This could be either because they want to avoid the rigmarole and the cost of registering with another regulator, or because of restrictions in their investment mandates. PNs offer customized tools to manage risk, lower financing costs, and improve portfolio yields in addition to lowering transaction costs. PNs, for example, can be designed with longer maturities list of indian companies using jit than are typically available in exchange-traded derivatives. SEBI has, of late, been trying to simplify rules governing FPIs which can dilute the existing checks against money laundering through this route. These instruments account for only 2% of FPI assets currently. Foreign portfolio investment is a common way to invest in overseas economies.

Dividends, capital gains, and any other payouts due to stockholders owning shares in the Indian firm are available to the investor. Foreign institutional investors are those who invest in assets that are located in a nation other than where they are registered or where their businesses are located. Foreign direct investment and foreign institutional investment are two types of foreign https://1investing.in/ investment in India . FPIs are non-residents who invest in Indian securities like shares, government bonds, corporate bonds, etc. According to market statistics, FPIs hold P-Notes of over Rs 1.9 lakh crore in cash and Rs 40,000 crore in derivatives. This means that banning of PNs for equity derivatives will lead to phasing out of around 25% of investment made through P-Notes.

The Concerns related to Participatory Notes

However, investments rebounded in December 2018 after regulators relaxed some of the more restrictive requirements. From January 2011, the new rules of SEBI required the FII to follow Know Your Customer norms and had to submit the details of transactions. This caused a decline in the issuance of participatory notes. Foreign Direct Investment is an investment made by a firm or individual in one country in business interests located in another country.

If the price of those shares go up, call up HSBC to sell them. HSBC returns principal + profit to Tom, after cutting commission. But their trading-techniques are far more complex than mutual funds, hence Hedge funds can make money even with sharemarket going down. IFCs have been included as eligible issuers for FII investment in the corporate bonds long-term infra category.

Working of the Participatory Notes

Although Indian exchanges offer options contracts, these contracts have a three-month maximum life, after which the FII must roll over its positions and purchase a new option contract. Alternatively, it can obtain a PN that can be customized to meet its hedging needs. The following points can help explain why Participatory Notes became such a popular vehicle for foreign investors to invest in the Indian security market.

• Also, the regulator has the ability to trace the ownership chain only after an investigation starts.
• With more broadbased flows and greater global pressure now on checking illicit fund flows, it should be possible to phase out PNs over the medium term.
• The SIT wants investors’ due diligence — or KYC — details to be known to the regulator.
• Foreign institutional investment, on the other hand, is defined by portfolio investment, i.e., quick money entering the Indian stock market for a short period of time, as a result of which there are fewer limitations on FII.

But often, within 3 months the P-notes would have changed many hands (e.g Tom to Jerry to Micky to Goofy). So, to take a shortcut, Tom will contact some ‘middleman’ who is already registered as an FII, has PAN card & DEMAT in India. Cannot become board of director in any Indian commodity exchange. Example If FII HSBC already owns 11% of Infosys shares (before 1/June/2014), they don’t need to sell 1% to get back in 10% limited. To the extent that such products are not available in the onshore markets, there will always be a demand for such structured products in the form of P-Notes.

P-Notes or Participatory Notes are Overseas Derivative Instruments that have Indian stocks as their underlying assets. They allow foreign investors to buy stocks listed on Indian exchanges without being registered. The instrument gained popularity as FIIs, to avoid the formalities of registering and to remain anonymous, started betting on stocks through this route. Participatory notes are important from the perspective of UPSC IAS Examinations and fall under the General Studies Paper 3.

Current Affairs [Articles]

The special investigation team on black money has asked the Securities and Exchange Board of India to furnish the details of all those investing through participatory notes (P-Notes). In late 2017, Indian regulators determined that P-Notes cannot take any derivative positions in Indian markets for reasons other than hedging. This stringent regulatory intervention caused investments through P-Notes to drop throughout 2018, finally hitting a more than 9-1/2 year low in November 2018.

• Participatory notes can be used to purchase any Indian security which is desired by an investor.
• P-notes are issued by foreign portfolio investors registered with SEBI to overseas investors who are not registered as FPIs in India.
• A year later the restrictions on participatory notes were removed due to the financial crisis.
• Any entity can invest in the participatory notes without registering under SEBI while registering under SEBI is compulsory for all FIIs.

The real estate and capital markets sectors are not eligible for these bonds. Interest income from these bonds will be subject to a 5% withholding tax, but capital gains arising from rupee appreciation will be exempt from taxation. Because PNs are derivative instruments that are freely traded, they can be easily transferred, resulting in multiple layers and obscuring the true beneficial owner.

Participatory Notes (P-Notes) – Indian Economy Notes For UPSC Exam!

In October 2007 SEBI issued regulations as per which FII cannot issue fresh P-Notes and the existing P-Notes would have to be wound up in the next 18 months. Foreign investment in India can be in the form of Foreign Direct Investment or Foreign Institutional Investment . We shall discuss in detail Participatory Notes, its working, its pros and cons, the regulatory issues involved and the steps taken by SEBI to regulate them. SEBI, the market regulator, has established tight requirements for obtaining FDI permission and documentation. By means of a merger or joint venture with a foreign company. Acquiring a controlling interest in an existing foreign company, Hence, 2 is correct.

P-Notes are Offshore Derivative Investments with equity shares or debt securities as underlying assets, as they are used by the investors abroad but not within India. Numerous studies have reflected that participatory notes affect the stock markets adversely. The promoters of Companies have been found using participatory notes to bring back the unaccounted money and as a means to manipulate the stock prices. Taking another viewpoint, if a person in India buys a derivative in India and sells it to an investor in London, India does not have the right to ask about the London investor except in the context of an investigation. If we want better knowledge about the beneficiary owner, we would do well to reform tax policy, capital controls and financial regulation to bring the business directly to India. This would be more effective in strengthening regulatory control, without destroying muchneeded global flows into India.

What are Participatory Notes (P-Notes)?

The existing ECB automatic route limits for eligible corporates were increased from US$ 500 million to US$ 750 million. The limit has been raised from US$ 100 million to US$ 200 million for borrowers in the services sector, and from US$ 5 million to US$ 10 million for NGOs engaged in microfinance activities. The use of ECBs to refinance buyer/supplier credit for the purchase of capital goods by infrastructure companies was approved. The monthly ex-post reporting requirement imposed on FIIs in respect of PNs effectively keeps PN transactions out of the real-time market surveillance mechanism and outside of SEBI’s enforceability jurisdiction. Which of the following statements about P notes Participatory Notes is are incorrect 1 nbsp nbsp nbs……

A major defect of the P-Notes as instruments to make investment in Indian shares is that it hides the identity of the investor. According to the ‘White Paper’ on black money prepared by the central government, a considerable portion of PNs are used by wealthy individuals who uses it as a mechanism to channelize black money kept in foreign countries to India. The Special Investigation Team on black money also recommended the phasing out of P-Notes.