Investments in domestic capital markets via participatory notes (P-notes) surged to a seven-month high of Rs 1.81 lakh crore at the end of May despite stringent norms put in place by SEBI to curb the inflow of illicit funds.

P-notes are issued by registered foreign portfolio investors to overseas investors who wish to be a part of the Indian stock markets without registering themselves directly. They however need to go through a proper due diligence process.

According to SEBI data, the total value of P-note investments in Indian markets — equity, debt and derivatives — increased to Rs 1,80,718 crore at May-end after hitting a four-month low of Rs 1,68,545 crore at the end of April.

In May, investments through the route had touched the highest level since October last year, when the cumulative value of such investments stood at Rs 1,99,987 crore.

Of the total investments in May, P-note holdings in equities were at Rs 1.09 lakh crore and the remaining were in debt and derivatives markets.

However, the quantum of FPI investments via P-notes rose to 6.3 per cent in May from 6 per cent in the preceding month.

Last week, SEBI had tightened the P-note norms by levying a fee of $1,000 on each instrument and barred their issuance for speculative purposes to check any misuse for channelising black money.

At the same time, the capital markets regulator had decided to relax the entry norms for foreign portfolio investors willing to invest directly in Indian markets rather than through participatory notes. The new measures follow a slew of other steps taken by the regulator in the recent past.

Earlier in April, the regulator barred resident Indians, NRIs and entities owned by them from making investment through P-notes.

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