Clipped from: https://www.thehindubusinessline.com/opinion/editorial/let-them-participate/article33661045.ece
Increase in outstanding P-notes implies higher overseas demand for Indian stocks
Participatory notes of Overseas Derivative Instruments have a tendency to raise the hackles of the regulators. Outstanding
While there was a buzz around the value of outstanding P-notes reaching ₹83,114 crore towards the end of November 2020, there is no real cause for alarm; these instruments account for only 2 per cent of FPI assets currently. The increase in value of outstanding P-notes can be explained by two factors. One, the rally in stock prices has resulted in inflating the value of existing P-note holdings and, two, there has been a great surge in FPI inflows this fiscal, with investments so far exceeding ₹2,42,000 crore. Despite the impact of the pandemic on the economy, foreign investors have preferred Indian equities owing to the country’s demographic advantage and its consumption-led growth. While foreign investors already registered with SEBI can easily increase their investments into the Indian market at such times, those yet to obtain registration may prefer the P-note route for its speed and lower compliance requirements. It further needs to be noted that there are no P-notes issued on derivatives outstanding now. P-notes on derivatives are the riskiest as they are used by hedge funds and large traders in the international market who tend to move in and out of stocks very rapidly, causing great volatility in stock prices.
The regulator, therefore, need not worry about scrutinising the P-note inflows or tightening the rules governing these instruments. But the same cannot be said about rules governing FPIs. SEBI has, of late, been trying to simplify rules governing FPIs which can dilute the existing checks against money laundering through this route. The re-categorisation of FPIs in 2018, wherein more institutional investors and funds were categorised as Category I FPIs needing lower compliance and KYC checks, is a case in point. Similarly, simplification of registration of multiple investment managers and doing away with the broad based eligibility criteria for institutional foreign investors could lead to trouble. While funds from overseas are necessary for increasing liquidity and better price discovery, the regulator cannot let down its guard on the kind of money that is entering India in the garb of FPIs.
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