Participatory Notes

Participatory Notes is a financial instruments or offshore derivative instruments (ODI) using which foreign investors can invest in Indian securities without registering with the Securities and Exchange Board of India (SEBI). In this article, you will learn about participatory notes meaning, advantages, disadvantages and SEBI bans on them, etc.

This article will provide key insights for GS Paper-3 Economy section of UPSC IAS Exam.

Table of Content

• What is Participatory Notes?
• Advantages of Participatory Notes
• Disadvantages of Participatory Notes
• Reasons of decrease in Participatory Notes
• Conclusion
• Frequently Asked Questions

What is Participatory Notes?

• Definition: It is a financial instruments or offshore derivative instruments (ODI) using which foreign investors can invest in Indian securities without registering with the Securities and Exchange Board of India (SEBI).
• It is also referred to as P-Notes or PNs.
• P-Notes investment in India was first introduced in 2003.

• P-Notes is issued by registered hedge fund investor or foreign portfolio investors (FPIs) to overseas investors who wish to be a part of the Indian stock market without getting registered.
• It was first introduced by the SEBI in 2000 as a unique Indian innovation.
• It increases when there are increased chances that global economy might suffer in near future.

Advantages of Participatory Notes:

• Participatory Notes helps to earn foreign currency required to maintain the stability of Indian Rupees in the world market including current account deficit.
• P-Notes helps Indian companies to grow and get quick investment for its day-to-day operations.
• Participatory Notes helps in ease oftrading and encourages more investors to invest in Indian economy.
  • It can be easily traded in foreign countries via endorsement and delivery.
• P-Notes helps some investors to get certain tax benefits in their home country by routing its investment through it.
• Participatory Notes trade is tax free if done in GIFT city.

Disadvantages of Participatory Notes

• Participatory Notes is highly volatile due to being moreliquid and can lead to downfall of an economy.
  • Example: Crisis of 2007 in India.
• Money laundering: as most of its real investors remains anonymous, it becomes an easy source of money laundering.
  • Thus, participatory notes and black money are often interlinked with each other.

Regulations of SEBI on P-Notes:

• SEBI has directed Foreign Institutional Investors (FIIs) to decrease participatory Notes participation to 40%.
• SEBI has ordered FIIs to report monthly details of participatory Notes transactions within 10 days. 
• SEBI has issued norms to enhance KYC regulations and shut the entities that are not transparent.
• SEBI had restricted P-Notes use to only hedging.
• SEBI bans P-Notes completely in the derivatives segment in India. 
• FIIs cannot issue overseas derivative instruments (ODIs) having derivatives as security other than for hedging their position in equity.

Conclusion

Participatory Notes or P-note though highly volatile might lead to better investment in a country along with its contribution in reducing current account deficit (CAD) of an economy. India that suffers from high CAD required P-Notes to reduce it and maintain correct number of foreign reserves in the country. However, it requires correct policy direction in order to outweigh the disadvantages associated with it.

Ref: Source-1

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Commercial Paper (CP)	Open Market Operations (OMO)
Electoral Bonds	Privatization of Government Sector
Securities and Exchange Board of India (SEBI)

FAQs (Frequently Asked Questions)