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P-note use at 8-month high of $32 bn in Oct

Source : BUSINESS_STANDARD
Last Updated: Mon, Dec 17, 2012 21:31 hrs

The popularity of the controversial offshore derivative instruments known as participatory notes, or P-notes, doesn’t look like fading away.

Foreign investments into Indian markets through P-notes, a preferred route for high net worth individuals (HNIs) and hedge funds from abroad, rose to an eight-month high of Rs 175,829 crore ($32 billion) in October, as various reform measures attracted these investors.

Earlier, foreign institutional investors (FIIs) were worried that P-notes would be targeted by tax officials after implementation of the proposed General Anti-Avoidance Rules (GAAR). These have since been put on the back burner by the government.

GAAR could have been detrimental for P-notes, as these instruments have long been under a scanner due to their opaque nature. Under GAAR, intended to check tax evasion, the onus was to be on companies to prove they were using a specific structure for commercial purposes and not to avoid tax. Tax officials could have questioned the claims of companies and FIIs. This is not the case currently, if a tax residency certificate is presented.

From the latest data issued by the Securities and Exchange Board of India, the total value of P-note investments in Indian markets (equity, debt and derivatives) at the end of October rose to the highest level since February, when their cumulative value was Rs 183,151 crore.

P-notes allow foreign HNIs, hedge funds and other institutions to invest through already registered FIIs, saving on the time and cost associated with direct registration.

The value of P-notes issued with derivatives as the underlying product, was Rs 95,536 crore at the end of October. FII investments through these notes rose to 14.4 per cent, up from 12 per cent in the previous month, the highest since 15 per cent in March this year. Till a few years ago, P-notes were a little over half of all FII investments. The share fell after Sebi tightened its disclosure and other regulations for such investments.

Market analysts say foreign entities have been hugely investing in the Indian market in the past two months, in the wake of the government’s initiatives on policy reforms. P-note investments were on a steep uptrend till mid-March but started declining sharply after the Union budget proposed the new GAAR regime and certain retrospective amendments for taxing offshore transactions.
 

HIGH ON OFFSHORE DERIVATIVES
Month 

 Total value of 
PNs on equity & debt

(B)
Assets
under
custody
of FIIs

Total value of
PNs on equity & debt

Including
PNs on
derivatives
Excluding
PNs on
derivatives
Including
PNs on
derivatives
as % of B
Excluding
PNs on
derivatives
as % of B
Jan’12 151,956 108,350 1,043,130 14.6 10.4
Feb’12 183,151 128,606 1,115,648 16.4 11.5
Mar’12 165,832 115,332 1,107,399 15.0 10.4
Apr 12 130,012 86,785 1,093,955 11.9 7.9
May’12 128,895 65,472 1,040,547 12.4 6.3
Jun’12 129,851 69,523 1,090,359 11.9 6.4
Jul’12 129,586 68,677 1,096,492 11.8 6.3
Aug’12 141,710 68,450 1,113,894 12.7 6.1
Sept’12 146,600 82,379 1,219,163 12.0 6.8
Oct’12 175,829 95,536 1,221,900 14.4 7.8
PN= P-Notes 

P-notes have accounted for 15-20 per cent of total FII holdings in India since 2009. It was 25-40 per cent in 2008 and over 50 per cent at the peak of the stock market bull run during a few months in 2007.




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