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FII Holdings Through P-Notes In India Hit 18-Month High

24 June, 2011

At a time when global headwinds led by trouble in Eurozone and stubborn inflation back home have cast a gloom over equity markets in India, there can be another alarming factor for the government. Foreign institutional investors’ (FIIs) India exposure through participatory notes (P-Notes) has hit a level, last seen only one-and-a-half year ago.

The total value of P-Notes on equity and debt including those on derivatives as a proportion of total assets under custody of FIIs rose to 19.5 per cent for the month of May, according to data available with market regulator SEBI. This stood at just 15 per cent for the month of April.

Although this is much below the level during the bull run that ended in January, 2008, the sudden rise and that, too, a sharp increase could be something to watch out for. The authorities had, in 2007-08, put a clamp to reduce the inflow of FII money through P-Notes in India.

P-Notes are offshore derivative products through which foreign investors (especially hedge funds) who are not registered in India, invest in the country.

The government and specifically, the securities regulator SEBI, had voiced apprehension on the huge inflow of foreign money from funds whose actual financiers were not visible to the Indian regulator, thus leading to concerns over the source of funds.

This was after the proportion of FII assets through P-Notes rose to as high as 55.7 per cent in June, 2007. It has been shrinking since then and over the recent past, and only occasionally has risen above the 18 per cent mark. This was partly due to foreign investors registering themselves with the regulators and, thereby, their India exposures were not counted under P-Notes.

Meanwhile, the total value of P-Notes on equity and debt including those on derivatives for the month of May rose to Rs 2,11,199 crore or $47 billion. This is the highest level since May, 2008, when it was Rs 2,34,933 crore and then shrunk to a low of just Rs 60,948 crore when the market bottomed out in February-March, 2009.

Signs of revival in importance of P-Notes are also visible in figures, excluding the derivatives. The total value of P-Notes on equity and debt, excluding those on derivatives, as proportion of FII’s total assets rose to 14.9 per cent last month, a level not touched since July, 2010.

The actual total value of P-Notes on equity and debt, excluding those on derivatives, also rose to Rs 1,61,210 crore, the highest level since August, 2008.

The total assets under the custody of FIIs stood at Rs 10,81,996 crore or $240 billion, as of last month.

 


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FII Holdings Through P-Notes In India Hit 18-Month High

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