Seasonality in Participatory Notes Investments in India: A Cautionary Trend


Deepak R.
Bhavya N.


In the recent years, the issue on ballooning investments by foreign investors into Indian markets through non-normal routes has been discussed but with less result-orientation. The issue on governance and need for reforms on participatory notes (PNs) has been raised by financial markets and also has been a point of discussion among practitioners and policy makers. The support from financial markets have been wary and negative to any discussion on participatory notes. Thus, any decisions from the government and the regulatory bodies have been casted away for further reconsiderations. The recently published report by Special investigation team (SIT) on PNs cautioned the regulators on misuse of the investments. According to the report, not following stricter know your client (KYC) norms in case of PNs might have led to rapid growth in investments by "unknown beneficial owners” which itself is a cautionary trend. This growth in investments by foreign investors through registered Foreign Institutional Investors (FIIs) is believed to follow systematic patterns but has not be dealt with. Thus, considering this backdrop, study was conducted to find out, if there existed any patterns in the investments cycle of foreign investors. The monthly data on total value of investments in equities, debt instruments and derivatives (including or excluding) in the form of PNs were collected for the period 2003-2015. The ratio-to-moving average method was considered in the study to develop seasonal index. From the analysis, we conclude that, significant seasonal patterns exists in the investments done in the form of PNs by the foreign investors. June and September months were found to have on average, the lowest and highest investments respectively for the study period. The pattern found appears not to be random in nature, and results obtained point towards presence of seasonality in investments.