Investment through PNs rising again

The notional value of investments in the domestic stock market through participatory notes (PNs), the off-shore derivatives issued by foreign institutional investors (FIIs), rose from 15.5 per cent in August to 16.4 per cent and 16.5 per cent in September and October, respectively.

This indicates that investments through PNs is rising, in line with the rise in stock markets. Some hedge funds and foreign private investors still prefer the PN route.

According to data by the Securities and Exchange Board of India (Sebi), FIIs held equity assets worth $168.53 billion in September and $161.8 billion in October. The investment through PNs stood at $27.65 billion and $26.68 billion in September and October, respectively. In August-end, while FII investment in stocks stood at $152.24 billion, the share of PNs was $23.64 billion.

The PNs’ share in stocks held by FIIs in 2009 is much smaller compared to 2007, when PN investments accounted for almost half the FIIs’ investments in equities. This was before Sebi decided to crack down on the instrument.

However, according to experts, PNs could again become controversial if their share keeps rising in coming months. “With the stock market looking good in the next few months and the economy on a recovery mode, the rupee is expected to appreciate against the dollar. Considering this, the authorities may be forced to take measure to stem capital inflows if the rise of the rupee against the dollar is sharp. PNs could become the first casualty of any policy decision (to curb capital flows),” said a managing director of a leading Mumbai-based stockbroking company.

While Sebi had lifted the ban on PNs in late 2008 due to poor market conditions and record outflows, it had invited FIIs to directly register in India instead of investing from behind a veil.