All You Need To Know About P-Notes


BENGALURU: Participatory notes/P-notes are offshore derivative instruments used by foreign investors who are interested in betting on Indian securities but not keen on registering with the capital market regulator. P-notes are issued by foreign brokerages registered with the Securities and Exchange Board of India (Sebi), according to ET.

sdP-Notes Ban in the Past:

On October 16, 2007, the Securities and Exchange Board of India (Sebi) put out a discussion paper that proposed curbs on P-notes based on derivatives and prohibiting sub-accounts of FIIs from issuing P-notes. The stock market crashed over the next three days with the Sensex diving almost 9 per cent on October 17 leading to trades being halted for an hour. The market fell again on October 18 and 19 and these markets had a good reason to worry because P-notes.

sdP-Note, a Sensitive Topic to Government:

The positions held through P-notes are worth 2,75,436 cr/11.5 percent of the assets under custody of foreign portfolio investors which is 23,86,457 cr. The government and Sebi worry that remarks on restrictions on P-notes can spook investors which will clamp down on transfer of P-notes that could result in a fall in foreign portfolio inflows.

sdP-Notes in News:

A Supreme Court appointed Special Investigation Team (SIT) is entrusted with the task of suggesting measures to curb black money, recommended Sebi should do more to identify real owners of P-notes and restrict their transfer. Sebi already has the powers to seek information from the broker on who is it issuing to. But in some layered transactions, the end beneficiary could be different from the first P-note buyer which is a confusing task.

sdA Controversial Instrument:

P-notes have always been called as controversial instruments and every time the government wants to regulate them, market starts falling which prevents the government to take any harsh step. The government fears that P-notes are being used as instruments for money laundering into foreign countries which could also be related to black money transfers. Even listed company promoters are believed to re-route their investments in their own companies through the P-note route.

sdSpecial Investigation Team (SITs) Decision:

The SIT’s decision to seek a clarification is a welcome move which have come up in years. Knowing the identity of the investor is very crucial for the markets but the initial reaction to the SITs decision is of a jerking reaction. SIT has further asked for stricter compliance norms of P-notes and has said nothing on banning them. Share of P-notes has already come down from 50 percent in 2007 to around 11.5 percent presently.

However, the memories of the sharp 1744 point fall on October 17, 2007 and when SEBI first proposed curbs on P-notes is enough to spread fear in the mind of investors and government together.