The share of foreign portfolio investments (FPI) through participatory notes (P-notes) has decreased to Rs 1.70 lakh crore at the end of February. According to Securities and Exchange Board of India (SEBI) data, total value of P-Notes investments in Indian markets including equity, debt and derivatives, at February-end declined to Rs 1,70,191 crore, from Rs 1,75,088 crore at the end of January.
Of the total, P-Note holdings in equities at February-end were at Rs 103,712 crore, while in debts and derivatives, were at Rs 11,700 crore and Rs 54,778 crore respectively. The quantum of FPI investments via P-notes decreased to 6.6 percent in February, from 7.1 percent in the preceding month. Last year, in December, investment through P-notes was the lowest since July 2013, when the aggregate value of such investment stood at Rs 148,188 crore. Investment through the route had been declining since September last year when it was at Rs 212,509 crore. It fell to Rs 199,987 crore at October-end and further to Rs 179,648 crore in November.
P-notes are typical instruments issued by registered FPIs to overseas investors who wish to participate in Indian markets without registering themselves directly in the country to save time. Meanwhile, the Indian government's new tax treaty with Singapore and Mauritius will come into effect from April 1, 2017, and the capital inflow into the Indian market via P-notes is likely to see a sharp fall. According to the changed double taxation anti-avoidance agreements (DTAAs), all investments made from these jurisdictions would attract short-term capital gains as the exemptions would get removed. As per SEBI data, nearly 90 percent of P-note investments are routed through Singapore and Mauritius, with which the Indian government has reworked tax arrangements.
As per the new treaty, capital gains that arise from shares purchased after April 1 by foreign investors based in these countries can be taxed in India. Accordingly, a capital gains tax of at least 7.5 percent can be charged on short-term gains from equity of investors from Mauritius and Singapore over the next two years and 15 percent after that. Besides the higher tax outgo, issuers of P-notes are more worried about operational difficulties.