Portfolio investments through participatory notes (P-notes) have witnessed a sharp decline of 21 per cent even though the market regulator the Securities and Exchange Board of India (Sebi) had reversed the restrictions on FII investments through the instrument last year.

According to Sebi data released late evening, the total share of P-note investments fell from 19.8 per cent in October 2008 to 15.5 per cent in June 2009. This implies that a majority of investments came from registered FIIs and their sub-accounts. P-note investments had hit peak in September 2007 at 51 per cent. Former Sebi Chairman M Damodaran had proposed to ban investments through P-notes in October 2007.

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Currently, there are 1,675 registered FIIs and 5,204 registered sub-accounts. “The FII registration process has been made much simpler now, which has encouraged a lot of investors coming through P-notes to directly get registered as FIIs. P-notes also expose the holder to a counter-party risk, so at a time when a lot of large institutions were going bust, investors found it safer to come directly rather then expose themselves to a counter-party risk,” said a lawyer who did not wish to be named.

FIIs have pumped in Rs 5,636 crore ( $1.15 bn) in 2009 till date.

Recently, Cayman Islands, a favourite tax haven for investment managers, was admitted as a member of the International Organisation for Securities Commission (IOSCO), the global standard-setter for securities markets. This move could pave the way for direct entry of several hedge funds into the Indian securities market as many of them are registered there.

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