What are P-Notes? 

• P-Notes or Participatory Notes are instruments issued by a registered Foreign Institutional Investor (FII) to an overseas investor who wishes to invest in Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India (SEBI).

What are the government & regulatory concerns? 

• The primary reason why P-Notes are worrying is because of the anonymous nature of the instrument as these investors could be beyond the reach of Indian regulators. 
• Further, there is a view that it is being used in money laundering with wealthy Indians, like the promoters of companies, using it to bring back unaccounted funds and to manipulate their stock prices.

What has SEBI done to regulate P-Notes? 

• SEBI has taken a number of steps to tighten rules on P-Notes. 
• From January 2011, FIIs have had to follow KYC norms and submit details of transactions. 
• In 2014, new rules on FIIs made it mandatory for those issuing P-Notes to submit a monthly report disclosing their portfolios. 
• Also, SEBI has mandated that in addition to KYC, the anti-money laundering rules (AML) will also be applicable to P-Note holders. 
• SEBI also issued norms on transferability of P-Notes between two foreign investors and increased the frequency of reporting by P-Note issuers.

Why in News?

• Investments in the Indian capital market through Participatory notes (P-notes) dropped to ₹87,989 crore at the end of January and experts believe that foreign investors will continue with their negative stance amid the Ukraine crisis.
• According to SEBI data, the value of P-note investments in Indian markets — equity, debt and hybrid securities — was at ₹87,989 crore by the end of January compared to ₹95,501 crore at December-end.
• At the end of November, the investment level was at ₹94,826 crore.

Reference:

1. https://www.thehindu.com/business/investments-through-p-notes-decline-to-87989-crore-in-january/article65144765.ece