Investments through participatory notes (P-notes) in the domestic capital market soared to Rs 63,288 crore till July-end, making it the fourth consecutive monthly rise.
Trends in P-notes
• According to the Securities and Exchange Board of India (SEBI), the value of P-note investments in Indian markets -- equity, debt, hybrid securities and derivatives -- stood at Rs 63,288 crore till July-end, while the same was at Rs 62,138 crore at the end of June.
• Prior to that, investment level was at Rs 60,027 crore and Rs 57,100 crore at the end of May and April, respectively.
• The investment level had fallen to an over 15-year-low of Rs 48,006 crore at the end of March.
• The figure at March-end was the lowest level of investment since October 2004, when the total value of P-note investments in the Indian markets stood at Rs 44,586 crore.
• The lower figure in March came amid significant volatility in broader markets on concerns over the coronavirus-triggered crisis.
These are issued by registered foreign portfolio investors (FPIs) to other foreign investors, willing to invest in the Indian stock market without going through the process of registering themselves.
In a report published by SEBI, the regulator disclosed that P-note participation has increased in all the segments of equity, debt, hybrid securities, and derivatives.
P-notes are used by foreign investors to invest in stock derivatives which have Indian stocks as underlying assets.
P-Notes are among the group of investments considered to be Offshore Derivative Investments (ODIs).
It allows them to skip the registration process, which is placed by the government for FPI investors.
It enables investors to stay anonymous while leveraging profit by engaging in speculations.
Advantages of P-Notes
Participatory notes are easily traded overseas through endorsement and delivery.
They are popular because investors anonymously take positions in Indian markets, and hedge funds may anonymously carry out their operations.
Some entities route their investments through participatory notes to take advantage of tax laws that are available in certain countries.
Disadvantages of P-Notes
Because of the anonymity it possesses, Indian regulators face difficulty determining a participatory note's original owner and end owner.
A substantial amount of unaccounted money enters the country through participatory notes.
This flow of untracked funds has raised some red flags.