Impact on P-notes
An area the Street is worried about is what would happen to investments routed through offshore derivatives instruments (ODIs), or in other words participatory notes (P-notes). As on March 2016, equity assets under P-notes stood at Rs 2.23 lakh crore, nearly 12% of the total FPI assets.
Experts believe investments into India through the P-note route will take a major beating after the new Mauritius treaty and also if subsequently a similar agreement is made with the Singapore government. As per estimates, nearly 70% of the P-note issuance happen in Mauritius and Singapore.
A note by law firm J Sagar Associates says: “Issuers of promissory notes may be adversely affected by protocol as costs of taxation arising out of the changed position on taxation would have to be built into such arrangements. This would make such arrangements not only costly but also less lucrative for investors who seek synthetic exposure to Indian securities.”
P-notes are essentially used by overseas investors to invest in the Indian market without having to register with market regulator Securities and Exchange Board of India (Sebi). These instruments are issued by FPI registered with Sebi.
Legal experts believe there could be operational issues between the FPI, or the P-note issuer and the P-note holder due to the new tax changes. The instrument may not be tenable and might require extensive restructuring, believe experts.
This, however, may not necessarily make a huge dent on the markets for two key reasons. First of all, the significance of P-notes as a vehicle to take exposure in domestic stocks. Consider this: at its peak, P-notes accounted for nearly 40% of the total FPI holdings. This is down to less than 12% currently.