P-note investments climb to Rs 84,647 cr in August

Foreign portfolio investors (FPIs) have invested Rs84,647 crore in Indian capital markets via participatory notes (P-notes) in August, while they offloaded over Rs30,355 crore (both in equity and debt) between July and October (first week).

The August spike comes after P-note inflows of Rs80,341 crore in July.
While the absolute value of P-note investments are far below the record levels of Rs4,50,000 crore hit in October 2007, the current investments are still high.
Participatory notes (P-notes) are issued by registered foreign portfolio investors (FPIs) to overseas players who wish to be part of the Indian stock market without registering themselves directly. Investing through P-Notes is also very simple and hence very popular amongst foreign institutional investors. It only needs the due diligence process.
In fact, the cumulative value of P-note investments in Indian secondary markets had risen to Rs1,31,006 crore in October 2017 from Rs1,22,684 crore in end-September.
Of the total investments made in September this year, P-note holdings in equities stood at Rs66,233 crore and the remaining in debt and derivatives markets. Besides, the quantum of FPI investments via P-notes rose to 2.5 per cent during the period under review from 2.4 per cent in the preceding month.
Before the rise, P-note investments were on a decline since June last year and hit an over eight-year low in September. However, these investments rose slightly in October but fell again in November and the trend continued till July this year.
In July this year, P-note investments had touched the lowest level since April 2009 when the cumulative value of such investments stood at Rs72,314 crore. The decline in investment could be attributed to several measures taken by the market watchdog to stop the misuse of the controversy-ridden participatory notes.
In July 2017, Sebi had issued strict norms stipulating a fee of $1,000 on each instrument to check any misuse for channeling black money. It had also prohibited FPIs from issuing such notes where the underlying asset is a derivative, except those which are used for hedging purposes.
Last month, Sebi issued revised KYC norms for FPIs, wherein resident as well as non-resident Indians have been permitted to hold non-controlling stake in such entities. These norms have been put in place weeks after a panel suggested various changes to the guidelines proposed earlier, amid concerns in certain quarters that overseas funds might face difficulties in ensuring compliance.
Non-resident Indians, overseas citizens of India and resident Indians have been permitted to hold a non-controlling stake in FPIs. There would also be no restriction on them to manage the non-investing FPIs SEBI-registered offshore funds as well as registered investment managers.