Participatory Notes: A Convenience or a Threat

Participatory Notes: A Convenience or a Threat

Remember the auction scenes depicted in the cinematic world where the bidder bids for some undisclosed third party? Ring a bell? What could be the purpose of such an activity? Well, such indirect participation is to bypass the formalities of registration with the regulating authority and obviously to maintain the anonymity of the participation.

So if the overseas investors want to invest in the Indian stock markets without getting into the regulatory approval process with the SEBI (Securities and Exchange Board of India) and other hassles, they can do so via participatory notes.

Participatory notes also called P-Notes are offshore derivative instruments (ODIs) with Indian shares as underlying assets. These instruments are used for making investments in the stock markets. However, they are not used within the country. They are used outside India for making investments in shares listed in the Indian stock market. That is why they are also called offshore derivative instruments. These notes allow foreign high net worth individuals, hedge funds and other investors to put money in Indian markets by getting into a contract with the local brokers and institutions without being registered with SEBI, thus making their participation easy and smooth. P-Notes also aid in saving time and costs associated with direct registrations.


Historically, P- Notes has been the preferred mode of investment by the FIIs right from their launch since 1992 which can be justified by the mere fact that they accounted for almost 50% of the FII investment in 2007. Firstly an investment avenue in such large proportion with the owner of the underlying not known adds up to the threat of market volatility. This was clearly evident when the Sensex crashed by 1744 points or about 9% of its value – the biggest intra-day fall in Indian stock-markets in absolute terms on october 17,2007 when SEBI announced the mere intent to curb the P- Notes. Secondly P-notes are identified as one of the routes through which black money transferred outside India comes back through a process called round-tripping.


Owing to such threats the SEBI has been constantly thriving to curb the use of P- Notes by bringing about regulatory changes and making the FII registration process easier. Presently about 6% of the total Foreign investment is in terms of P- Notes which is significantly lower considering it stood at over half the total investment at one point of time.


The recent policy changes made include levying a fee of $1,000 on each instrument to be collected and deposited by the issuing FPI once every three years, starting from April 1, 2017 and barred their issuance for speculative purposes to check any misuse for channelising black money. At the same time, SEBI decided to relax the entry norms for foreign portfolio investors willing to invest directly in Indian markets rather than through participatory notes.


P- Notes have often been in controversy in India for alleged misuse for round-tripping of funds and adding to the market volatility. But the norms have been made stringent in the recent years, following which they have also become less attractive. The intent of the watchdog was never to ban an investment avenue which has its own perks  but to rather encourage the investors follow a more regulated and transparent route, simultaneously making sure that the proposed route is easy, fast and convenient.

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