Exposure through the investment instrument falls to an all-time low in June.
Foreign institutional investors’ (FIIs) India exposure through participatory notes (P-Notes) fell to an all-time low in June.
Last month FIIs pared P-Note positions worth Rs 53,570 crore, bringing these off-shore derivative contracts’ share in total FII investments below 10 per cent for the first time since 2003, beginning which data is available with the Securities and Exchange Board of India (Sebi).
P-Note investors now own Rs 1.07 lakh crore worth shares of the Rs 10.86 lakh crore worth shares held by FIIs. That the unwinding came even as FIIs remained net buyers of Rs 1,014 crore in June showed a lot of short positions that these investors had built up would have got adjusted, analysts said.
“Many P-Note investors had built up short positions in the earlier months. These shorts would have got squared off in the rally and internally adjusted,” said Sailav Kaji, director — institutional equities & chief strategist, Padmakshi Financial Services.
P-Note exposure went up from Rs 1.34 lakh crore in January to Rs 1.61 lakh crore in May without corresponding inflows into the Indian markets.
During these five months, Indian markets received net inflows of around Rs 700 crore, suggesting most positions built up through P-Notes could have been short positions.
The deregulation of diesel prices towards the end of June triggered a rally in the Sensex, which consumed many of these shorts, said brokers.
Fears of another round of regulatory crackdown on P-Notes could also be a reason, according to an FII. “P-Note investors are shifting their investments to regular FII route,” he said.
According to recent reports, Sebi has asked P-Note issuers to provide details of end beneficiaries of these notes on an upfront basis regularly.
P-Notes were originally preferred by investors who did not want to reveal their identities or ones who did not want to go through the registration and compliance processes of Sebi.
After taking the extreme step of asking investors to unwind all derivative positions and ban new positions in 2007, Sebi did a U-turn in 2008 allowing P-Note investments.
But to bring in transparency, Sebi issued tough guidelines in 2008, under which the issuer of P-Notes, usually an FII, must know the ultimate beneficiary of the transaction.
Sebi required that the P-Notes be issued only to persons regulated by an appropriate foreign regulatory authority and should be issued after compliance with ‘know your client’ norms.
Following these new rules, the P-Notes’ share dipped to an average 15-16 per cent during most of 2009 and 2010, down from 35-38 per cent in 2007-2008.