Participatory notes & its impact

Participatory Notes & Its Impact

Participatory NotesCommonly known asP-NotesorPNsInstruments issued by registered foreigninstitutional 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.

Used for making investments in thestock markets. Used outside India for making investments in shares listed in the Indian stock market. 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.Aid investors who do not want to register with SEBI and reveal their identities to take positions in the Indian market.

However, they are not used within the country. That is why they are also called offshore derivative instruments. 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.

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Advantages of participatory notes:

Anonymity:Any entity investing in participatory notes is not required to register with SEBI, 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

Tax saving

It strengthen rupee against the dollar.

Disadvantages of P-notes:Indian regulators are not very happy about participatory notes because they have no way to know who owns the underlying securities. It is alleged that a lot of unaccounted money made its way to the country through the participatory note route.

Trading through participatory notes is easy because they are like contract notes transferable by endorsement and delivery.

Trading through participatory notes is easy because they are like contract notes transferable by endorsement and delivery.Some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries.

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The End