Investment through Participatory Notes (P-Notes) into India's capital market grew to over Rs 2.58 lakh crore (about USD 39 billion) at the end of October. 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 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) increased to Rs 2,58,287 crore at October-end, from Rs 2,53,875 crore in the previous month. This was the second successive month when investment through this route increased. The total outstanding value of P-Notes witnessed a steady rise since January and the momentum continued till March.
However, investments through this route registered a drop in April, but hit a seven-year high in May. The inflows slipped in the subsequent three months (June-August) but marginally rose in September and again grew in October. The drop in investment via P-Notes during June-August comes 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 later said it has no intention of banning this financial instrument overnight. Responding to a query on apprehensions that P-Notes are being misused, Sebi chief UK Sinha had last month said the regulator has all the data about entities who are using this. The quantum (percentage) of FII investments via P-Notes remain unchanged at 11 percent.
Till a few years ago, P-Notes used to account for more than 50 percent 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 percent of the total FII investment in India since 2009. While it used to be much higher 25-40 percent in 2008, the reading was as high as over 50 percent at the peak of stock market bull run in 2007.
In absolute terms, the 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.
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