging market shares in their portfolios, the highest since 2004.

Fund managers have taken a “very, very aggressive stance” on developing nations, Bowers said.