FII debt holding through p-notes double this year

Value of P-notes in debt rises from Rs 9,500 crore to Rs 21,687 crore in 2014

The value of debt investments of foreign investors through participatory notes (P-notes) has doubled in the first nine months of calendar year 2014.

The total value of P-notes, also known as offshore derivative instruments, in debt has increased from Rs 9,500 crore in December 2013 to a record level of Rs 21,687 crore in September 2014, an increase of nearly 130 per cent.

The share of P-notes in overall foreign investment into the debt market is nearly 10 per cent, indicating that a number of overseas investors are drawn towards the Indian paper through this fast-track investment route.

Total investments by foreign portfolio investors into debt instruments stood at Rs 2.56 lakh crore at the end of September 2014.

Typically, the P-note route is used by foreign investors who are not registered with the market regulator, the Securities and Exchange Board of India.

Attractive yields on offer, stabilising domestic currency and easing inflation has drawn foreign investor towards the Indian debt market. So far in 2014, foreign portfolio investment into the debt market has been far in excess compared with the equities market.

“High net-worth investors mainly invest through P-notes to avoid the formality of registering with the regulator, which takes up to three months. These investors want to lock in at current attractive yields through readymade vehicles such as P-notes through foreign banks,” said Ajay Manglunia, head of fixed income at  Edelweiss Capital.

According to experts, the high yield differential between the developed world and the emerging markets such as India is also a big draw for foreign investors.

Experts said after adjusting for the cost of hedging, which has come down due to the stability in the rupee against the dollar, the returns on sovereign Indian securities could be as high as four per cent.

HSBC Global believes investment by overseas investors could continue despite already having invested $20 billion into the Indian debt market this year. “Fiscal improvements could also encourage greater portfolio investment… FII (foreign institutional investor) investment into government debt is now close to its limit, even if there is still room for investment into the corporate debt market,” said a report by HSBC Global Research.

“Indian bond yields look attractive in nominal terms to global investors, while concerns about the currency have eased massively over the past two years,” CLSA noted. According to the brokerage, easing inflation and the decline in oil prices provide “the potential for significant rate cuts next year”.

The market has already begun to factor in the possibility of rate cuts with the yields on the 10-year benchmark government security (G-sec) coming down, analysts said.

“The government and its policy decisions so far have undoubtedly been the biggest attraction for foreign investors. Even when Indian yields are lower than other emerging market economies, investors are more comfortable with parking money in Indian instruments because the risks involved are much lower,” said Ashish Agarwal, executive director of A K Capital.

According to industry players, the large part of P-note investments are going into corporate debt, where the yields are given more attractive compared to G-secs.

“There have been many issuances from financial companies. P-note investors are particularly interested in government-owned companies and banks,” said Manglunia.