No big room left for fresh P-notes

There will be little room left for fresh issuance of Participatory Notes (P-notes) following the capital market regulator's tough posture on Monday that Foreign Institutional Investors (FIIs) cannot issue new notes beyond 40 percent of their assets under custody, say analysts.

Sebi Chairman M Damodaran, in a conference call with FIIs, affirmed that it was sticking to the proposed limit of 40 percent of assets under custody for the issuance of new P-notes by foreign brokerages.

All leading FIIs, which are issuing P-notes, have either exceeded the limit, or are near the 40 per cent limit, said industry players.

Top five FIIs - Morgan Stanley & Co International, Merrill Lynch Espana, Citigroup Global Markets Ltd, Goldman Sachs & Co and CLSA Merchant Bankers - account for 60 per cent of P-notes.

Sebi said brokers who exceed the limit will need to pare their outstanding notes. "Those who are known for their P-note issuances may have already exceeded the limit, and hence they will have to bring down their P-note holdings. We see little headroom for fresh P-note issuances," said an analyst with a brokerage outfit, on condition of anonymity.

An analysis by Citigroup India last week said P-note investments, excluding the underlying shares, account for 34 per cent of FII assets with custodians in BSE-500 companies.

Calculated on the August-end data provided by Sebi, FIIs' total P-note exposure is $59 billion. If this is 34 per cent of the total P-note value, excluding derivatives, FIIs can invest $10.4 billion more, said the Citigroup analysts.

But there is one problem: FIIs, which have big room for P-note issuance, may not be interested in P-note business while those that are into P-note business have little headroom from here on, said an analyst.

Sebi wants to limit the issuance of additional P-notes, and have proposed to cap the amount that can be issued by each broker.

Brokerage houses who have issued less than the limit may do so at an incremental rate of 5 per cent of their assets under custody, the regulator said.

Manish Jain, vice-president, investment banking, Atherstone Capital (Asia) said, the window of 24 hours provided for the 3,000-odd sub-accounts for providing a letter of intent to the regulator to get direct licence is expected to spark off heavy business for law firms in coming days.

Sebi said it would allow the so-called sub accounts of overseas brokers to apply for a full license and will process the application in about a week.