What is a Participatory Note?

P-Notes or PNs are acronym to Participatory Notes. These instruments are issued to overseas buyers by the foreign institutional investors (FII) who are registered with SEBI. These notes are actually Overseas Derivative Instruments that have Indian stocks as their underlying assets.  The foreign institutional investors (FII) who have registered with SEBI issue these instruments to overseas investors., who wish to invest in the Indian stock markets without registering themselves with the market regulator SEBI.

As the investors used to remain anonymous; there was a view that it is being used in money laundering with wealthy Indian promoters using it to bring back unaccounted funds and manipulate their company’s stock prices. In view of the above reason, SEBI made it obligatory in 2011 that FIIs have had to follow KYC norms and submit details of transactions. In 2014, SEBI mandated that in addition to KYC, the anti-money laundering rules (AML) will also be applicable to P-Note holders.  SEBI further tightened the regulations on foreign portfolio investors, recently made new rules on transferability of P-Notes between two foreign investors and increased the frequency of reporting by P-Note issuers.