The Hindu Business Line : Participatory notes account for over 40 pc of FII inflows

FUNDS routed through participatory notes account for almost 42 per cent of the $8.3 billion invested by FIIs in the Indian securities market so far this year. The share of P-Notes (as participatory notes are commonly referred to) has gone up from 24 per cent earlier this year to the current level, according to SEBI sources.

The pace at which the Indian markets have moved so far this calendar year has left regulators worried about possible misuse of P-Notes. FII investments, directly and through the P-Notes route, have provided the biggest liquidity support to the current bull run.

While FIIs were net investors to the tune of $8.5 billion during the last calendar year, expectations are that they would invest close to $12 billion this year. This would take the market's exposure to P-Notes to over $5 billion, if the same ratio were maintained for the next three months.

The total number of registered FIIs now stands at 782. This is up from 632 on December 31, 2004. Market participants say that the new FIIs registered this year are largely Japanese and Scandinavian investors.

Participatory notes are like contract notes. These are issued by FIIs to entities that want to invest in the Indian stock market but do not want to register themselves with the SEBI.

FIIs registered with the SEBI and their sub-accounts can issue, deal, or hold P-Notes. The underlying security against these notes would be listed or proposed-to-be-listed securities on any Indian stock exchange.

FIIs issue these notes to investors abroad with details of scrips that can be bought and expected returns over specific periods of time. If the client agrees, they deposit the funds with the overseas branch of the FII.

Then, the Indian arm of the FII proceeds with the transaction, buying the scrips in the Indian market and settling it on its own account. The details of the ultimate investor are not revealed at all in the Indian market or to the SEBI.

The SEBI rule, however, says that P-Notes can be issued only to regulated entities (in any country). Further transfer of these can also be made only to other regulated entities.

FIIs are not allowed to issue P-Notes to Indian nationals, persons of Indian origin or overseas corporate bodies (which are majority owned or controlled by NRIs).

This is done to ensure that the P-Note route is not used for money laundering purposes.

FIIs are required to report to the SEBI on a monthly basis if they issue, renew, cancel, or redeem P-Notes. The SEBI also seeks some quarterly reports about investing in P-Notes.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Depression heads for Vidarbha

PSUs are not Govt departments: Raha

ONGC draws blank in discoveries, Cairn Energy tops the list: DGH

Sensex swings 235 points intra-day — Closes 13 points down, small, mid-cap stocks feel the heat

Participatory notes account for over 40 pc of FII inflows

ONGC to step up crude output — To set up 3 more refineries

Waiting period for Green Card may trigger Indian techies' return