Arbitrage game ends for FIIs

Sources said some of the big FIIs had been running parallel mini-exchanges outside the country, allowing one P-note holder to sell to another through the books of the FIIs.  These FIIs had a vested interest in maintaining a situation where they could play an arbitrage game and charge higher fees for providing investors with an indirect access to the Indian markets.  The notional value of P-notes stood at Rs 3,53,484 crore till August this year. Five of the total 34 FII sub-accounts accounted for 60 per cent of the total issuances.  When P-notes are issued to buy securities listed on the Indian bourses, the cost may be somewhere around 1 per cent of the transaction in India. When they are issued in the overseas market, the cost for the ultimate buyer comes to around 4 per cent.  Dealers in P-notes said foreign brokers kept some spread for themselves, even while adding documentation charges for creating special structure for deals. More than one broker was also involved in these transactions.  Investors were also willing to pay a premium because of the freedom to remain anonymous if they invest through P-notes.  FIIs also issued customised instruments to overseas clients that included longer-duration Nifty or stocks futures and options.  On NSE, there are futures and options contracts with three-month durations.  In the offshore market, FIIs issued structured derivative instruments for three years and charged fees accordingly as they had dynamic hedging mechanism against such products.  Sources said P-notes were not the only instrument through which FIIs were making a killing. The day when Sebi issued draft norms for restricting P-notes, FIIs went short on Indian ADRs listed on the NYSE and the Nasdaq.  While there was panic the next day, FIIs covered the short position at very low levels, making big profits for themselves.