Five FIIs account for 60% of PNs

There was 28 foreign institutional investors issuing participatory notes (P-notes) as on July 31, 2007, and their cumulative outstanding notional value stands at $86.26 billion - nearly 40 per cent of the value of foreign portfolio investments in India, according to the government.

P-notes, which are offshore derivatives of Indian equities, are issued by FIIs to overseas investors who want to invest in Indian stock market, but do not want to register themselves with the Securities and Exchange Board of India (Sebi).

The top five FIIs issuing P-notes are Morgan Stanley & Co International, Merrill Lynch Espana, Citigroup Global Markets Ltd, Goldman Sachs & Co and CLSA Merchant Bankers, the Union Minister of State for Finance Pawan Kumar Bansal said in Lok Sabha today.

"The top five P-notes issuing FIIs together account for about 59.6 per cent of the notional value of the outstanding P-notes as on July 31," he said. The cumulative notional value of P-notes issued by the five top FIIs was $51.41 billion as on July 31, Bansal said. Morgan Stanley & Co International has issued PNs worth Rs 55,401 crore, followed by Merrill Lynch Espana (Rs 47,928 crore), Citigroup Global Markets (Rs 45,018 crore), Goldman Sachs and Co (Rs 34,771 crore) and CLSA Merchant Bankers (Rs 24,388 crore).

There are over 1,000 FIIs registered with the Sebi, and the value of their total investment in India is estimated at about $200-225 billion. This makes the total value of P-notes issued by the 28 FIIs at $86.26 billion.

Though the amount appear big, if one takes into account the total market capitalisation of $1 trillion, this accounts for just 8.6 per cent of the Indian stock market capitalisation.

PN is a derivative instrument issued in foreign jurisdictions by an FII or one of its associate entities. The instruments generally have Indian securities or indices as the underlying asset in the form of equity, debt, derivative or an index.

The investors in PNs merely derive economic benefits of investing in the security, without actually owning the underlying Indian securities, which are being held in the name of the FII that issued PN.

P-notes have been a subject of debate with a committee appointed by the Reserve Bank of India recommending its ban as the ultimate beneficiaries of these offshore instruments were not known.