What are 'Participatory Notes'

Participatory notes, also referred to as "P-notes," are financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India (SEBI) to invest in Indian securities. Any dividends or capital gains collected from the underlying securities go back to the investors. Indian regulators are against participatory notes because they fear that hedge funds acting through participatory notes will cause economic volatility in India's exchanges.

BREAKING DOWN 'Participatory Notes'

Foreign institutional investors (FIIs) provide quick money entering the Indian capital market. Because of the short-term nature of investing, regulators have fewer guidelines for FIIs. To invest in Indian stock markets without the hassle of involvement with the regulatory approval process, FIIs trade P-notes.

What Participatory Notes Are

P-notes are offshore derivative instruments with Indian shares as underlying assets. Brokers and FIIs registered with SEBI issue the instruments and make investments on the FII’s behalf. Brokers must report their P-note issuance status to SEBI each quarter. The notes allow foreign investors with high net worth, as well as hedge funds and other investors, to invest in Indian markets without registering with SEBI. Investors save time, money and scrutiny associated with direct registration.

Pros and Cons of Participatory Notes

P-notes are easily traded overseas through endorsement and delivery. They are popular because investors anonymously take positions in Indian markets, and hedge funds anonymously carry out their operations. Some entities route their investments through P-notes to take advantage of certain countries’ tax laws.

However, because of the anonymity, Indian regulators face difficulty determining a P-note’s original and end owner. Therefore, much unaccounted money enters the country through P-notes. In addition, SEBI has no jurisdiction over trading P-notes. Although FIIs must register with SEBI, the P-notes trading among FIIs are not registered. For this reason, India’s government is concerned that P-notes are being used for money laundering.

For this reason, the Special Investigation Team (SIT) wants stricter compliance measures put in place for trading P-notes. However, when the government proposed putting trading restrictions on P-notes in the past, the Indian market became extremely volatile. For example, around the time the government began talking about curbing P-note trading in October 2007, the market dropped 1744 points. Because FIIs help fuel the growth of the Indian economy, industries and capital market, and because increasing regulations on P-notes would increase the difficulty of foreign money entering the market, the Indian government and investors reacted with fear. The government ended its discussion on regulating P-notes.

  1. Securities And Exchange Board Of ...

    The regulatory body for the investment market in India. The purpose ...
  2. Associated Person

    The name given to participants within the futures market that ...
  3. National Stock Exchange Of India ...

    The National Stock Exchange is India's largest financial market ...
  4. Qualified Institutional Placement ...

    A qualified institutional placement (QIP) is basically a fundraising ...
  5. Demonetization

    India's demonetization means that it is stripping a currency ...
  6. INR (Indian Rupee)

    The currency abbreviation or currency symbol for the Indian rupee ...
Related Articles
  1. Investing

    INDA: iShares MSCI India ETF

    Learn about the iShares MSCI India exchange-traded fund, which invests in equities of Indian companies and is suitable for risk-tolerant investors.
  2. Investing

    Bombay Stock Exchange CEO Ashish Chauhan on India Rising

    India's largest stock exchange is hitting its stride. We talk with CEO Ashish Chauhan in New York.
  3. Investing

    5 Hot Indian Stocks

    Some of these Indian stocks have returned 40%+ YTD, which shows the growth potential of this growing economy.
  4. Retirement

    Can You Retire in India with $200,000 in Savings?

    India's cost-of-living ranks among the lowest in the world, but retiring there presents some challenges unrelated to finances.
  5. Investing

    BP Only Second Foreign Firm to Enter Indian Market

    BP plans to open fuel stations in India, becoming only the second foreign oil company to enter the fastest-growing major economy in the world.
  6. Retirement

    Going Back to India to Retire: A How-to Guide

    If your family hails from this land of vibrant culture and ancient traditions, retiring in India may be an ideal choice, provided you plan for it.
  7. Investing

    India Remains An Emerging Market Bright Spot

    Change has finally come to India. The election of a business-friendly reformer appears to be the spark that will send Indian equities higher.
  8. Investing

    India's Economy Is Bright: 3 Mutual Funds to Take Advantage of (MINDX, WAINX)

    Learn about three India equity sector funds positioned to take advantage of phenomenal growth forecast for the emerging market economy.
  9. Insights

    Apple CEO Tim Cook Visits India (AAPL)

    Cook's aggressive campaigning in the East continues.
  10. Investing

    How India Makes Money

    India currently has the ninth largest nominal GDP (and third largest in PPP) in the world.
  1. What are some examples of a Foreign Institutional Investor (FII)?

    Discover some examples of foreign institutional investors, and learn information about the nature of foreign institutional ... Read Answer >>
  2. What happens if you don't hedge your investments?

    Learn the purpose, advantages and disadvantages of hedging, and find out how to utilize hedging to enhance an overall investment ... Read Answer >>
  3. Do hedge funds pay dividends?

    Learn how investors can earn dividends from publicly traded hedge funds, and identify a couple of the industry's big players ... Read Answer >>
Hot Definitions
  1. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  2. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  3. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  4. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  5. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  6. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
Trading Center