FIIs unwind Rs 53,000 cr from P-Notes on compliance fears

Foreign institutional investors (FIIs) have unwound Rs 53,000 crore of their investments routed through participatory notes (P-Notes) in March and April with the government's tax proposals giving rise to onerous compliance challenges for foreign investors.

The total value of P-Notes on equity and debt, including derivatives, held by FIIs has fallen from Rs 1,83,151 crore (16.4 per cent of total FII assets) in February to Rs 130,012 crore (11.9 per cent of total FII assets) in April this year, as per data from the Securities and Exchange Board of India (Sebi).

The total P-Notes, excluding derivatives, also declined by Rs 42,000 crore from Rs 128,606 crore in February 2012 to Rs 86,785 crore (which is just 7.9 per cent of FII assets in India).

The Finance Ministry had clarified that it would not be chasing after these P-Notes, or such derivative products that allow foreign investors to invest anonymously into Indian equities, as part of its recently proposed GAAR (General Anti-Avoidance Rules).

However, concerns that all short-term capital gains made by FIIs and P-Note investments would be taxed have been haunting the market since the Budget presentation on March 16.

"They (markets) had advanced in the first three months of 2012 on the back of strong FII inflows. However, the overseas capital flows have turned negative in the wake of the controversy over GAAR, Vodafone tax dispute and weak economic fundamentals," Amar Ambani, Head of Research, IIFL, said.

There's already speculation that many FIIs might now opt for Singapore instead of routing funds through Mauritius. The sharp fall in P-Notes is an indication that many FIIs had stopped using this route to avoid any future tax liability, said a market source.

In June, as much as 55.7 per cent of the money pumped in by FIIs came as P-Notes — Rs 367,330 crore out of Rs 659,570 crore assets under the management of FIIs was unregulated hot money. However, Sebi tightened the norms and asked them to come through the "front door".

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