The Indian market recently saw a decline in the value of Participatory-Note (P-Notes) investments according to data from the Securities and Exchange Board of India (SEBI). The statistics show that the figures declined in January 2022 compared to December 2021. The P-Notes investments have been on a downward trend, especially with foreign investors displaying an aggressive selling approach since October 2021.
Reasons for the Decline of P-Note Investments
The declining value of P-Notes can be attributed to a myriad of causes. First, the aggressive selling approach by foreign investors since October 2021 greatly contributed to this. Moreover, with the Omicron fears fading away, investors anticipated a fast recovery of the global economy. However, the US Federal Reserve’s decision to adopt a ‘faster and sooner’ stance on rate hikes has made investors wary, leading to a reduction in their holdings in risk assets across the board.
Another contributing factor is the geopolitical situation involving Ukraine, which has led to extra pressure on the already apprehensive global investors. It is predicted that the Foreign Portfolio Investors (FPIs) will still maintain their net negative stance until there is some clarity about the resolution of the situation in Ukraine.
Understanding the Concept of a Participatory Note
Participatory Notes (P-Notes) are Offshore Derivative Instruments (ODIs) that Registered Foreign Portfolio Investors (FPIs) issue to overseas investors who desire to invest in the Indian stock markets without undergoing the lengthy process of direct registration. These notes are underpinned by Indian stocks. FPIs, who are non-residents, invest in different Indian securities including government bonds, corporate bonds, and shares.
Although the registration requirements for P-note holders are relatively less stringent, they are still required to undergo a proper due diligence process as stipulated by the SEBI.
Foreign Portfolio Investment Explained
Foreign Portfolio Investment (FPI) entails having financial assets from a country outside of the investor’s country of residence. These assets could be stocks, Global Depository Receipts (GDRs), bonds, mutual funds, and exchange-traded funds. A GDR is essentially a bank certificate issued across multiple countries for shares in a foreign company.
FPI is one of the popular methods through which investors can invest in overseas economies— the other being Foreign Direct Investment (FDI), especially for retail investors. Unlike FDI where investors have control over ventures or direct ownership of property or a stake in a company, FPI only involves passive ownership.
