Participatory Notes commonly know as P-Notes or PNs are instruments issued by registered foreign institutional investors (FII) to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India – SEBI.
SEBI permitted foreign institutional investors to register and participate in the Indian stock market in 1992.
Investing through P-Notes is very simple and hence very popular amongst foreign institutional investors.
3 Participatory Notes Crisis of 2007
4 Trends in PN
Participatory notes are instruments 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 that country. That is why they are also called offshore derivative instruments.
In the Indian context, foreign institutional investors (FIIs) and their sub-accounts mostly use these instruments for facilitating the participation of their overseas clients, who are not interested in participating directly in the Indian stock market.
For example, Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.
Anonymity: Any entity investing in participatory notes is not required to register with SEBI (Securities and Exchange Board of India), whereas all FIIs have to compulsorily get registered. It enables large hedge funds to carry out their operations without disclosing their identity. Ease of Trading: Trading through participatory notes is easy because participatory notes are like contract notes transferable by endorsement and delivery. Tax Saving: Some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries. Money Laundering: PNs are becoming a favourite with a host of Indian money launderers who use them to first take funds out of country through hawala and then get it back using PNs.
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