The India investment behaviour of foreign institutional investors (FIIs) has undergone a sea change over the last two years. Partly attributed to the government’s move to discourage its use, participatory notes (P Notes) has become a small proportion of total assets under management by FIIs.

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

The government and specifically the securities regulator Sebi had apprehension on growing use of P-Notes during the peak of bull run which ended in January 2008. The concern was on the huge inflow of foreign money whose actual financiers were not visible to the Indian regulator. This led to concerns of the source of funds.

These P-Notes accounted for as much as 55% or more than half of total inflow into India in June 2007, has shrunk to just around 15% over the last few months, the lowest in six years (for which the data is available with Sebi).

Although, the quantum of investment through P-Notes at Rs 97,885 crore (June’09) is more than four times what it was in 2003, the proportion of P-Notes o the total AUM of FIIs is lower than what was there that time (~20%).

Further, the total value of P-Notes had hit a high of Rs 4.49 lakh crore (~100 billion in mid 2007) which has shrunk to less than a quarter now.

Even as one of the reason for this is lower value of stocks compared to 2007, it is largely due to the shift in investment pattern of FIIs as many of the foreign funds have over time registered themselves with Sebi and are investing directly, as desired by the authorities.

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