What are p-notes?

Answer 1

Participatory Notes or P-Notes or PNs as it is called - are instruments issued by registered foreign institutional investors to overseas investors, who wish to invest in the stock markets without registering themselves with the market regulator Participatory notes are like contract notes. These are issued by FIIs to entities that want to invest in the Indian Stock Market but do not want to register themselves with the SEBI. FIIs registered with the SEBI and their sub-accounts can issue, deal, or hold P-Notes. The underlying security against these notes would be listed or proposed-to-be-listed securities on any Indian stock exchange.

FIIs issue these notes to investors abroad with details of scrips that can be bought and expected returns over specific periods of time. If the client agrees, they deposit the funds with the overseas branch of the FII. Then, the Indian arm of the FII proceeds with the transaction, buying the scrips in the Indian market and settling it on its own account. The details of the ultimate investor are not revealed at all in the Indian market or to the SEBI. Further Suplement RBI, which had sought a ban on PNs, believes that it is tough to establish the beneficial ownership or the identity of ultimate investors. It fears that FIIs, which have to comply with the know-your customer norms, know the identity of the investor to whom the note was issued. But it is possible for the investor to sell the PN to another player resulting in multi-layering. Tax officials fear PNs are becoming a favourite with many Indian money launderers who use it to first ship funds out of the country, through hawala, and then get it back using PNs. However, Indian regulators are not very happy about participatory notes because they have no way to know who owns the underlying securities. Regulators fear that hedge fundsacting through participatory notes will cause economic volatility in India's exchanges. But I think it is too late .... Ban on PNs may pull the already-deprived market to flat on the ground.
Participatory Notes. Financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India to invest in Indian securities.