New FII norms won't affect existing P-note positions: Sinha

Foreign investments into Indian markets through the P-notes route rose to Rs 1.68 lakh cr in May from Rs 1.57 lakh crore in March

The new regime for foreign investors, which bars a section of these from issuing participatory notes (P-notes), will not affect existing positions, said U K Sinha, chairman of the Securities and Exchange Board of India (Sebi).

P-notes allow hedge funds and foreign institutions to bet on Indian stocks through registered foreign brokers without registering with Sebi.  

The capital market regulator said on Tuesday it was dividing foreign institutional investors (FIIs) into three categories and that the third category would not be able to issue P-notes, which are offshore derivatives instruments.

“If you look at it closely, the institutions that have issued P-notes perhaps don’t fall in category three. They fall in category two,” said Sinha on the sidelines of the CII Mutual Fund summit.

For implementing a risk-based Know Your Customer (KYC) system, Sebi has decided to divide foreign investors into three categories. Category one comprises FIIs like sovereign wealth funds and foreign central banks, while the second category will include asset management companies, pension funds and insurance companies. Category three includes investors not covered in the first two categories, primarily individuals and trusts.

Foreign investments into Indian markets through P-notes rose to Rs 1.68 lakh crore in May from Rs 1.57 lakh crore in March. The investments through this route were into equity, debt and derivatives.

The government and Sebi have been worried about the quality of flows into Indian equities against the P-note positions though the percentage of flows through this route has been on the wane in recent years.

The value of P-notes as a percentage of FIIs' stock and debt investments was 11.69 per cent in May. It was as high as 50 per cent in August and September, 2007, the peak of the bull run.