After witnessing a decline in the month of February, the share of foreign portfolio investments (FPI) in domestic capital markets through participatory notes (P-notes) have surprisingly surged to 4-month high of Rs 1.78 lakh crore at the end of March despite stringent norms put in place by Sebi to curb inflow of illicit funds. According to Securities and Exchange Board of India (SEBI) data, total value of P-note investments in Indian markets including equity, debt and derivatives, at March-end, has surged to Rs 178,437 crore, from Rs 170,191 crore at the end of February. Prior to that, the total investment value through P-notes stood at Rs 175,088 crore in January-end and Rs 157,306 crore in December-end.
Of the total, P-note holdings in equities at January-end were at Rs 111,803 crore, while in debts and derivatives were at Rs 12,475 crore and Rs 54,160 crore respectively. The quantum of FPI investments via P-notes remained unchanged at 6.6 percent in March. P-notes are issued by registered Foreign Portfolio Investors to overseas investors who wish to be a part of the Indian stock markets without registering themselves directly. They however need to go through a proper due diligence process.
P-Notes, long vilified for the anonymous nature of their investors and suspected as a route for money laundering, are seeing rising interest among short-term foreign investors as the general anti-tax avoidance rule (GAAR) became applicable from 1 April. Under GAAR, foreign investors would need to prove that such structures are not aimed at evading taxes. Investing via P-Notes has a lower tax liability of 7.5-8 percent.