P-notes investments continue to drop; hit new low of Rs 665.87 bn till Oct

Investments in the Indian capital market through participatory notes (P-notes) continue to decline and hit a nine-and-a-half year low of Rs 665.87 billion till October.

P-notes are issued by registered foreign portfolio investors (FPIs) to overseas investors who wish to be part of the Indian stock market without registering themselves directly. They, however, need to go through a due diligence process.

According to Sebi data, the total value of P-note investments in Indian markets -- equity, debt, and derivatives -- slumped to a fresh low of Rs 665.87 billion till October-end from Rs 795.48 billion at September-end.

Prior to that, the value of P-note investments had risen to Rs 846.47 billion at August-end, which was the first rise in such fund infusion in 10 months.

As per the data, the fund inflow through P-notes in October was the lowest since March 2009, when the cumulative value of such investments stood at Rs 694.45 billion.

The decline in investments could be attributed to several measures taken by the market watchdog to stop the misuse of the controversy-ridden participatory notes, experts said.

Of the total investments made last month, P-note holdings in equities were at Rs 505.84 billion, while the remaining was in debt and derivatives markets. The quantum of FPI investments via P-notes dropped to 2.2 per cent during the period under review from 2.5 per cent in the preceding month.

P-note investments were on a decline since June last year and hit an over eight-year low in September 2017.

In July 2017, Sebi had notified stricter norms stipulating a fee of $1,000 on each instrument to check any misuse for channelising black money.

It had also prohibited FPIs from issuing such notes where the underlying asset is a derivative, except those which are used for hedging purposes.

Meanwhile, in September this year, the market regulator issued revised KYC norms for FPIs, wherein resident as well as non-resident Indians have been permitted to hold non-controlling stake in such entities.

These norms were put in place weeks after a panel suggested various changes to the guidelines proposed earlier, amid concerns in certain quarters that overseas funds might face difficulties in ensuring compliance.

Non-resident Indians (NRIs), overseas citizens of India (OCIs) and resident Indians (RIs) have been permitted to hold non-controlling stake in FPIs.