FPI Investments In Index Futures Shift To Singapore After P-Note Curbs
P-Notes issued against derivatives dry up after SEBI’s July circular.
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Foreign investors who traded in index futures through Offshore Derivative Instruments are shifting to the Singapore Stock Exchange after the market regulator placed curbs on such contracts.
The Securities and Exchange Board of India on July 7 asked foreign portfolio investors to liquidate such offshore contracts, also called participatory notes, issued against derivatives, either by the end of the contract or the end of 2020, whichever is earlier. Fresh issuances have almost dried up since then and the total notional value fell to less than a third to Rs 8,222 crore by July-end, according to data released by SEBI. Data for August is still not out.
SEBI has been discouraging the use of participatory notes issued by foreign banks that allowed overseas investors to trade without registering in India. The regulator promised easier norms for direct trading while tightening disclosure requirements for P-Notes.
It also barred the use of P-Notes for hedging foreign investors’ exposure in the cash segment though index futures. SEBI only allows hedging through single stock futures. For example, if an FPI takes exposure in say Infosys, they can hedge it through Infosys Futures or Options, and not Nifty Futures or Options.
A large chunk of P-Notes issued against derivatives was used to short Nifty Futures for speculative and hedging purposes. Since it’s no longer permissible, FPIs opted to liquidate nearly $4 billion of their positions.
The trade has since shifted to the Singapore Stock Exchange, where volumes in Nifty Futures, called SGX Nifty, spiked towards the end of July. Open interest, or the number of outstanding SGX Nifty contracts, also rose during the period.
The rise in volumes in SGX Nifty is a direct result of the SEBI circular, a custodian at a multinational bank aware of such transactions told BloombergQuint. This is a first reaction as FPIs can’t unwind positions overnight as there are tax implications, the person said requesting anonymity.
So, the investors will take positions in the offshore market like SGX Nifty, and then later either decide to get out of India or invest directly, the custodian said. That would take three to six months, he said.
This has also brought down the volumes of FPI trades in the entire derivatives segment. The volumes have fallen nearly 10-15 percent after SEBI’s July circular, a senior official at the National Stock Exchange said on the condition of anonymity.