Investments through Participatory Notes (P-Notes) into India’s capital market dropped to Rs 2.72 lakh crore (about $41 billion) at the end of July.
P-Notes, mostly used by overseas HNIs (High Net Worth Individuals), hedge funds and other foreign institutions, allow such investors to invest in Indian markets through registered foreign institutional investors (FIIs).
This saves time and cost for them, but the flip side is the route can also be used for round-tripping of black money.
According to Sebi data, total value of P-Note investment in Indian markets (equity, debt and derivatives) declined to Rs 2.72 lakh crore at July-end, from Rs 2.75 lakh crore in the previous month.
Prior to that, investments through P-Notes had hit a seven-year high of Rs 2.85 lakh crore in May. This was the highest investment since February 2008, when the cumulative value stood at Rs 3.23 lakh crore.
The total outstanding value of P-Notes witnessed a steady rise since January and the momentum continued till March. The investments through this route registered a drop in April, but hit a seven-year in May. The inflows slipped in the last two months (June-July).
The drop in investment via P-Notes come amid Supreme Court-appointed Special Investigation Team (SIT) on black money asking Sebi to review its regulations on participatory notes to help identify the end-users of these instruments.
However, the government last month said that there was no requirement for “much change” in the regulations for P-Notes as the existing norms make it ‘almost impossible’ to misuse this route.
Besides, the quantum (percentage) of FII investments via P-Notes decreased to 11.1 per cent last month from 11.5 per cent in June.
Till a few years ago, P-Notes used to account for more than 50 per cent of 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 to 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, the value of P-Note 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.
