Participatory Notes

Participatory Notes are offshore/overseas derivative instruments (ODIs) issued by registered foreign institutional investors (FII) to overseas investors. They are commonly known as P-Notes.


Why in news?

  • The market regulator Securities and Exchange Board of India (SEBI) has tightened the Participatory Notes (P-note) norms.
  • The main purpose of this decision is to keep vigil on foreign investments to curb black money inflows in the country.
  • In this regard, SEBI has introduced Know Your Client (KYC) compliance for holders of these instruments in order to bring them on a par with domestic investors.
  • SEBI also has sought information on the ultimate beneficiaries of these products.
  • SEBI has also imposed a condition that P-Notes can be transferred only to entities authorised for their use and that too after prior consent from the issuer foreign investor


What are Participatory notes?

  • P-Notes are issued to overseas investors who wish to invest in the Indian stock markets without registering themselves with the market regulator SEBI.
  • Investing through P-Notes is very simple and is very popular amongst FIIs. SEBI had permitted FIIS to participate and register in the Indian stock market in 1992.
  • P-Notes are not used within the country but are mainly used outside India for making investments in shares listed in the Indian stock market.
  • For example, India-based brokerages buy securities from the Indian stock and then issue P-Notes to foreign investors for the securities. Any capital gains or dividends collected from the underlying securities go back to the investors.



  • Ease of Trading: Trading through P-Notes is easy because they are like contract notes transferable by endorsement and delivery.
  • Tax Saving: Some of the entities route their investment through P-Notes to take advantage of the tax laws of certain preferred countries.



  • Anonymity: Any entity investing in P-Notes is not required to register with SEBI. It enables large hedge funds to carry out their operations without revealing their identity.
  • Money Laundering: P-Notes are used by money launderers. They first take funds out of country through hawala and then get it back using P-Notes.


SIT to monitor P-Notes data:

  • The special investigation team (SIT) on black money has asked the Securities and Exchange Board of India (Sebi) to furnish the details of all those investing through participatory notes (P-Notes).
  • This is the first time the government-constituted body has sought such massive amount of data, which includes the list of beneficial owners and transfer trials of investors taking the P-Note route to invest in domestic equity and debt markets.
  • The SIT wants to ensure that the regulatory changes made by Sebi are sufficient to curb misuse of tools, particularly with respect to end beneficiaries. The expert panel is concerned that the P-Note route could still be used by Indian companies to bring back unaccounted money



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