Participatory Notes
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).
- To invest in the Indian stock markets and to avoid the cumbersome regulatory approval process, investors trade participatory notes. They, however, need to go through a due diligence process.
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 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?
- Investment in the Indian capital markets through P-notes declined to ₹80,092 crore till June-end, making it the lowest level in 20 months.
- This was the lowest level since October 2020, when investment through the route was at ₹78,686 crore.
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