7-Month P-Notes Investment in FY2020 Reaching FY2019 Total, But Govt says it is Declining Trend!

Moneylife Digital Team 10 December 2019

Investor Interest

Investment in India through offshore derivative instruments (ODIs), also known a participatory notes (P-Notes) is again rising and during first seven months of FY2020, it is nearing total investment received in FY2019.

However, the government, sharing past three year's data, says there is decline in the notional value of investments through P-Notes.

Anurag Thakur, minister of state for finance, while responding to a question in the Lok Sabha (http://164.100.24.220/loksabhaquestions/annex/172/AU3391.pdf) says, "There is a declining trend in investments in India. The notional value of ODI’s (on debt, equity and derivatives) as a percentage of asset under custody of foreign portfolio investors (FPI) has reduced from 55.7% in June 2007 to 2.3% in October 2019."

K Shanmuga Sundaram, a member of Parliament (MP), has asked about total amount of Participatory Notes (P-Notes) invested in India during the last three years and if there is a declining trend.

The P-Notes investment data sourced from market regulator SEBI and shared by the minister, however, shows a different picture. As per the data, during FY2019, investment through P-Notes was Rs78,110 crore, about 27% lower than Rs1.06 lakh crore recorded in FY2018.

But during the first seven months of FY2020 or from April to October 2019, the investment through P-Notes has reached Rs76,773 crore, just Rs1337 crore short of total investment in FY2019.

P-notes is an instrument issued by a registered foreign institutional investor (FII) to an overseas investor, who wishes to invest in Indian stock markets without registering themselves with SEBI. The instrument had been associated with 'round-tripping' of domestic 'black money' back into the Indian economy. The market regulator then tightened norms and asked all P-notes users to follow anti-money laundering law and FPIs to report any suspected breach immediately.

In July 2015, a Supreme Court-monitored special investigation team (SIT) on black money had caused another flutter by asking the market regulator to put in place regulation to pinpoint ‘final beneficial owners’ of P-Notes, right down to the individuals, or promoters and directors of companies that held the P-Notes.

SEBI has permitted only foreign portfolio investors or FPI to issue ODI. During FY2019, the notional value of ODIs as a percentage of the total assets under custody (AUC) of FPIs was 2.3%, the reply in Lok Sabha shows.

According to the minister, in order to ensure transparency SEBI has been constantly tightening norms for taking exposure in Indian capital markets through ODI or P-Notes route. "The recent measures taken by SEBI include imposition of a regulatory fee of $1000 on each ODI subscriber, mandatory know-your-customer (KYC) for all ODI subscribers, monthly reporting of all ODI transactions, and filing of suspicious transaction reports by ODI issuers. These measures have increased the compliance cost for ODI issuing FPI’s and has made ODI a less attractive investment route as compared to taking direct registration and investing in India as an FPI," Mr Thakur said in his written reply.

Talking about misuse of ODIs, the minister says, "SEBI has been rationalising the disclosure and reporting norms in line with the FPI regulations and guidelines from time to time in order to check misuse of these instruments and strengthen the ODI regulatory framework for transparency in disclosures in the interest of securities market."

Comments

User

Ramesh Poapt

7 years ago

loophole for sure in the system or well planned one!?

ramchandran vishwanathan

7 years ago

This is really a racket . Normal investors are asked to sign contracts and provide documents , whereas the parties using PN route are given a free hand