P-Notes clampdown leads to more block deals

SEBI’s plan to curb participatory notes (P-notes) from the Indian stock market is sending institutional investors into an overdrive to restructure their shareholding pattern in companies.

The block deals counter on both exchanges saw hectic activity on Friday as entities holding shares in P-notes started to reverse their positions. Market experts said that shares are being transferred from parties holding shares in P-note form to FIIs registered with the market regulator.

Block deals were done in predominantly blue chip shares like Reliance Industries, Bharti Airtel, Hindalco and HDFC. Second line companies with large P-note holding as a percentage of total shares also witnessed hectic activity.

On Monday, SEBI had proposed measures to control anonymous foreign investments through P-notes in the futures and options market which make up about 30% of the money that has flowed into India recently. This had affected market sentiment earlier in the week resulting in market players selling off stocks across the board. The stocks with high P-note components were hit the most.

“If they sell shares in the open market, prices will tank further,” says the head of equities at a domestic brokerage. “The only option they have is transfer shares to a registered FII or some other entity and thus try to cap any more bleeding in share prices,” he says.

He feels that these players may be actually warehousing their shares with a friendly entity. Another investment expert pointed out that entities holding shares for some other players as proxies may have also have played a role in these block deals.

“Some of the players usually warehouse their stocks with obscure entities in the form of P-notes,” he explains. He says that this helps them as these shares remain out of regulator’s bound and can be held secretly for managing the movement in the index or some other purpose.

“However, as prices have fallen significantly, many such proxy players do not want to take the risk of further losses (as chances are that shares will fall further),” he adds. These players then shift the shares to other players who are willing to bear the risks of further losses or even stay invested.