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Participatory Notes

Participatory Notes

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Published by vishnu0751

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Published by: vishnu0751 on Oct 29, 2009
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Participatory notes
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(April 2007)
Participatory notes
PNs / P-Notes
) are instruments used by investors or hedge fundsthat arenot registered with theSEBI(Securities & Exchange Board of India) to invest inIndian  securities.
Participatory notes
are instruments that derive their value from an underlyingfinancial instrument such as an equity share and, hence, the word, 'derivative instruments'.SEBI  permitted FIIs to register and participate in the indian stock market in 1992.Indian based brokerages buy Indian-based securities and then issue PNs to foreign investors. Anydividendsor capital gainscollected from the underlying securities go back to the investors. Participatory notes are instruments used for making investments in thestock markets. However,they are not used within the country. They are used outside India for making investments inshares listed in that country. That is why they are also called offshore derivative instruments.In the Indian context, foreign institutional investors (FIIs) and their sub-accounts mostly usethese instruments for facilitating the participation of their overseas clients, who are not interestedin participating directly in the Indian stock market. For example, Indian-based brokerages buyIndia-based securities and then issue participatory notes to foreign investors. Any dividends ocapital gains collected from the underlying securities go back to the investors. According to anexpert group constituted by the finance ministry in India, in August 2004, participatory notesconstituted about 46 per cent of the cumulative net investments in equities by FIIs.
Any entity investing in participatory notes is not required to register with SEBI (Securities andExchange Board of India), whereas all FIIs have to compulsorily get registered. Trading through participatory notes is easy because participatory notes are like contract notes transferable byendorsement and delivery. Secondly, some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries. Thirdly, participatory notes are popular because they provide a high degree of anonymity, which enableslarge hedge funds to carry out their operations without disclosing their identity.Participatory notes in brief is as follows :What are participatory notes or PNs? Participatory notes are instruments used by foreign fundswhich are not registered to trade in domestic Indian Capital Markets. PNs are derivative

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