In recent news, investment in the Indian capital markets via Participatory notes (P-notes) have shown a decline. As of May-end, 2022, the total investment dipped to Rs 86,706 crore. This came along with Foreign Portfolio Investors (FPIs) seeing a 5% drop in their assets under custody – from Rs 50.74 trillion at the end of April 2022 to Rs 48.23 trillion by end-May, 2022. This marks the eighth consecutive month of net pull-out by FPIs from equities.
Understanding Participatory Notes
Participatory Notes are Offshore Derivative Instruments (ODIs) issued by registered FPIs to overseas investors looking to invest in the Indian stock markets without direct registration. The underlying assets of P-notes are Indian stocks. FPIs, who are non-resident investors putting money into Indian securities such as shares, bonds and more, issue these notes. Even though P-note holders face less stringent registration requirements, they still have to undergo a thorough due diligence process set by the Security and Exchange Board of India (SEBI).
Factors Leading to the Decline in P-Notes
One of the major contributing factors to the decline in P-notes is the uncertainty surrounding inflation levels and the actions of the US Federal Reserve (Fed). The Fed has taken measures to control inflation by tightening the monetary policy and hiking rates, which is being replicated by other central banks, including Britain and the Eurozone. Additionally, a significant amount of currency correction has played its part in this reduction, affecting both equity and debt portfolios.
Future Expectations for P-Notes
Despite the current downward trend in P-Note investments, experts believe the next quarter or two may see FPIs returning to invest in Indian equities. The equity markets show promising valuations currently and issues with supply-chain and inflation are expected to subside in the upcoming months.
Foreign Direct Investment in India
Foreign Direct Investment (FDI) is an investment from a foreign country into business interests located in another country. Distinguished from portfolio investments, the FDI generally involves establishing foreign business operations or acquiring foreign business assets including ownership or controlling interest in a foreign company. The options for FDI include opening a subsidiary in a foreign country, acquiring a controlling interest in a foreign company or through a merger or joint venture.
On the other hand, Foreign Portfolio Investment (FPI) is characterized by foreign entities and non-residents investing in Indian securities; however, it doesn’t ensure a controlling interest in India at an investment that is lower than FDI. It does, conversely, provide flexibility for entry and exit.