The much hyped participatory notes or p-notes that are issued by overseas investors seem to be losing popularity and the extent of ?hot money? in the Indian market seems to be coming down. Data released by the Securities & Exchange Board of India (Sebi) indicates that the percentage of P-Notes in the total assets under management (AUM) of foreign institutional investors has now dropped to an all-time-low of 15.55%.
P-Notes, also known as overseas derivative instruments, were extremely popular with hedge funds. Sebi-registered FIIs issue PNs, a derivative instrument, to other foreign investors who are not registered with the market regulator but wish to invest in Indian securities. They hold the securities on behalf of their clients.
Earlier in 2007, when the hedge funds were flush with liquidity, would use the p-notes route to participate in the Indian equity markets. During June 2007, P-Notes constituted around 55% of the assets under management of the overseas investors. And in October 2007, a total of Rs 4.5 lakh worth investments were routed through the p-notes in the Indian equity market. It was at this time that Sebi banned issuances of fresh P-Notes, asked FIIs to reduce the extent of p-notes to 40% of the assets under management by unwinding issuances over an 18 month period. However, in October 2008, Sebi reversed the restrictions and allowed the market to function at its own pace.
And, it has shown that the ?hot money? in the system has actually come down drastically and is now not a threat. ?This is a welcome development and shows that the market now has a low number of speculators from the overseas markets. And, it shows that the markets are sensible and there are times when there are irrationalities.
However, speculators are also required to be in the market as they build up liquidity, which is much important for the system,? said a senior fund manager with a leading domestic fund.
According to Sebi data, the total value of P-Notes was around Rs 97, 885 crore in June 2009. It has grown from Rs 60,948 crore in February 2009, which was the lowest recorded in the past three years.
However, with direct FII investment in the markets rising at a faster pace, the share of P-Notes based investments has fallen to 15.55% levels.
FII assets under management have grown by 60%, that is, from Rs 3.29 lakh crore to Rs 6.29 lakh crore, from January 2009 till June 2009. Over the same period, the p-note value of investments has also grown by 48%.