FIIs look at warehousing of P-notes

Some foreign institutional investors (FII) are looking at warehousing their participatory notes (P-notes) with a buyback option to avoid distress selling of P-notes that have equities as underlying. This follows the market regulator's proposal to give them 18 months to unwind their positions.

The proposal under discussion will work as follows: The FII holding such P-notes will sell them to another FII, which will charge a fee for warehousing them, and after a mutually agreed time, it will sell them back to the owner-FII by reversing the transaction.

The deal is complicated, but is a win-win for all. While FIIs can actually unwind their P-notes exposure or that of their sub-accounts without actually selling the shares, the warehousing FII earns a fat fee. The regulator will also be happy as the exposure to P-notes falls.

Meanwhile, FIIs, in general, are happy with the market regulator's move to speed up registration. They are also relieved that the proposal to limit P-notes is not for controlling capital inflows, but for greater transparency.

The announcement on proprietary sub-accounts being allowed to get converted into a separate FII was also well received. "It's a good sign that the regulator is ready to listen to our issues. He has acted fast," said a representative of an FII having big exposure to P-notes.

Currently, FIIs are waiting and watching to see how things take shape. The most important relief is that the measures are not for controlling capital flows as that would have meant the regulator delaying the registration process.

"The Sebi's preparedness to expedite the process of registration gives us the comfort that capital inflows can continue in the capital market," an FII representative said.