What are Participatory Notes (P-Notes)?

Participatory Notes are commonly know as P-Notes or PNs instruments. These are used by foreign investors who wish to invest in the Indian stock market, but without registering themselves with the market regulator, the Securities and Exchange Board of India (SEBI).

PNs are offshore investment derivative instrument which means these instruments are used outside India for making investment in the Indian stock market.

Why are P-Notes popular?
P-Notes are popular among Foreign Institutional Investors as the features of p-notes ate restricted to them. However, SEBI has often in the past shown its dissatisfaction towards P-Notes as the investors remain anonymous. Registered FIIs take care of all the transaction of a p-note investor and it is therefore not mandatory to disclose client details, unless asked.

How Hedge Funds acts in P-Notes
Hedge funds are those which invest through P-Notes. They tend to borrow money and invest in emerging markets.

How do they affect the Indian market?
Foreign Institutional Investors(FIIs) are organizations established outside India and they make proposal for investment in India. FIIs play a vital role in Indian stock market as they are the main source for liquidity. Health of the market can be determined by the investment trend done by FIIs.
Huge amounts of investments by FIIs is a sign of good health and it gains confidence in the market. However, the confidence tumbles when government intervene by slapping tax on investment.

According to the latest report, investors in participatory notes have pulled out Rs one lakh crore, in the last three months on concerns of the government's taxation net and chase for black money.

The down trend started after the Union Budget in March which proposed new taxation rule of General Anti-Avoidance Rule (GAAR) and few amendments in other tax laws.

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