Last month saw an all-time foreign institutional investment (FII) drop in India through participatory notes (P-Notes). As a recent report detailed in Business Standard noted, the figures dropped to less than 10 percent for “the first time since 2003.” According to director of institutional equities and chief strategist of Padmakshi Financial Services, Sailav Kaji, “many P-Note investors had built up short positions in the earlier months. These shorts would have got squared off in the rally and internally adjusted,”
There was an increase of P-Note exposure from January to May from Rs 1.34 lakh crore to Rs 1.61 lakh crore “without corresponding inflows into the Indian markets.” But then the following month things took a nosedive. Between January and May, although Indian markets were extremely popular, receiving “net inflows of around Rs 700 crore, suggesting most positions built up through P-Notes could have been short positions.”
So what happened in June? What happened from the high of the previous five months? It wasn’t great when the country encountered deregulated diesel prices. That was probably what led to the Sensex rally that according to brokers, “consumed many of these shorts.” Then there were worries that there would be another P-Notes crackdown which caused P-Note investors to move their monies to the standard FII route.
Further, P-Note issuers were required to give details of the notes’ end beneficiaries on “an upfront basis regularly” At the start, investors who wanted to remain anonymous, or those who didn’t make an official registration, would veer towards P-Notes. There has now been a request that P-Notes will only be given to those individuals “regulated by an appropriate foreign regulatory authority and should be issued after compliance with ‘know your client’ norms.” Once these rules were put in place, there was an average of 15-16 percent drop of P-Notes’ share during the bulk of 2009/10, “down from 35-38 percent in 2007/8.