Investment through Participatory Notes (P-Notes) into India's capital markets has hit a 15-month low of Rs 2.35 lakh crore at the end of December.
P-Notes, mostly used by overseas HNIs (High Net Worth Individuals), hedge funds and other foreign institutions, allow investors to invest in Indian markets through registered foreign institutional investors (FIIs).
This saves time and cost for them, but the flip side is that the route can also be used for round-tripping of black money.
According to Sebi data, total value of P-Notes investment in Indian markets (equity, debt and derivatives) declined to Rs 2,35,534 crore at the end of December from Rs 2,54,600 crore in the previous month.
This is the lowest level since September 2014, when the cumulative value of such investments stood at Rs 2.22 lakh crore.
In October, investment was at Rs 2.58 lakh crore through this route.
The total outstanding value of P-Notes witnessed a steady rise since January and the momentum continued till March.
However, investments through this route registered a drop in April, but hit a seven-year high in May. The inflows slipped in the subsequent three months (June-August) but marginally rose in September and October and again fell in November as well as in December.
The drop in investment via P-Notes during June-August came when Supreme Court-appointed Special Investigation Team (SIT) on black money asked Sebi to review its regulations on participatory notes to help identify the end users of these instruments.
However, the government later said it had no intention of banning this financial instrument overnight.
The quantum (percentage) of FII investments via P-Notes fell to 10.1 per cent from 11 per cent.
Till a few years ago, P-Notes used to account for more than 50 per cent of total FII investment, but their share has fallen over the years after Sebi tightened disclosure norms and other related regulations.
As things stand, P-Notes make up around 15-20 per cent of the total FII investment in India since 2009. While it used to be much higher, 25-40 per cent in 2008, the reading was as high as over 50 per cent at the peak of stock market bull run in 2007.
In absolute terms, the value of P-Notes investment rose to a record of Rs 4.5 lakh crore in October 2007, but dropped to Rs 3.22 lakh crore in February 2008 and Rs 60,948 crore in February 2009.
Of these 37 ODI-issuing FPIs, the top-ten accounted for
nearly 73 per cent of the total outstanding ODIs, which stood at Rs 2,23,077 crore as on March 31, 2016 or about 10 per cent of the total asset under custody of all FPIs registered in India.
This ratio has come down significantly from over 55 per cent at the peak of bull run in Indian stock market in 2007.
Top on the list was Morgan Stanley Asia (Singapore) Pte with nearly 14 per cent share in the total outstanding ODIs, followed by Copthall Mauritius Investment Ltd (nearly 12 per cent), Goldman Sachs (Singapore) Pte (over 9 per cent), Credit Suisse (Singapore) Ltd (nearly 7 per cent) and HSBC Bank (Mauritius) Ltd (over 6 per cent).
Also in the top-ten were Merrill Lynch Capital Markets Espana of Spain, Citigroup Global Markets Mauritius, Swiss Financial Corp (Mauritius), JPMorgan Chase Bank, National Association (USA) and Citicorp Investment Bank of Singapore with 4-6 per cent share each.
While there are apprehensions that the stricter set of norms will make it costlier to invest in India through P-Notes as one of the major attractions of such instrument is cost-effectiveness and easier access, most of the ODI issuers consulted by Sebi have agreed to a majority of new measures being put in place to check any misuse.
Apart from the requirement of reporting about positions of ODIs, the issuers would be now required to provide further details about the end beneficial owner and comply with onshore KYC norms.
The latest changes would make the regulatory framework in India more stringent than many developed and developing nations.
Rules have been tightened several times in recent years to check any misuse of this route, but P-Notes have still continued to court controversies.
These instruments are in vogue in various other markets by different names such as Equity Linked Notes, Capped Return Notes, Total Return Swaps, Participating Return Swaps, Credit Linked Loan, Equity Linked Certificates.
ODIs are issued by an FPI overseas as market access products against securities held by it that are listed or are proposed to be listed on a stock exchange in India, as its underlying. These underlying securities can be equity, debt, derivatives, index, a basket of securities from different jurisdictions with a portion being Indian securities or indices, or a basket of Indian securities.
The ODIs include over-the-counter derivatives documented through a bilateral contract, as also the securitised instruments such as notes, certificates or warrants.
