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Presented By :Jyoti kumari Tripti Majhi Noopur


Participatory Notes or P-Notes are financial instruments that are issued by FIIs to investors and hedge funds who wish to invest in Indian stock markets, but who are not registered with SEBI (Securities and Exchange Board of India). Other name of P note is offshore derivative instruments.

? In your mind

Why P-Notes? How does it work ? Who gets P-Notes? Who can invest in P-notes? What are hedge funds? What is an FII?

Why P-Notes ?
Since international access to the Indian capital market is limited to FIIs. The market has found a way to circumvent this by creating the device called participatory notes, which are said to account for half the $80 billion that stands to the credit of FIIs. Investing through P-Notes is very simple and hence very popular

Who gets P-Notes ?

P-Notes are issued to the real investors on the basis of stocks purchased by the FII. The registered FII looks after all the transactions, which appear as proprietary trades in its books. It is not obligatory for the FIIs to disclose their client details to the Sebi, unless asked specifically. Morgan Stanley , Credit Lyonnais, Citigroup ,Goldman Sachs, Macquarie and Standard Chartered Bank who are registered in India with SEBI issue Participatory Notes.

Who can invest in P-notes?

Any entity incorporated in a jurisdiction that requires filing of constitutional and/or other documents with a registrar of companies or comparable regulatory agency or body under the applicable companies legislation in that jurisdiction Any entity that is regulated, authorised or supervised by a central bank, such as the Bank of England , the Hong Kong Monetary Authority, or any other similar body. Any entity that is regulated, authorised or supervised by a securities, such as the Financial Services Authority (UK), the Securities and Exchange Commission, Trading Commission, the Securities and Futures Commission.

Any entity that is a member of securities or

futures exchanges such as the New York Stock Exchange (Sub-account), London Stock Exchange (UK), provided that they are ultimately accountable to the respective securities / financial market regulators.

Any individual or entity (such as fund, trust, collective investment scheme, Investment Company or limited partnership) whose investment advisory function is managed by an entity satisfying the criteria of above.

How does it work ?

FIIs who issue/renew/cancel/redeem P-Notes, are required to report on a monthly basis. The report should reach the Sebi by the 7th day of the following month. The FII merely investing/subscribing in/to the Participatory Notes -- or any such type of instruments/securities -- with underlying Indian market securities are required to report on quarterly basis (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec) FIIs who do not issue PNs but have trades/holds Indian securities during the reporting quarter (JanMar, Apr-Jun, Jul-Sep and Oct-Dec) require to submit 'Nil' undertaking on a quarterly basis

What are hedge funds?

Hedge funds , are those which invest through participatory notes, borrow money cheaply from Western markets and invest these funds into stocks in emerging markets. This gives them double benefit: a chance to make a killing in a stock market where stocks are on the rise; and a chance to make the most of the rising value of the local currency

What is an FII?
An FII, or a foreign institutional investor, is an entity established to make investments in India However, these FIIs need to get registered with the Securities and Exchange Board of India Entities or funds that are eligible to get registered as FII include pension funds; mutual funds; insurance companies / reinsurance companies; investment trusts; banks; international or multilateral organisation or an agency thereof or a foreign government agency or a foreign central bank; foundations (serving broader social objectives); and charitable trusts / charitable societies.

The following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs: Asset Management Companies Investment Manager/Advisor Institutional Portfolio Managers Trustees

Advantages of P-Notes

Convenient for foreign investors, because participatory

notes are like contract notes transferable by approval

P-note provide high degree of anonymity. Some of the entities want their investment through P notes to take advantage of the tax laws of certain preferred countries.

It is important source of investment in Indian capital market

It strengthen rupee against the dollar.

"Know Your Customer (KYC) procedure is the key principle for identification of an individual/corporate opening an account.

The customer identification should entail verification through an introductory reference from an existing account holder/a person known to the bank

Or on the basis of documents provided by the customer. Came into existence after UBS scam. The objectives of the KYC framework is:

(i) To ensure appropriate customer identification and (ii) To monitor transactions of a suspicious nature.

Role of P-notes in Indian security market

Huge inflow of foreign funds into Indian stock market

On April , 2003, a bearish market turned into a bull market

with index had jumped 55 % ,major reason for this was Pnotes and total contribution of FII was around 5 billion

The contribution of participatory notes in 2003 was estimated to be $ 1.5 billion and approx $ 9 bn in 2009

P-Notes accounted for as much as 55% or more than half of

total inflow into India


In 2005 P-notes rose dramatically from 30.6% in April (the Sensex was 6,605 ) to 46.73% in August (the Sensex was 7,805 ) and it crosses 9000 in that year.

Participatory notes account for over 42% pc of FII inflows

till Sep. 2009

Participatory Notes Crisis of 2007

P-notes crisis took place on 16th of October, 2007

proposals of SEBI were not clear and this led to a knee-jerk


Sensex crashed by 1744 points in a single day. P.Chidambaram issued clarifications, that the government was not against FIIs and was not immediately banning PNs

20500.00 20162.50 20000.00



19000.00 18715.82 18500.00


17998.39 17559.98 17307.90





15500.00 Oct-16-2007 Oct-17-2007 Oct-18-2007 Oct-19-2007 Oct-26-2007 Oct-27-2007

Major reasons for investors investing in P-Notes








kong,Srilanka, singapore do not have any tax on short term

capital gains.

Whether participatory note be abolished?

It is also called problematic note

Capital market regulators dislike p-notes

It gives rise to illegal activities.As it is associated with Benami transaction which is not allowed in indian stock market

The income tax deptt has proposed to tax participatory holders P-note creates a mirage that the market is booming

UBS securities scam