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General

P-Notes: A Non Issue

So the whole P-Note thing has been sorted out. (SEBI Press Release)

  • P-Notes on derivatives are out. Meaning no more participatory notes ISSUED on derivatives. But current ones can stay, and need to be phased out in 18 months. 18 months is an eternity in the stock markets, so can we please stop worrying about this as a problem.
  • P-Notes on equities and debt can continue – and that’s restricted to 40% of Assets under Control (AUC). This number is not ambiguous as the TV-channels would like to make you believe; it is just the figure given by custodians. SEBI collates them in their monthly bulletins (sample) so why can’t an FII do it?
  • Sub-accounts can no longer issue P-Notes, on anything. They need to be full fledged FIIs.
  • If a sub-account has applied to become an FII, they don’t get restricted from the sub-account p-note closure, until their application is processed.
  • Who can become an FII? Any foreign institution that is regulated by some authority abroad, has a fund manager with more than 1 year track record, and the ability to fill out an application.
  • This affects very little going forward. Some people may complain and whine and wail; but for us lay investors this means very little.
  • One thing it may do is reduce foreign fund flows until this full fledged FII registration is complete. At the pace SEBI is going (they are planning to clear them out in a week!) this is again a non-issue.
  • If the markets tank due to this issue, it’s not due to this issue, this issue is just an excuse.
  • The irrationality of the markets has not gone away, it still exists; we are at a market wide P/E of 25, which isn’t bonkers but is definitely higher than we’re used to seeing. If it’s purely from foreign fund flows, then we’ll see a correction of sorts, but if it’s a re-rating of India’s economy (note: China’s P/E is 45+) then the P/E means little even today. Don’t know which is what.
  • Again, today’s P/E isn’t totally reflective since results season isn’t over yet.
  • I’m still betting on the momentum to go forward. I’ve got a wider stop loss now – 20% – but it’s really starting to work now. (More on that later)