Why in news:
- Participatory notes (P-notes) are poised for a comeback, this time through the International Financial Services Centre (IFSC), Gift City, Gujarat, after nearly a decade of being discouraged by Indian regulators.
- Some leading global banks that currently issue P-notes from global jurisdictions, such as Singapore, are considering shifting to Gift City as the special economic zone offers both tax sops and regulatory clarity.
About Participatory notes:
- Participatory notes also referred to as P-notes, or PNs, are financial instruments required by investors or hedge funds to invest in Indian securities without having to register with the Securities and Exchange Board of India (SEBI).
- P-notes are among the group of investments considered to be Offshore Derivative Investments (ODIs).
- Any dividends or capital gains collected from the securities go back to the investors.
- Indian regulators are generally not in support of participatory notes because they fear that hedge funds acting through participatory notes will cause economic volatility in India’s exchanges.
- Participatory notes allow non-registered investors to invest in the Indian market.
- Participatory notes are popular investments due to the investor remaining anonymous.
Mechanism of P-notes:
- Participatory notes are offshore derivative instruments with Indian shares as the underlying assets.
- Because of the short-term nature of investing, regulators have fewer guidelines for foreign institutional investors.
- To invest in the Indian stock markets and to avoid the cumbersome regulatory approval process, these investors trade participatory notes.
- Foreign institutional investors (FIIs) issue the financial instruments to investors in other countries who want to invest in Indian securities.
- Brokers and foreign institutional investors registered with the Securities and Exchange Board of India (SEBI) issue the participatory notes and invest on behalf of the foreign investors.
- Each month, brokers must report their participatory note issuance status to the regulatory board.
- This system lets unregistered overseas investors, such as high-net-worth individuals, hedge funds, and other investors buy Indian shares without the need to register with the Indian regulatory body.
- They provide access to quick money in the Indian capital markets.
- Investors save time, money, and scrutiny associated with direct registration.
- These investments are also beneficial to India as they allow for foreign investment into the country.
Syllabus : Prelims; Economy