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P-note holders slash positions

Market estimates Rs 5,000 cr unwinding on Monday, Tuesday.
Participatory note (P-note) holders investing in India may have trimmed their positions by Rs 5,000 crore, according to market estimates, as the Indian market fell up to 12 per cent in Monday and Tuesday trading sessions.
The Securities and Exchange Board of India (Sebi) has restricted P-note investments in the derivatives market and asked investors to unwind their positions within 18 months.
At the same time, the regulator has permitted P-note investments in the cash market up to 40 per cent of FIIs’ assets under custody.
An incremental 5 per cent increase in P-note investments has been allowed, subject to the 40 per cent level. P-notes are offshore derivatives instruments (ODIs) issued by FIIs to anonymous investors, who do not come under Sebi’s supervision.
“Roughly 34 FIIs and sub-accounts issue P-Notes which form around 50 per cent of assets under FII. Assuming that most, if not all, pulled out… we think around Rs 5,000 crore still cannot be ruled out,” said Manish Jain, vice-president, structured products group, Atherstone Capital.
Another fund manager said: “P-note holders have unwound their positions. But, that is because of redemptions from overseas investors due to US subprime woes.”
According to stock exchange figures, FIIs sold a net of Rs 7,200-crore on the first two days of this week in the cash segment. However, in the derivatives segment, FIIs were net buyers for Rs 8,774 crore — interpreted as an arbitrage play by the overseas funds.
Moreover, P-note limit is calculated on the basis of the value of the bid and not the margin money paid, said sources.
Consequently, the P-note route is an inefficient way of investing in IPOs, feel market participants. Several P-note holders were trapped after investing in the two mega IPOs — Reliance Power and Future Capital Holdings.
P-note headroom for its holders is limited and divided between investing in the secondary market and the primary market.
Sebi’s recent regulation states that those “FIIs with notional value of PNs outstanding (excluding derivatives) as a percentage of their assets under custody in India of more than 40 per cent shall issue PNs only against cancellation/redemption/closing out of the existing PNs of at least equivalent.”
When the markets tanked on Tuesday, investors cut positions. Weak global markets exacerbated the situation as they rushed to pull out of the Indian market.
“There is bound to be a liquidity grind as we’ll see tightening of monetary policy in Asia and Europe. Till now we’ve seen a lot of liquidity in the equity markets and realty, but as banks tighten the interest rates and global interest rates rise, we’ll start to feel the pinch because then profits will be hit. The US economy has slowed down and some are even terming it as a technical recession,” said Jain.
However, we are still positive with respect to the long term story. But 2008 itself doesn’t look too promising in terms of how much money will come into our markets,” said Jain.
The fact that several FIIs have opted for direct registrations and others are in the pipeline could be a stumbling block. “Applying for IPOs through P-notes is an inefficient way because it is not easy to be able to manage the headroom,” said Paul Parambi, head, International business, Kotak Mahindra Bank.
Several well-known hedge funds have been granted direct entry into the Indian stock markets, nearly three months after Sebi imposed curbs on foreign investments through P-note route. Since the curb, the number of FIIs in India has swelled by 123 to 1,248. “Whatever sell has happened has included P-note holders and hedge funds as well. The lack of incremental capacity in P-notes has led to these players cutting positions in the secondary market,” said a research head of an institutional broking firm. FIIs have sold a net of Rs 7,200-odd crore on the first two days of this week in the cash segment
Foreign investors were, however, net buyers in the derivatives segment for Rs 8,774 crore
Several hedge funds have made direct entry into the Indian stock market after Sebi imposed curbs on foreign investments through P-note route
Since the curb, the number of FIIs in India has swelled to 1,248

Source: Business Standard

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