Sebi’s curbs slow down P-note flow

According to market experts a friendlier FPI regime introduced by Securities and Exchange Board of India (Sebi) and tightening of norms for the issue of offshore derivative instruments (ODI) have resulted in a higher number of investors opting to invest directly in the Indian markets.

However, they added that most of the investors who are still investing through the P-note route are doing it for valid commercial reasons. During the last three years, the value of P-note as a percentage of FPI’s to total AUC custody has almost remained in the range of 11-11.5 per cent. It was as high as 16.4 per cent in February 2012 and 55.7 per cent in June 2007.

Siddharth Shah, partner, corporate and funds, Khaitan & Co said that Sebi regulation already stipulates that P-notes can be issued or transferred to only regulated entities which are broad based and with the requisite undertakings by the issuers of ODI that such P-notes are not being held for the benefit of restricted entities or through opaque structures.

“This to an extent does address certain concerns regarding the black money issue. Over the years, the regulator has brought in adequate checks and balances to ensure that the P-note route is not used as a conduit for undesirable investment in India. This is one of the reasons why the volumes of P-note investments have come down significantly over the years,” he said.

Adding that this route is used for commercial reasons, he added, “For instance, they don’t have to incur depository or custodian charges and they find the P-note regime simpler and efficient with the ability to design an OTC derivative product based on a basket of underlying Indian securities that specifically suits their requirement. This could also be to take benefit of leverage that such products offer.”

“Due to the friendlier FPI regime put in place by Sebi, a lot of long term investors are taking direct exposure to market by getting registration with the capital market regulator.

However, short-term investors and some of those first time investors who want to test the Indian markets are opting the P-note route to gain exposure to Indian equities,” said U.R. Bhat, MD, Dalton Capital Advisors.