P-NOTES -FIIS GO AAARRRGGHHH!

By Ruma Dubey

The market is really angry and frustrated! AAARRGGGHHH!!!

Well, first it was GAAR which came to hound the peace and tranquil that the FIIs were in and now its P-Notes. And FIIs are reacting in the most predictable way – by pounding down the markets, threatening the Govt to retract any action against P-Notes, or else….that hangs in fire.

Currently, the mere report put out by the Supreme Court appointed special investigative team's (SIT's) “recommendations” have routed the markets. Mind you, these are not even considered yet for implementation and yet the markets have shown how worse things could get it indeed implemented.

As per a report put out by SEBI in October the total value of Participatory notes (P-notes) investments in Indian markets, which combined equity, debt and derivatives, rose to Rs.2,65,675 crore or US$43 billion. This was the highest level since Feb’08 when cumulative P-note investment stood at Rs.3,22,743 crore but thankfully lower than Rs.4.49 lakh crore inflow into P-notes in Oct’07 after which some curbs were imposed.

P-note is once again the best tool used for routing back black money into India to make a quick buck. It has been proven for a long time now that P-notes are dangerous. These are basically issued by FIIs to their unregistered clients who want to invest in the Indian equity market but do not want to meet the disclosure requirements to do so. Thus the modus operandi they opt for is to invest their money with the fund companies (FIIs), who will invest in Indian market on their behalf. The fund company is registered with SEBI in India and issues participatory notes to these investors as a proof of their investment. Participatory notes are instruments used by foreign funds not registered in the country to trade in the domestic market. The big danger here – we think it’s an FII investing but actually, we do not know the identity at all.

There is more worrying data. All this money is coming into equities –over 60% is into equity and and another 15-20% in equity derivatives. The balance, which is the least, comes into debt – the least in the least volatile investment.

The trend has been that the moment there is a mention of ‘black money’ investments into P-notes surges. Firstpost has put out a very interesting data – when black money made headlines in 2011, there was a 35% rise in P-notes investments; in 2012 before the White Paper on Black money was tabled, P-notes rose 25% and then in 2014, the same surge was seen. Clearly, P-notes remain the best way to route back black money into India.

P-notes are indeed a tight slap on all our faces. When we, people like you and me, want to open an account, we are harassed to the core, asking us to submit all forms of identification proof even after filling out the KYC form. But here, in the very same market, many HNIs are allowed to invest without even giving their details. How are such discriminatory policies allowed by SEBI?

P-notes are used by four categories of people – Firstly a legitimate fund investing in India,  secondly to route black money by politicians and HNIs who have amassed wealth through under/overinvoicing and corruption. Third are the foreign companies aiming to take control of certain companies and fourthly, terror financiers – for years, the National Security Advisor (NSA) has been cautioning against terror-financing through the banking and stock market channels. Apart from the first category, all the remaining three are worrisome.

The menace of P-notes has to be removed. Clearing the market off these P-notes should become a part of the “Swaccha Bharat” movement.  India currently is at a good juncture with the world having some faith in the new Govt and its policies. This is probably the best time to do away with the P-notes. We need to do away with anonymity of investor and his sources. If there is confidence in the Indian story, why can’t investors give their names and addresses to celebrate India’s arrival on the global map? As we strive hard to show the world that we are growing into a responsible country, why not take the opportunity to separate out legitimate global money and dubious inflows?

Now is the best time for the Finance Minister to start phasing out P-notes as this ‘hot money’ is undermining the corporate and stock market valuations. Mr.Jaitley, kindly begin the clean up!