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Participatory notes

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Participatory notes

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

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