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Investments in domestic capital markets through participatory notes (P-notes) surged to a six-month high of over Rs 1.5 trillion (Rs 1.5 lakh crore) at December-end despite stringent norms put in place by regulator Sebi to check their misuse.
P-notes are issued by registered foreign portfolio investors to overseas investors who wish to be part of Indian stock markets without registering themselves directly. They, however, need to go through a proper due diligence process.
According to Sebi data, the total value of P-note investments in Indian markets — equity, debt, and derivatives — increased to Rs 1.52 trillion (Rs 1,52,243 crore) at December-end from Rs 1.28 trillion (Rs 1,28,639 crore) at the end of November.
This is the highest level since June when the cumulative value of such investments stood at Rs 1.65 trillion (Rs 1.65 lakh crore).
Of the total investments in November, P-note holdings in equities were at Rs 1.2 trillion (Rs 1.2 lakh crore) and the remaining in debt and derivatives markets.
Besides, the quantum of FPI investments via P-notes surged to 4.6 per cent during the period under review from 4 per cent in the preceding month.
Prior to the recent surge, P-note investments were on a decline since June and hit an over eight-year low in September. However, these investments slightly rose in October but fell in November.
These declines could be attributed to several measures taken by markets regulator Sebi to stop the misuse of the controversy-ridden participatory notes.
In July, Sebi notified stricter P-notes norms stipulating a fee of $1,000 that would be levied on each instrument to check any misuse for channelising black money.
Also, Sebi prohibited FPIs from issuing such notes where the underlying asset is a derivative, except those which are used for hedging purposes.
The move was a follow-through of Sebi's board approval of a relevant proposal in June. These measures were an outcome of a slew of other steps taken by the regulator in the recent past.
In April, Sebi had barred resident Indians, NRIs and entities owned by them from making the investment through P- notes. The decision was part of efforts to strengthen the regulatory framework for P-notes, which have been long seen as being possibly misused for routing black money from abroad.
