Participatory Notes Explained

September 21, 2021
Participatory Notes Explained

Participatory Notes (PNs or P-Notes) are instruments issued by registered foreign institutional investors (FII) or overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator SEBI. These are considered as offshore derivative investments as Indian shares as underlying assets. These investments are of short-term in nature.

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

According to Securities and Exchange Board of India (SEBI) data, the value of P-note investments in Indian markets – equity, debt and hybrid securities – was at Rs 97,744 crore in August 2021. Some of FIIs working in this segment are Citigroup (C), Deutsche Bank, HSBC etc.

Why Participatory Notes (P-Notes) are preferred?

  • P- Notes are preferred route for overseas investors because 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
  • Since the ultimate beneficiary of transactions carried out using participatory notes is not known to the market regulator and the tax authorities, there is scope for misuse and tax avoidance

Who is Foreign Institutional Investor (FII)?

Foreign Institutional Investor (FII) is an investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds. Not only do FIIs trade for themselves, but they also trade for their clients, who are known as sub-accounts. These sub-accounts do not have to be regulated to be able to register with SEBI

FIIs have to report all such investments each quarter to SEBI; however they need not disclose the identity of the actual investors

Features of Participatory Notes

Some of the prominent features of Participatory Notes are:

  • Overseas investors can invest in India without registering with SEBI
  • Identity of investor is not disclosed with SEBI; however FIIs have to get registered with SEBI
  • Investments are for short term
  • The dividends and capital gains belongs to investor
  • Sudden withdrawal by FIIs causes huge volatility in stock markets
  • Instrument to attract money in capital market which helps in growth of economy
  • Easily traded overseas through endorsement and delivery

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