Participatory Notes

Reviewed by Vineeth | Updated on Aug 26, 2020

Introduction to Participatory Notes

Participatory notes are often referred to as PNs or P-Notes. These are financial instruments used by investors and hedge funds to invest in the Indian securities, and no registration is required with the SEBI, the market watchdog in India. Investments flowing in through PNs are considered as offshore derivative investments (ODIs). Deutsche Bank and Citigroup are the leading issuers of participatory notes.

Any capital gains and dividends accumulated through these PNs will go into the hands of investors. The SEBI and other market regulatory bodies in India are in favour of participatory notes as they are worried about hedge funds functioning via these instruments leading to volatility in the Indian exchanges.

Understanding Participatory Notes

Foreign institutional investors (FIIs) offer the financial instruments in other countries for the local investors to invest in the Indian securities market. FIIs are those investors or funds that are based out of a foreign country and invest in the Indian securities market. This has enabled the foreign investors that are unregistered to trade in the Indian securities market without having to register with any of the Indian securities market regulators.

Investments made through PNs are beneficial to the Indian economy as they can provide quicker means of raising funds for the benefit of the Indian listed companies and economy. The guidelines set by the Indian regulators for this kind of investment is not a lot in number as these investments are typically short-term in nature. Going through a lot of hassles to obtain a registration with the authorised can be time-consuming, and the existence of PNs has alleviated the need for it.

Advantages of Participatory Notes

  1. PNs can be easily traded in foreign countries via endorsement and delivery.

  2. PNs are well known as investors, and hedge funds can enter Indian markets anonymously and go about their operations. Some individuals and entities are investing through PNs so that they can benefit from tax laws in particular countries.