New Delhi: Investments through participatory notes (P-Notes) into India's capital markets declined to 18 month low of Rs 2.18 lakh crore at the end of February, amid sluggish equity markets. P-Notes, which are mostly used by overseas HNIs (high net worth individuals), hedge funds and other foreign institutions, allow investors to invest in Indian markets through registered foreign portfolio investors (FPIs), the key driver of Indian markets. This saves time and cost for them, but the flip side is that the route can also be used for round-tripping of black money.
According to SEBI data, total value of P-Notes investment in Indian markets (equity, debt and derivatives) has been falling since October. It declined to Rs 2,17,740 crore at the end of February from Rs 2,31,317 crore in the previous month. Total value of P-Notes investment in Indian markets stood at Rs 2.58 lakh crore, Rs 2.54 lakh crore, Rs 2.35 lakh crore and Rs 2.31 lakh crore in October, November, December and January, respectively.
It was Rs 2.54 lakh crore in September. Of the total, P-Note holdings in equities were at Rs 1.32 lakh crore at February-end and the remaining holdings were in debt and derivatives markets. The January figure marks the lowest level since August 2014, when the cumulative value of such investments stood at Rs 2.11 lakh crore. The quantum (percentage) of FII investments via P-Notes rose to 10.7 per cent in February, from 10.5 per cent in the preceding month.
Meanwhile, the benchmark Sensex plunged 7.5 per cent during the period under review. Earlier this month, SEBI chairman U K Sinha had said that strong measures have been put in place to check any misdemeanors including misuse of the instrument. Besides, SEBI Whole Time Member S Raman had said that it is difficult to identify the end-users of such instruments.
"But under the new regime, we have limited the rights for who can subscribe to these instruments to only two of the three classes of FPIs. These are sovereign funds and regulated entities. We have debarred others from issuing or subscribing to P-Notes. "After November 2014, we further tightened the norms as we found that there was a possibility of a gap or some regulatory arbitrage that could have been misused. We closed that gap also," Raman said.
Till a few years ago, P-Notes used to account for more than 50 per cent of the total FII investment, but their share has fallen over the years after SEBI tightened disclosure norms and other related regulations.
As things stand, P-Notes make up around 15-20 per cent of the total FII investment in India since 2009. While it used to be much higher, 25-40 per cent in 2008, the reading was as high as over 50 per cent at the peak of stock market bull run in 2007.
In absolute terms, value of P-Notes investment rose to a record of Rs 4.5 lakh crore in October 2007, but dropped to Rs 3.22 lakh crore in February 2008 and Rs 60,948 crore in February 2009, respectively.