The opacity surrounding the investments through Participatory Notes or P-Notes, has to end, sooner than later. Investors made much of the country’s need for foreign exchange and for a booster for the stock markets to allow funds to flow in through the non-transparent method. This was mostly hot money which people feared would slip out as easily as it had come in. The identity of the owners of P-Notes, or derivative instruments issued by foreign portfolio investors, was hidden from the authorities, though some effort was made by the market regulator to maintain a record for its own purpose. But every time there was a mild suggestion about lifting the veil over P-Notes, panic ensured on the bourses. Clearly, the P-Note owners were using their money to bully the authorities.
Over a decade ago, over fifty percent of all investment in stocks was through the P-Note route. Since then, their share had come down substantially, but overall total investment through P-Notes is said to be of the order of over Rs.2.75 lakh crore, a majority of it in equities alone. Now, the Special Investigating Team set up by the Supreme Court to unearth black money has unsurprisingly zeroed in on P-Notes. It wants their use curbed drastically. The SIT has asked the SEBI to end the secrecy surrounding P-Notes, enlist the identity of their real beneficiaries and ensure that their misuse to launder black funds is eliminated. P-Notes are widely suspected to be the instruments of choice of those Indians who have stashed illicit funds abroad and are keen to put it to good use for further profits. Such round-tripping of black money might be virtually eliminated once the P-Note route is shut down. Foreign portfolio investors issue these derivative instruments which are easily transferrable, thus making it hard for the identity of the actual owner to be known.
In 2007, the issuers of such instruments were made to register with the SEBI, but this failed to eliminate the problem, though the percentage of funds thus routed through, did come down. Now, the latest proposals, if accepted by the Finance Ministry, might further discourage investors to use P-Notes. A day after the combined effect of China and P-Notes led to a 550-point fall of the Sensex, Finance Minister Arun Jaitley tried to calm the mood of market men, assuring them that there wouldn’t be a knee-jerk reaction and that investor interest would be foremost while taking a decision on the recommendations of the SIT. But as the economy grows at 7-8 percent per annum, India becomes an attractive destination for investment funds, a reliable regulatory system is in place, foreign funds would flow in aplenty through the front door, obviating the need for the P-Note route altogether. It is a matter of time before P-Notes become irrelevant.
