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P-Notes cover lost ground, investments race to over 7-year high

Investments through participatory notes (P-Notes) into India’s capital market stood at Rs. 2.85 lakh crore (about USD 45 billion) at the end of May, the highest level in more than seven years.

P-Notes, mostly used by overseas HNIs (High Net Worth Individuals), hedge funds and other foreign institutions, allow such investors to invest in Indian markets through registered Foreign Institutional Investors (FIIs).

This saves time and costs for them, but the flip side is the route can also be used for round-tripping of black money.

According to Sebi data, total value of P-Note investment in Indian markets (equity, debt and derivatives) rose to Rs. 2.85 lakh crore at May-end, from Rs. 2.68 lakh crore in April.

This is the highest investment since February 2008, when the cumulative value of such investments stood at Rs. 3.23 lakh crore.

The total outstanding value of P-Notes has been rising steadily since January this year and the momentum continued till March, with April registering a drop but May hitting the highest level in over seven years.

The quantum (percentage) of FII investments through P-Notes rose to 11.8 per cent last month from 11.4 per cent in April.

Till a few years ago, P-Notes used to account for more than 50 per cent of total FII investment, but their share has fallen over the years after Sebi tightened disclosure norms and other related regulations.

As things stand, P-Notes make up mostly 15-20 per cent of the total FII investment in India since 2009 while it used to be much higher – 25-40 per cent – in 2008. The reading was as high as over 50 per cent at the peak of stock market bull run in 2007.

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