The Sensex fell more than 450 points on Monday amid jitters over the
P-note (participatory note) issue and an 8 per cent plunge in China
markets. The government issued a clarification on P-notes, with Revenue
Secretary Shaktikanta Das saying there is no need for markets to panic
just yet.
The Supreme Court-appointed Special Investigation Team on Friday recommended tighter norms on a popular investment route called P-notes into Indian markets. The recommendations were part of a report from the Supreme Court-appointed panel, detailing the need for greater oversight across a variety of activities to tackle the menace of black money.
Revenue Secretary Shaktikanta Das told NDTV, "At this point of time there is no need to rush to any conclusion. The government has not yet decided. There is no reason for the market to panic." He said the government will consult stakeholders like market regulator Securities and Exchange Board of India (Sebi), the Reserve Bank of India and other market players before deciding on the P-note issue.
Finance Minister Arun Jaitley chipped in, saying that the government will not take any step which will affect the investment climate negatively.
What are P-notes?
P-notes are investment vehicles that offer foreign high net worth individuals, hedge funds and other investors exposure to Indian markets without being registered with Sebi. While norms have been tightened considerably for P-notes over the years, they remain popular among foreign investors because through this investment route, they are able to save time and costs associated with direct registrations with Indian authorities.
Why is the market worried?
Investments through participatory notes (P-notes) into India's capital market were at a whopping Rs 2.75 lakh crore (about $43 billion) at the end of June. This was 11.5 per cent of total foreign institutional investment (FII) into the Indian markets.
But the quantum in percentage terms of FII investments through P-notes has been steadily decreasing over the years. Till a few years ago, P-notes used to account for more than 50 per cent of total FII investment, but their share has fallen over the years after Sebi tightened disclosure norms and other related regulations.
Earlier in 2007, when a crackdown on P-notes had taken place, the Sensex plunged around 10 per cent within minutes of the market opening. Trading had to be halted and then finance minister P Chidambaram had to make statements to calm the markets.
What analysts say
TS Harihar of HRBV Client Solutions says that the SIT's recommendations on tightening P-note norms could make foreign investors jittery.
Prabhat Awasthi, managing director and head of equity at Nomura India, however, says that the P-note issue will be just a "passing phase" for the Indian markets. "Typically these issues have tended to get resolved because the government tends to be sensible about not disrupting the market."
"Besides, many global banks have tightened their KYC norms. So bulk of P-notes, specially coming through issuance done through global investors, will all be genuine guys," he adds.
Revenue Secretary Shaktikanta Das said, "Over the years, market regulator Sebi has tightened the P-note regime. And once India moves to automatic exchange of information with other countries, a lot of tax related information will come. Internationally, the system is correcting itself."
However, Mr Awasthi of Nomura warns that if there are additional norms in the wake of SIT recommendations that make it difficult for foreign investors to invest in Indian markets, it would be a cause of concern.
The Supreme Court-appointed Special Investigation Team on Friday recommended tighter norms on a popular investment route called P-notes into Indian markets. The recommendations were part of a report from the Supreme Court-appointed panel, detailing the need for greater oversight across a variety of activities to tackle the menace of black money.
Revenue Secretary Shaktikanta Das told NDTV, "At this point of time there is no need to rush to any conclusion. The government has not yet decided. There is no reason for the market to panic." He said the government will consult stakeholders like market regulator Securities and Exchange Board of India (Sebi), the Reserve Bank of India and other market players before deciding on the P-note issue.
Finance Minister Arun Jaitley chipped in, saying that the government will not take any step which will affect the investment climate negatively.
What are P-notes?
P-notes are investment vehicles that offer foreign high net worth individuals, hedge funds and other investors exposure to Indian markets without being registered with Sebi. While norms have been tightened considerably for P-notes over the years, they remain popular among foreign investors because through this investment route, they are able to save time and costs associated with direct registrations with Indian authorities.
Why is the market worried?
Investments through participatory notes (P-notes) into India's capital market were at a whopping Rs 2.75 lakh crore (about $43 billion) at the end of June. This was 11.5 per cent of total foreign institutional investment (FII) into the Indian markets.
But the quantum in percentage terms of FII investments through P-notes has been steadily decreasing over the years. Till a few years ago, P-notes used to account for more than 50 per cent of total FII investment, but their share has fallen over the years after Sebi tightened disclosure norms and other related regulations.
Earlier in 2007, when a crackdown on P-notes had taken place, the Sensex plunged around 10 per cent within minutes of the market opening. Trading had to be halted and then finance minister P Chidambaram had to make statements to calm the markets.
What analysts say
TS Harihar of HRBV Client Solutions says that the SIT's recommendations on tightening P-note norms could make foreign investors jittery.
Prabhat Awasthi, managing director and head of equity at Nomura India, however, says that the P-note issue will be just a "passing phase" for the Indian markets. "Typically these issues have tended to get resolved because the government tends to be sensible about not disrupting the market."
"Besides, many global banks have tightened their KYC norms. So bulk of P-notes, specially coming through issuance done through global investors, will all be genuine guys," he adds.
Revenue Secretary Shaktikanta Das said, "Over the years, market regulator Sebi has tightened the P-note regime. And once India moves to automatic exchange of information with other countries, a lot of tax related information will come. Internationally, the system is correcting itself."
However, Mr Awasthi of Nomura warns that if there are additional norms in the wake of SIT recommendations that make it difficult for foreign investors to invest in Indian markets, it would be a cause of concern.
