Participatory Notes

Participatory Notes (P-Notes or PNs) are financial instruments issued by registered foreign institutional investors (FIIs) to investors or hedge funds who want exposure to Indian securities without registering directly with SEBI. They are considered a type of Offshore Derivative Investment (ODI).

Key Features: Purpose Provide indirect access to Indian equity and derivative markets for foreign investors. Enable global investors to participate in Indian markets without fulfilling direct registration requirements. Structure Issued by SEBI-registered FIIs. The underlying assets can include: Indian stocks Equity derivatives Returns to the P-Note holder are linked to the performance of the underlying Indian securities.

Advantages: Quick and easy entry into Indian markets. Provides anonymity for investors who may not want direct disclosure to Indian authorities. Reduces compliance burden compared to direct FII registration. Risks Market risk associated with underlying securities. Counterparty risk if the FII defaults. Regulatory risk due to SEBI restrictions or changes in ODI regulations. Regulatory Aspect Governed by SEBI regulations. Issuers must report P-Note holdings to SEBI. SEBI has gradually tightened rules to increase transparency in P-Note investments.

Example A hedge fund in Singapore wants exposure to Indian equities but doesn’t register with SEBI. A SEBI-registered FII issues P-Notes to the hedge fund. The hedge fund gains returns equivalent to Indian market performance without being a direct FII.