P-note investments rise to 2-year high of Rs 1.84 lakh crore

Currency depreciation, continuation of Fed stimulus make it the preferred route

Investments through participatory notes (P-notes), typically used by foreign investors not directly registered with the stock market regulator in India, touched a near two-year high in October.

These investments stood at Rs 183, 862 crore at October-end, the highest since May 2011. The P-note route is generally used by wealthy investors abroad, hedge funds and other investors who want to participate in the Indian markets but without being registered with the Securities and Exchange Board of India (Sebi) as foreign institutional investors (FIIs).

Flows into Indian equities through the P-note route have been rising, due to currency depreciation and continuation of the stimulus programme of the US Federal Reserve, say market watchers.

“Investors who opt for the P-note route do not have a long-term view on India. They see India as a place where relatively big money can be made in the short term, through tactical positioning of investments,” said U R Bhat, managing director of Dalton Capital, a registered FII.

FIIs, those registered with Sebi, have made net investments of Rs 39,784 crore in both debt and equity in calendar year 2013, according to data from the regulator.

“The increased flows coming through the P-notes are in line with the overall rise in money coming through foreign investors,” said Sandeep Singal, co-head of institutional equity, Emkay Global Financial Services.

P-notes in 2007 accounted for about half of the total investments by FIIs. These have since come down, following greater regulatory scrutiny on this route. At present, they account for 15-20 per cent of the total FII investment.

Investments by FIIs, both direct and indirect, hit a temporary snag in May as the currency decline started, on the back of an improvement in the American economy. Currencies across emerging markets slipped against a strengthening dollar. The rupee has fallen by 15 per cent since April.  

Sentiment was further dampened by fear of an early withdrawal in the US Federal Reserve’s $85-billion bond-buying programme.  Since June, foreign flows through the P-note route have increased by 25 per cent.

Market participants are confident that the money coming in is here to stay, having taken into account all the negatives. “Several investors had chosen to quit investing in India because of the problems on the economic front and the decline in the equity markets. Any money coming in today is aware of the issues and will likely see an increase, going forward,” said Singal.

“The money coming in through P-notes is hedge fund money or short-term money. Investors could be taking a view on the elections at this point, which is why the FII money is coming in regularly,” said Vikas Khemani, head (institutional equities), Edelweiss Securities.