What is Participatory Notes ?
Definition & Explanations:
- Participatory Notes commonly known as P-Notes or PNs are
instruments issued by registered foreign institutional investors (FII) to
overseas investors, who wish to invest in the Indian stock markets without
registering themselves with the market regulator, the Securities and Exchange
Board of India - SEBI.
- Financial instruments used by investors or hedge funds that
are not registered with the Securities and Exchange Board of India to invest in
Indian securities. Indian-based brokerages buy India-based securities and then
issue participatory notes to foreign investors. Any dividends or capital gains
collected from the underlying securities go back to the investors.
- In many ways, this is similar to an informal ADR process,
where brokerages hold on to stocks for foreign investors. However, Indian
regulators are not very happy about participatory notes because they have no way
to know who owns the underlying securities. Regulators fear that hedge funds
acting through participatory notes will cause economic volatility in India's
- Participatory notes are
generally issued overseas by the associates of India-based foreign brokerages
and domestic institutional brokerages. They are, in fact, offshore derivative
instruments issued by foreign institutional investors.