·         The Securities and Exchange Board of India (SEBI) plans to further tighten norms for issuance of offshore derivative instruments (ODIs) and participatory notes (PNs). SEBI has proposed levying a regulatory fee of $1,000 on every foreign portfolio investor (FPI) that issues ODIs or PNs.

·         Aim is to reduce the exposure investors take via such instruments in the Indian equity market.

·         It has invited public comments on the proposal till June 12, 2017

What are P-notes?

·         Participatory notes also called P-Notes are offshore derivative instruments with Indian shares as underlying assets.

·         These instruments are used for making investments in the stock markets.

·         However, they are not used within the country. They are used outside India for making investments in shares listed in the Indian stock market. That is why they are also called offshore derivative instruments.

Who issues P-Notes?

·         Participatory notes are issued by brokers and FIIs registered with SEBI.

Why are participatory notes used?

·         Investing through P-Notes is very simple and hence very popular amongst FIIs. Overseas investors who are not registered with SEBI have to go through a lot of scrutiny, such as know-your-customer norms, before investing in Indian shares.

·         To avoid these hurdles, foreign investors take this route.

Advantages of participatory notes

·         Anonymity: Any entity investing in participatory notes is not required to register with SEBI, whereas all FIIs have to compulsorily get registered. It enables large hedge funds to carry out their operations without disclosing their identity.

·         Ease of trading: Trading through participatory notes is easy because they are like contract notes transferable by endorsement and delivery.

·         Tax saving: Some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries.

Disadvantages of P-notes

·         Indian regulators are not very happy about participatory notes because they have no way to know who owns the underlying securities.

·         It is alleged that a lot of unaccounted money made its way to the country through the participatory note route.