Securities and Exchange Board of India (SEBI) has tightened the Participatory Notes (P-note) norms. The  purpose of this decision is to keep vigil on foreign investments to curb black money inflows in the country. SEBI has introduced Know Your Client (KYC) compliance for holders of these instruments in order to bring them on a par with domestic investors. SEBI also has sought information on the ultimate beneficiaries of these products.

Participatory notes

Participatory Notes are offshore/overseas derivative instruments (ODIs) issued by registered foreign institutional investors (FII) to overseas investors. They are commonly known as P-Notes. P-Notes are issued to overseas investors who wish to invest in the Indian stock markets without registering themselves with the market regulator SEBI. advertisement Investing through P-Notes is very simple and is very popular amongst FIIs. SEBI had permitted FIIS to participate and register in the Indian stock market in 1992. P-Notes are not used within the country but are mainly used outside India for making investments in shares listed in the Indian stock market.

 For example, India-based brokerages buy securities from the Indian stock and then issue P-Notes to foreign investors for the securities. Any capital gains or dividends collected from the underlying securities go back to the investors. Advantages Ease of Trading: Trading through P-Notes is easy because they are like contract notes transferable by endorsement and delivery.

 Tax Saving: Some of the entities route their investment through P-Notes to take advantage of the tax laws of certain preferred countries.

Disadvantages Anonymity: Any entity investing in P-Notes is not required to register with SEBI. It enables large hedge funds to carry out their operations without revealing their identity.

Money Laundering: P-Notes are used by money launderers. They first take funds out of country through hawala and then get it back using P-Notes.