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Information about P-note & how it affects Indian market

P-notes or Participatory notes, were the key reason for the fall of the Indian stock market over 550 points recently, registering the biggest single-day drop in the last two months.

The Bombay Stock Exchange or BSE fell below 28, 000, shaving off approx Rs 1.5 lakh crore in investor wealth in a single day.

Market experts stated that the fall can largely be due to the SIT’s report on tackling black money where the SIT suggested cancelling P-notes as a way to Indian market investment.

So what are these P-notes?

P-notes are a medium for people living outside India without registering themselves with the Securities and Exchange Board of India (Sebi).

SEBI is the standard authority and the capital market regulator In India, and anyone interested in Indian Stock Market Investment must register first with SEBI.

How does P-Notes work?

P-Notes are useful for those who don’t want to reveal their identity for various reasons. As such they put their money in foreign bank branches located out of India, which then issue P-Notes or Participatory notes to them. The bank can then invest those P-notes in the Indian stock markets on their behalf, without disclosing their identities to SEBI.

Why are P-notes in the news?

The Special Investigation Team (SIT) appointed by the apex court of India i.e. the Supreme Court, released its report last week and suggested that SEBI must take action against it to curb black money by identifying the people who are behind P-notes.

How does this affect Indian markets?

It looks like the markets haven’t taken the news well. Recently, the Bombay Stock Exchange fell over 550 points and NSE’s Nifty fell 161 points. Indian stock markets take foreign money through the scheme of Foreign Institutional Investors (FIIs) and many choose to have the P-notes for keeping their identities a secret.

If the government takes an action on the report of SIT and asks SEBI to curb black money through a clampdown on P-Notes, then the foreign money coming through FII will leave the Indian stock markets, This is exactly what happened last week, where the market lost around Rs 1.5 lakh crore in value.

Why so much focus on P-Notes?

Kotak said, “ the positions held through Participatory Notes are around the value of Rs 2,75,436 crore or 11.5% of the assets under custody of foreign investors, which is Rs 23,86,457 crore. Although they are nowhere close to the highest (till now) of Rs 4,49,613 crore during the peak of the previous bull run in October 2007, the government and SEBI worry that putting restrictions on P-notes can spook investors. A curb on the transfer of P-notes could lead to a fall in foreign portfolio inflows.

Undoubtedly, foreign investment remains a part of the economic strategy and budget of the nation, but how it will take the turn after the report of SIT, all depends on the decisions of the government and SEBI. Whether they will completely ban or bring laws to change the rules of FII investment, we will see only in future.

Conclusion- P-notes are an absolute medium of FII investment where investors don’t want to reveal their identities. But, this also brings black money to the Indian stock market and thus hampering India’s progress. We have to see a lot about them in the future.

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