P-Notes: Foreign investors fine with regulator Sebi proposals

However, these investors have opined that introduction of any further control measures is unlikely to be "resource effective" as the regulatory requirements in India are already more stringent than other jurisdictions globally for Offshore Derivative Instruments (ODIs) commonly known as Participatory Notes or P-Notes.

They have also sought to allay concerns emanating from a large chunk of end-beneficial owners of P-Notes being located in Cayman Islands, which accounts for over 41 per cent of all such entities. In a representation before the capital markets regulator, these investors said the fund managers invest money on behalf of many investors and that needs an entity to pool such investments.

 As many funds have hundreds -- at times thousands -- investors from multiple countries, it is not possible for a fund manager to open separate securities and banking accounts for each investor across different markets and Cayman Islands happens to be "one of the eligible jurisdictions with regard to investments as FPIs as well as subscription of ODIs". They also said the establishment of funds in Cayman Islands is independent of their decision to invest in India as these funds invest globally and India is "often just one part of their portfolio". 

As part of an analysis conducted by Sebi, which would consider a tighter set of norms for P-Notes next week, Cayman Islands is followed by Mauritius (11.09 per cent) as the second-biggest location for end-beneficial owners of ODIs.

Other major locations include the UK and the US with over 10 per cent share each. Typically, P-Notes are instruments issued by registered foreign institutional investors to overseas investors who wish to invest in the domestic stock markets without registering themselves directly in India, but still need to go through a proper due diligence process.

P-Notes now make up for about 10 per cent of the total FII inflows as against over 50 per cent at the peak of stock market bull run in 2007. Rules have been tightened several times in recent years to check any misuse of this route, but P-Notes have still continued to court controversies.