Participatory Notes

Introduction

• Participatory notes, also referred to as P-Notes, are Overseas Derivative Instruments that have Indian stocks as their underlying assets. 
• They allow foreign investors to buy stocks listed on Indian exchanges without being registered with the Securities and Exchange Board of India (SEBI).
• The instrument gained popularity as FIIs, to avoid the formalities of registering and to remain anonymous, started betting on stocks through this route.

Characteristics of P-Notes

• Brokers and foreign institutional investors registered with the Securities and Exchange Board of India (SEBI) issue the participatory notes and invest on behalf of the foreign investors. 
• Brokers must report their participatory note issuance status to the regulatory board each quarter. The notes allow foreign investors with high net worth, hedge funds, and other investors, to participate in the Indian markets without registering with SEBI. This  helps investors save time, money and scrutiny associated with direct registration.
• P-notes are also called Equity Linked Notes, Overseas Derivative Instruments, Participating Return Notes and Capped Return Notes, etc.  
• The investor in P-notes does not own the underlying Indian security, which is held by the FII (Foreign Institutional Investor) who issues the P-Notes. yThus, the investors in P-notes gain economic benefits by investing in the securities without actually holding them. 
• The P-Notes holders do not have any voting rights in relation to security/shares. 

Concern regarding P-Notes

• As these are issued outside of India, SEBI does not have full control over them. 
• It is also alleged that most of the money invested through P-Notes is unaccounted money or black money. P-Notes are also used for money laundering purposes which converts black money into white money. 
• SEBI has been successful in taking action against FIIs who are non-compliant and those who have misreported offshore derivatives. 
• SEBI has made it mandatory from January 2011 that all FIIs have had to follow KYC norms and submit details of transactions including P-notes. y In 2014, SEBI made it mandatory for those FPIs issuing P-Notes to submit a monthly report disclosing their portfolios