Mutual funds top on use of P-Notes; Top-10 FPIs have 73% share

Amid concerns over possible misuse of always-in-controversy PNotes, mutual funds have emerged as the top users of these offshore instruments for investing in Indian markets with a share of over 60 per cent.
Besides, just ten foreign portfolio investors account for almost 73 per cent of total outstanding investments worth over Rs 2.2 lakh crore through the Offshore Derivative Instruments -- commonly known in India as Participatory Notes or PNotes.
These FPIs include Singapore and Mauritius-based arms of global giants like Morgan Stanley, Goldman Sachs, Credit Suisse, HSBC, Merrill Lynch, Citigroup and JP Morgan.
Markets regulator Sebi (Securities and Exchange Board of India) has decided to tighten the due-diligence norms for issuance and transfer of ODIs after concerns were raised by the Supreme Court-appointed Special Investment Team (SIT) on Black Money about the possible misuse of these instruments for laundering of black money or round tripping of funds.

While foreign investors can register themselves as FPIs to invest directly in India, ODIs are typically market-access instruments preferred by those looking to save on time and operational costs involved with a direct registration.
Sebi rules allow certain classes of FPIs to issue ODIs after a proper due-diligence process that has been further tightened now to address the concerns raised by the SIT.

The regulator has also collected information for the SIT from the ODI issuers about the number of ODI subscribers in various categories along with their outstanding investment.
Out of a total of nearly 2,500 entities that are subscribing to ODIs, nearly 1,500 (over 60 per cent) are mutual funds and about 300 others are 'companies'.

Other ODI users included over 50 'Trusts', nearly 100 banks, over 50 sovereign wealth funds, over 200 hedge funds and 60 pension funds. There are also some university funds, endowment funds and charitable societies or foundations.
The ODI issuers informed Sebi that they do not issue these instruments to individuals at all.
According to Sebi, there are 37 FPIs which are issuing ODIs and these include "global banks and securities houses which issue ODIs all over the world and have well established infrastructure -- both physical and technological -- and documentation programmes in place which are used for global jurisdictions and offer their services in markets globally".

An analysis of reports filed by the ODI issuers with Sebi further showed that the top-ten locations where end beneficial owner of FDIs was located together accounted for nearly 93 per cent of total outstanding ODIs.
Top on the list is Cayman Islands (over 41 per cent), followed by Mauritius, the UK and the US with nearly 11 per cent share each in the total outstanding ODIs. Also in the top-ten locations were Ireland, France, Luxembourg, Singapore, British Virgin Islands and South Korea with 1-6 per cent share each.