P-notes hit 8-year low on strict rules

The stringent norms prescribed by Sebi for the issue of offshore derivative instruments or Participatory Notes (P-Notes) by foreign portfolio investors (FPIs) have led to a steep fall in investment through such instruments in the Indian markets.

Investment made by FPIs through P-Notes has slumped to `1.23 lakh crore as on September 2017, its lowest level since August 2009.

P-Notes or offshore derivative instruments are issued by FPIs to individuals or institutions located outside India who do not want to invest directly in the domestic market by registering with Sebi.

Such investments now accounts for just 4.1 per cent of the total assets under custody (AuC) of FPI’s as against 16 per cent in 2009.

The opaque nature of such instruments has often brought them under the closer scrutiny of various financial market regulators in India.

Sebi started tightening its noose around P-notes over the last two years amid concern regarding the misuse of such instruments for money laundering and other activities.

In June 2017, Sebi prohibited the issue of ODIs against derivative contracts for speculative purposes. Additionally, the regulator also imposed a fee of $1,000 on each ODI issuing FPI for each and every ODI subscriber coming through such FPI.

Explaining the rational behind tightening of the norms governing the issue of ODIs, Sebi chairman Ajay Tyagi in June 2017 said that the intention is not to completely do away with the instrument. “We want to encourage overseas investors to directly enter the market. This instrument should be used only by those investors who want to test the Indian markets,” he said.

Last year, Sebi had asked the issuers of such instruments to follow the anti-money laundering law prescribed by India.

The regulator had also asked the issuing authority to provide monthly reports of complete transfer trail of such instruments and also report any suspicious transactions to Fraud Investigation Unit (FIU).