Investment in Capital Markets through P-Notes dropped

According to Sebi data, the value of P-note investments in Indian markets—equity, debt, and hybrid securities—stood at Rs.96, 292 crores at December-end, as compared to Rs.99, 315 crores at the end of November.

Equity, debt, and hybrid securities:

What are Participatory Motes (P- Notes)?

P-notes are issued by registered foreign portfolio investors (FPIs) to overseas investors who wish to be a part of the Indian stock market without registering themselves directly after going through a due diligence process.

Who issues P- Notes and what is the process?

• Participatory notes are issued by brokers and FIIs registered with SEBI. The investment is made on behalf of these foreign investors by the already registered brokers in India.
• For example, Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.
• The brokers that issue these notes or trades in Indian securities have to mandatorily report their PN issuance status to SEBI for each quarter. These notes allow foreign high-net-worth individuals, hedge funds and other investors to put money in Indian markets without being registered with SEBI, thus making their participation easy and smooth.

Advantages of participatory notes:

• Anonymity: Any entity investing in participatory notes is not required to register with SEBI, whereas all FIIs have to compulsorily get registered. It enables large hedge funds to carry out their operations without disclosing their identity.
• Ease of trading: Trading through participatory notes is easy because they are like contract notes transferable by endorsement and delivery.
• Tax saving: Some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries.
• P-Notes also aid in saving time and costs associated with direct registrations.

Disadvantages of P-notes:

• Because of the anonymous nature of the instrument, the investors could be beyond the reach of Indian regulators.
• P- Notes are being used in money laundering with wealthy Indians, like the promoters of companies, using it to bring back unaccounted funds and to manipulate their stock prices.

Why SEBI is not in favour to ban P-Notes?

• P- Notes are used globally in many markets.
• According to SEBI’s and the government’s views, P-Notes are legitimate instruments that are required for normal financial transactions and are prevalent in all the larger markets.
• In an attempt to ban, P-Notes in 2007 due to a surge in capital flows and excess liquidity, markets crashed immediately which recognised the importance of P-Notes in the Indian economy.

Capital market in India:

• The long-term financial market of an economy is known as the ‘capital market’. This market makes it possible to raise long-term money for a period of a minimum of 365 days and above.
• Across the world, banks emerged as the first and foremost segment of the capital market.
• In coming times many other segments got added to it, viz., the insurance industry, mutual funds, and finally the most attractive and vibrant, the security/stock market.
• Organised development of capital market together with putting in place the right regulatory framework for it, has always been a tough task for the economies.
• It is believed today that for strong growth prospects in an economy presence of a strong and vibrant capital market is essential.
• Over time, the Indian capital market started to have the following segments:
  • Financial Institutions
  • Investment Institutions
  • Banking Industry
  • Insurance sector
  • Security market