Overseas investors’ exposure to Indian equities through the participatory notes (P-notes) route soared to its highest level since February, reflecting their confidence in the government’s resolve to push reforms further and their faith that the general anti-avoidance rules (GAAR) will come into play only after another couple of years.
P-notes is an offshore derivative instrument with underlying local stocks, issued to foreign investors not registered in India by global brokerages such as CLSA, Morgan Stanley and others. Investments via P-notes touched Rs 1,75,829 crore or 14.4 per cent of FIIs assets under custody of Rs 12,21,900 in October, as per the latest data. The total value of P-notes excluding exposure to equity derivatives also touched the highest since February at 7.8 per cent (Rs 95,536 crore) of total assets, according to the Securities and Exchange Board of India (Sebi).
This is the highest in eight months, and fourth straight-month rise from a low of 11.8 per cent (Rs 1,29,586 crore) in July. The highest exposure so far this year via the P-notes route in value terms was in February at Rs 1,83,151 crore or 16.4 per cent of total assets under custody of FIIs.
Exposure through P-notes could be over and above the total inflows by FIIs and their sub-accounts registered with the Sebi this calendar at $22.2billion year-to-date. “It is not necessary for brokers issuing P-notes to take similar exposure directly in Indian markets when they issue these offshore instruments to foreign clients,” said a Sebi official.
Foreign investors started to unwind their P-notes following the Union budget, fearing tax outgo under the controversial GAAR rules that aimed to clamp down on FII money coming through Mauritius and other tax havens.
The government-appointed Shome Committee proposed deferment of GAAR implementation for three years, encouraging the foreign investors to increase exposure into Indian stocks through the P-notes route, said analysts. The mini-reforms which marked P Chidamabaram’s return to finance ministry, the passage of FDI in retail in Parliament, further push in areas such as the Land Acquisition Bill and approval for the cabinet committee on investment, which will accelerate the pace of approvals for investment projects, will encourage foreign investors to bet on Indian equities, said analysts.
“We believe that the policy decisions since mid-September, though after considerable delay, have helped remove the risk of a persistent decline in private investment. We believe that unlike in the past, the current investment cycle is different due to the adverse impact of corruption scandals on the government machinery, political environment and the confidence of the corporate sector. In this context, the decision to set up the cabinet committee on investment and its impact on the approval process will have a significant bearing on capex cycle,” said Chetan Ahya of Morgan Stanley, in a note.
Analysts also reckoned that the Indian economy may have bottomed out and there are early signs of revival from hereon, which will also boost inflows into Indian stocks in 2013.
Ambit Capital’s Ritika Mankar Mukherjee said FY13 may see growth reviving to 6.3 per cent as there are early signs of capex recovery with investment growth recorded at a four-quarter high, an improvement in services sector growth despite the sequential slowdown in the government funded community social and personal services components and the near-certain understatement of consumption growth.