Participatory Notes commonly known 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.
Contents
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.
Working
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 the Indian stock market. 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.
Need
- 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.
- P-notes are not necessarily just for the India market. In general terms, p-notes are used for any market/share classification whereby there are restrictions for foreign investors (i.e. require a Foreign Investor-type license for non-locally domiciled brokerages). The notable markets include Shenzhen and Shanghai for China A-shares, some MENA markets and Korea in addition to India.
Trends
According to an expert group constituted by the finance ministry in India, in August 2004, participatory notes constituted about 46 per cent of the cumulative net investments in equities by FIIs.Now according to Dr Subramanian Swamy(now RS Member) the PNs contribute about 60% of investment by FIIs
Participatory notes were never phased out completely as initially hinted by SEBI, while FII registration was streamlined and both cash as well as derivative markets moved to the latter platform. This stabilized inflows as well as increased FII participation. As a result, FII participation through PN was down from 51% to 16% over three years. The primary causes cited are:
In June 2012, SEBI ordered FIIs to report monthly details of P-notes transactions within 10 days. Earlier, FIIs were given a time of six months for such reporting. This move came just a few weeks after Govt of India's white paper on black money identified P-notes as one of the routes through which black money transferred outside India comes back through a process called round-tripping.
On November 24, 2014 SEBI issued new norms to curb illegal funds inflow. The new norms will enhance KYC and shut out entities form opaque and non-transparent structure to filter the kind of money that flows into the country≠§§§