P-Note investors step up their activities in equity markets

Recent bulk deal information (over the past one week) released by Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) reveals that P-Note players have stepped-up their activities in the equity markets. CLSA (Mauritius) and Deutsche Securities (Mauritius) were the major buyers in the street cumulatively investing more than Rs1.3 bn in Indian equities. Some of their major investments include

(1) Unitech – CLSA (Mauritius) bought Unitech stock worth Rs883 mn after the real estate company concluded its QIP issue—abating concerns on its bankruptcy
(2) Sintex Industries - CLSA (Mauritius) bought Sintex stock worth Rs100 mn
(3) Eicher Motors – Deutsche Securities (Mauritius) bought Eicher Motors stock worth Rs200 mn
(4) Jubilant Organosys - Deutsche Securities (Mauritius) bought JOL stock worth Rs122 mn

Morgan Stanley and Merill Lynch together divested stocks worth Rs0.6 bn. Some of their major divestments include

(1) Gruh Finance – ML (Espana SV) sold Gruh Finance stock worth Rs135 mn
(2) Morgan Stanley (Dean whiter) sold stocks of (a) Educomp – Rs256 mn, (b) Karuturi Global – Rs87 mn, (c) Bajaj Hindustan - Rs82 mn and (d) Ziacom – Rs40 mn.

What are P-Notes?

Participatory notes (PNs / P-Notes) are instruments used by investors or hedge funds that are not registered with the SEBI (Securities & Exchange Board of India) to invest in Indian securities. Participatory notes are instruments that derive their value from an underlying financial instrument such as an equity share and, hence, the word, 'derivative instruments'. SEBI permitted FIIs to register and participate in the indian stock market in 1992.

Indian based brokerages buy Indian-based securities and then issue PNs to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.
Participatory notes are instruments used for making investments in the stock markets. However, they are not used within the country. They are used outside India for making investments in shares listed in that country. That is why they are also called offshore derivative instruments.
In the Indian context, foreign institutional investors (FIIs) and their sub-accounts mostly use these instruments for facilitating the participation of their overseas clients, who are not interested in participating directly in the Indian stock market. For example, Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. According to an expert group constituted by the finance ministry in India, in August 2004, participatory notes constituted about 46 per cent of the cumulative net investments in equities by FIIs

Source: Exchanges, Team M&A