Value of P-Note holdings at six-and-a-half year high

Foreign assets under the indirect route is Rs.2.65 lakh cr, highest since February 2008

The value of foreign investor holdings of Indian securities through Participatory Notes (P-Notes) has hit its highest level since the end of the previous bull run.

Foreign investors hold Rs 2.65 lakh crore of Indian securities through the P-Note route, which does not require them to register with the Indian stock market regulator. The latter has issued the data for October. The previous high in absolute terms was Rs 3.22 lakh crore in February 2008.

Most of this capital is invested in the equity market, according to data from the Securities and Exchange Board of India (Sebi). A total of Rs 1.63 lakh crore was invested in equities and Rs 23,116 crore in debt. Derivatives accounted for another Rs 79,179 crore.

In all, foreign investors held Rs 21.71 lakh crore worth of Indian securities. Assets under the P-Note route accounted for 12.2 per cent of the total, as compared to 37.9 per cent of their overall holdings in February 2008.

The latest figure comes to 8.6 per cent if one excludes derivatives from the total assets and considers only the value of the securities themselves.

P-Notes or offshore derivative instruments are issued by foreign investors which are registered with Sebi. They buy on behalf of unregistered investors or those who do not invest directly, and issue them P-Notes. This instrument gives the latter, in essence, ownership of the purchased securities. The route is popular with hedge funds and other investors which quickly move in and out of a market.

The increase in inflows comes after heavy buying during the September quarter. A Kotak Institutional Equities Strategy Report dated November 17 says they were net buyers in sectors such as consumer products and banking. They sold stocks in industrials and cement, according to the report, authored by Sanjeev Prasad, Sunita Baldawa and Akhilesh Tilotia.

Foreign investors had been net buyers by Rs 90,000 crore so far this year. They were net buyers by Rs 892 crore in October. Sentiment around the Indian markets turned positive in the second half of October, after the government announced reform measures, including decisions on allocation of coal mines. They bought Rs 9,040 crore in November.

The current level, while the highest in absolute terms, is still not so in percentage terms. Foreign investors held 55.7 per cent of their overall investments through the P-Note route in June 2007. Regulatory restrictions on this route subsequently resulted in the proportion falling drastically. The absolute figure was also higher at the time. P-notes accounted for Rs 3.67 lakh crore in foreign assets.