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What if P-notes are banned?
Wed, 12 Aug Pre-Open

What are participatory notes (P-notes)?

A 'Participatory Note' is an instrument issued by foreign institutional investors (FII) registered with the Securities and Exchange Board of India (SEBI). The underlying asset in the 'Participatory Notes' is Indian securities. Such instruments are issued to overseas investors.

What are the concerns related to P-Notes?

The instruments are issued outside India and are traded without any jurisdiction of SEBI. There are indications that promoters of Indian companies have used this quote to bring back unaccounted funds. Participatory notes have been one of the biggest vehicles for turning the colour of money from black to white.

Is it difficult to ban P-Notes?

The RBI may be pushing hard to ban the P-notes but the government has the final say in foreign investment rules. A full ban may be difficult to implement because of the implications on stock market and considering that India runs a current account deficit and needs foreign investment to bridge the gap in savings, policy makers would have to think many times before going ahead with an outright ban.

Recommendations of Special Investigation Team

The SIT appointed by apex court recommended that the government should obtain details of beneficial ownership or identity of the final holder or investor of P-Notes and make it non-transferable. They made an important observation that 31.3% of the P-note investment (which amounts to Rs 850bn) is held by Cayman Islands, raising a question of how a jurisdiction with a population of less than 55,000 could possibly invest Rs 850bn in one country!

And how did SEBI react to this?

Well.... it simply reiterated that it would allow only entities from Financial Action Task Force-compliant nations to issue these notes and that it knows enough about the beneficial owners.


The SIT observation raises real concerns on the beneficial owners of the P-notes issued by FII. It is believed that the value of P-note holdings stands at Rs 2.4 trillion and forms around 10.3% (both equity and derivative) of total Foreign Portfolio Investor (FPI) holdings. This would be a significant chunk of the total value considering foreign investors have a significant share of the free float shares in the market and thus becomes a concern. If there is a clamp down on these instruments, investors should not be surprised to major volatility in the market in the short term. In that case, all they can and should do is be prepared to take the necessary action

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Jan 17, 2018 (Close)