Investment Via Participatory Notes Hits 15-Month Low


New Delhi: Investment through Participatory Notes (P-Notes) into India’s capital markets has hit a 15-month low of Rs 2.35 lakh crore (about $16 billion) at the end of December.

P-Notes, 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 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) declined to Rs 2,35,534 crore at the end of December from Rs 2,54,600 crore in the previous month.

This is the lowest level since September 2014, when the cumulative value of such investments stood at Rs 2.22 lakh crore.

In October, investment was at Rs 2.58 lakh crore through this route.

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 October and again fell in November as well as in December.

The drop in investment via P-Notes during June-August came when Supreme Court-appointed Special Investigation Team (SIT) on black money asked Sebi to review its regulations on participatory notes to help identify the end users of these instruments.

However, the government later said it had no intention of banning this financial instrument overnight.

The quantum (percentage) of FII investments via P-Notes fell to 10.1 per cent from 11 per cent.

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, 25-40 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-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.