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.
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| 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.
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| 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.
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| 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.
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| 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.
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| Investors were also willing to pay a premium because of the freedom to remain anonymous if they invest through P-notes.
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| FIIs also issued customised instruments to overseas clients that included longer-duration Nifty or stocks futures and options.
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| On NSE, there are futures and options contracts with three-month durations.
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| 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.
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| 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.
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| While there was panic the next day, FIIs covered the short position at very low levels, making big profits for themselves. |
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