A fourth of FIIs still prefer P-note access: PWC survey

Around 27% of the 203 FIIs surveyed said they won't prefer direct access to the Indian markets over P-notes

Over one of every four overseas investor still prefers participatory notes (P-notes) to take exposure to the Indian markets, reveals a survey conducted by PricewaterhouseCoopers (PWC), a leading consultancy firm.

Around 27% of the 203 foreign institutional investors (FIIs) surveyed said they won't prefer direct access to the Indian markets over P-notes. In comparison, less than 10% of overseas investments happen through this route, down from a peak of over 50% during 2007.

Tightening of p-note regulations has seen the importance of these instruments shrink drastically over the years. Experts say the Indian markets is losing out on investments from investors who don't wish to enter India directly but at the same time find the current P-note framework restrictive.

"There are a few investors who don't wish to go through the entire registration process required for direct access. The tightening of the p-note framework might have impacted investments from these investors," said Gautam Mehra, India tax leader, PWC.

P-notes are financial instruments that allow foreign investors to take exposure to Indian stocks without having to register with market regulator Sebi. The ease-of-use and cost-effectiveness of p-notes had made them very popular among FIIs.

In a bid to curb misuse of this route, Sebi in May tightened the p-note framework, making it at par with that for onshore investors.

Despite p-note tightening, foreign flows into the Indian markets have remained strong this year. Two-thirds of the respondents in the PWC survey said they prefer India as an investment destination over other emerging markets (EMs). This has reflected in FII inflows this year. Overseas investors have net bought shares worth $5.6 billon so far in 2016.

Among other key findings of the survey, nearly half of the respondents said the cost of trading in India vis-?-vis other EMs is high. PWC said transaction cost, particularly on derivatives trading, needs to be brought down for the domestic markets.

Also, 77% of FIIs said they were satisfied with the ultimate outcome of the minimum alternate tax (MAT) controversy. Last year, the tax department had asked a number of FIIs to re-file their returns with financial statements in a bid to levy MAT on them. PWC said the issue has been now been resolved and there are no outstanding MAT notices against any FIIs. Majority of FIIs, who participated in the survey, appreciated the turnaround time by the regulator for their queries and also the current trade and settlement process.