I read in an article which mentioned that some companies are now allowed 100% investments from FPIs. Hypothetically if a person/fund is bullish about one of those companies and approaches multiple FPIs to issue P-Notes against that company’s share (as P-Notes seem to allow for instruments like total return swaps which were used by Archegos). In case that particular company’s share price goes down drastically, will a situation similar to Archegos arise? As P-Notes investment has been on a rise recently (SEBI Report), are there higher risks of Archegos-type situation occurring?
Also, I had come across an article that mentioned an example scenario -
Say a fund house based out of Singapore wants to bet on Rs 100 crore worth of Tata Steel shares for six months. It would get in touch with an investment bank in India, put up Rs 15 crore and borrow Rs 85 crore from the investment bank. This Rs 100 crore would then be used to buy Tata Steel shares. The fund house would pay the investment bank a fixed fee as well as interest on the borrowed money, every month. If the value of the Tata Steel shares were to rise to Rs 110 crore at the end of the month, the investment bank would have to pay Rs 10 crore to the fund house. The fund house’s profit will be the capital gain minus the fixed fee and interest charges.
But if the value of Tata Steel shares is lower at the end of the month, the investment bank will ask the fund house to either reduce its position or put up more capital. This is known as a margin call. Throughout the tenure of the swap contract, the shares sit in the books of the investment bank.
Would such a transaction happen via the P-Notes route?