Investments by rich overseas entities through ‘Participatory Notes’ into Indian markets rose to a five-month high of Rs 1,41,710 crore (around $26 billion) in August, even as funds pumped into equities fell for the second consecutive month.
The surge in the investment appears to be largely into the derivatives market, although equities account for more than half of the funds pumped in by P-Note investors into Indian markets.
The P-Notes, mostly used by overseas HNIs (High Networth Individuals), hedge funds and other foreign institutions, allow them to put their money into Indian markets through already registered FIIs, while saving on time and costs associated with direct registrations.
As per the latest data released by SEBI, the P-Note investments in Indian markets (equity, debt and derivatives) has reached highest level since March, when they had infused Rs 1,65,832 crore.
The quantum of FII investments through these P-Notes also rose to 12.7 per cent, up from 11.8 per cent in the previous month the highest since 15 per cent in March this year.
Till a few years ago, the P-Notes used to account for more than 50 per cent of total FII investments, but their share has fallen after SEBI tightened its disclosure and other regulations for such investments.
According to market analysts, after a lull in the last three four months overseas entities have back to India on expectations of the government’s fresh initiatives on policy reforms.
The P-Note investments were on a steep uptrend this year till mid-March, but started declining sharply after the government in its Union Budget proposed new taxation regime of General Anti-Avoidance Rule (GAAR) and certain retrospective amendments for taxing offshore transactions.
The PNs have been accounting for mostly 15-20 per cent of total FII holdings in India since 2009, while it used to be much higher, in the range of 25-40 per cent in 2008. However, it was as high as over 50 per cent at the peak of Indian stock market bull run during a few months in 2007.