Understanding the rise of Participatory Notes investments in India’s domestic capital market is more than just looking at numbers. It requires a thorough understanding of the intricate mechanism involving foreign portfolio investors (FPIs) and overseas counterparties. The end of March 2019 saw these investments rise to INR 78,110 crore, showcasing an advancement that mirrored optimistic market sentiments.
Participatory Notes and Their Role
Participatory Notes, commonly known as P-notes, are instruments issued by registered Foreign Portfolio Investors (FPIs) to those keen on engaging with the Indian stock market. Interestingly, these investors do not need to register themselves directly, but they must go through a due diligence process. The rise in investment through P-Notes aligns with an increase in the net inflows of FPIs in the cash segment.
Dissecting Foreign Portfolio Investment
Foreign Portfolio Investment (FPI) essentially comprises securities and other financial assets passively owned by foreign investors. What distinguishes FPI is that it doesn’t grant the investor direct ownership of financial assets and maintains relative liquidity based on the volatility of the market. An integral part of a country’s capital account, FPI reflects on its Balance of Payments (BOP), which records the flow of money between one country and others over a fiscal year.
Importantly, FPI does not involve active management or control over the securities or the business by the investor. Given that the investor’s objective is a quick monetary return, FPI tends to be more liquid and less risky compared to Foreign Direct Investment (FDI).
The Difference: FPI and FDI
Unlike FPI, Foreign Direct Investment (FDI) allows an investor to purchase a direct business interest in a foreign country. The primary goal here is to generate a long-term income stream while assisting the company in boosting its profits. In an FDI scenario, the investor manages his investments actively and exercises considerable control in the company where he invests. However, due to his money being tied up with a company, the investor experiences less liquidity and more risk while trying to sell his interest.
Participatory Notes Investment Facts
| Particulars | Details |
|---|---|
| End of March 2019 P-Notes investment | INR 78,110 crore |
| Investors of P-Notes | Registered FPIs |
| Liquidity of FPI | More liquid than FDI |
| Risk level of FPI | Less risky than FDI |
Liquidity and Risk Factors
Though both FPI and FDI are forms of foreign investment, they have distinguishing characteristics, particularly in terms of liquidity and risk. While FPI provides more liquidity and is generally less risky, FDI, due to its long-term nature and direct involvement, might expose the investor to more risk, but could also provide greater returns. Hence, investors should keep these aspects in mind when selecting an investment method.