Investment in P-notes continues to decline; hits new low of Rs 80,341 crore

Investments through participatory notes into Indian capital markets plunged to over nine-year low of Rs 80,341 crore till July-end amid stringent norms put in place by the watchdog Sebi to check misuse of these instruments.  P-notes are issued by registered foreign portfolio investors (FPIs) to overseas investors who wish to be part of the Indian stock market without registering themselves directly. They, however, need to go through the due diligence process.

According to the Sebi data, the total value of P-note investments in Indian markets – equity, debt, and derivatives – slumped to a low of Rs 80,341 crore till July-end from Rs 83,688 crore clocked by June-end. Prior to that, in May the figure was Rs 93,497 crore.

This is the lowest level since April 2009 when the cumulative value of such investments stood at Rs 72,314 crore. Of the total investments made last month, P-note holdings in equities were at Rs 60,550 crore and the remaining in debt and derivatives markets. Besides, the quantum of FPI investments via P-notes dropped to 2.4 percent during the period under review from 2.6 percent in the preceding month.


These are used by overseas market participants that don’t want to get registered as FIIs. P-notes are not issued in India, rather these are issued by an India registered FII to other overseas investors. The FII will be the entity to initiate a transaction in our stock markets, which could be on behalf of foreign clients. P-notes are then issued by the FII to the client, underlining that the securities are held on behalf of the client albeit in the name of the FII. The P-note holder is entitled to all the dividends, capital gains and other payouts on the underlying securities. FIIs have to periodically report to Sebi on P-note issuance without the need to name the final beneficiary.

The primary reason why P-Notes are worrying is that of the anonymous nature of the instrument as these investors could be beyond the reach of Indian regulators. Further, there is a view that it is being used in money laundering with wealthy Indians, like the promoters of companies, using it to bring back unaccounted funds and to manipulate their stock prices.

These are a popular way to invest in Indian markets as not only do these save the investor from regulatory hassles of registration, but also allow the final beneficiary to remain anonymous.

Large hedge funds and high net worth individuals find this a hassle-free and simple way to get exposure to Indian markets.

Reports also suggest that P-notes may aid in the movement of black money or unaccounted funds. Such funds leave the country through various routes and can easily re-enter via investments aided by P-notes, which won’t reveal the identity of the beneficiary. Given that P-notes are issued outside India to overseas investors, they are not regulated and are open to misuse.

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