Participatory note

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Participatory Notes commonly known as P-Notes or PNs are instruments issued by registered foreign institutional investors (FII) to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India - SEBI.

SEBI permitted foreign institutional investors to register and participate in the Indian stock market in 1992.

Investing through P-Notes is very simple and hence very popular amongst foreign institutional investors.


Participatory notes are instruments used for making investments in the stock markets. However, they are not used within the country. They are used outside India for making investments in shares listed in the Indian stock market. That is why they are also called offshore derivative instruments.

In the Indian context, foreign institutional investors (FIIs) and their sub-accounts mostly use these instruments for facilitating the participation of their overseas clients, who are not interested in participating directly in the Indian stock market.

For example, Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.


  1. Anonymity: Any entity investing in participatory notes is not required to register with SEBI (Securities and Exchange Board of India), whereas all FIIs have to compulsorily get registered. It enables large hedge funds to carry out their operations without disclosing their identity.
  2. Ease of Trading: Trading through participatory notes is easy because participatory notes are like contract notes transferable by endorsement and delivery.
  3. Tax Saving: Some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries.
  4. Money Laundering: PNs are becoming a favourite with a host of Indian money launderers who use them to first take funds out of country through hawala and then get it back using PNs.
  5. P-notes are not necessarily just for the India market. In general terms, p-notes are used for any market/share classification whereby there are restrictions for foreign investors (i.e. require a Foreign Investor-type license for non-locally domiciled brokerages). The notable markets include Shenzhen and Shanghai for China A-shares, some MENA markets and Korea in addition to India.

Participatory Notes Crisis of 2007[edit]

On the 16th of October, 2007, SEBI (Securities & Exchange Board of India) proposed curbs on participatory notes which accounted for roughly 50% of FII investment in 2007. SEBI was not happy with P-Notes because it is not possible to know who owns the underlying securities and hedge funds acting through PNs might therefore cause volatility in the Indian markets.[1]

However the proposals of SEBI were not clear and this led to a knee-jerk crash when the markets opened on the following day (October 17, 2007). Within a minute of opening trade, the Sensex crashed by 1744 points or about 9% of its value - the biggest intra-day fall in Indian stock-markets in absolute terms. This led to automatic suspension of trade for 1 hour. Finance Minister P.Chidambaram issued clarifications, in the meantime, that the government was not against FIIs and was not immediately banning PNs. After the markets opened at 10:55 am, they staged a remarkable comeback and ended the day at 18715.82, down just 336.04 from Tuesday’s close after tumbling to a day’s low of 17307.90.

This was, however not the end of the volatility. The next day (October 18, 2007), the Sensex tumbled by 717.43 points — 3.83 per cent — to 17998.39, its second biggest fall. The slide continued the next day when the Sensex fell 438.41 points to settle at 17559.98 at the end of the week, after touching the lowest level of that week at 17226.18 during the day.

The SEBI chief, M.Damodaran held an hour-long conference on the 22nd of October to clear the air on the proposals to curb PNs where he announced that funds investing through PNs were most welcome to register as FIIs, whose registration process would be made faster and more streamlined. The markets welcomed the clarifications with an 879-point gain — its biggest single-day surge — on October23, thus signalling the end of the PN crisis. SEBI issued the fresh rules regarding PNs on the 25th of October, 2007 which said that FIIs cannot issue fresh P-Notes and existing exposures were to be wound up within 18 months. The Sensex gave a thumbs up the next day - Friday, 26 October by re-crossing the 19,000 barrier with a 428-point surge. The coming Monday (October 29, 2007) history was created when the Sensex leaped 734.5 points to cross the hallowed 20,000 mark.


According to an expert group constituted by the finance ministry in India, in August 2004, participatory notes constituted about 46 per cent of the cumulative net investments in equities by FIIs.Now according to Dr Subramanian Swamy(now RS Member) the PNs contribute about 60% of investment by FIIs[2]

Participatory notes were never phased out completely as initially hinted by SEBI,[3] while FII registration was streamlined and both cash as well as derivative markets moved to the latter platform. This stabilized inflows as well as increased FII participation. As a result, FII participation through PN was down from 51% to 16% over three years. The primary causes cited are:[4]

  • Regulatory changes - SEBI banned Overseas Derivative Instruments and asked FIIs to decrease PN participation to 40%
  • Alternatives - FII registration was made easier

In June 2012, SEBI ordered FIIs to report monthly details of P-notes transactions within 10 days. Earlier, FIIs were given a time of six months for such reporting. This move came just a few weeks after Govt of India's white paper on black money identified P-notes as one of the routes through which black money transferred outside India comes back through a process called round-tripping.[5]

On November 24, 2014 SEBI issued new norms to curb illegal funds inflow. The new norms will enhance KYC and shut out entities form opaque and non-transparent structure to filter the kind of money that flows into the country[6]≠§§§


  1. ^ Vaidyanathan, R. (Oct 24, 2007). "Why Participatory Notes are dangerous". The Hindu. Retrieved February 22, 2011. 
  2. ^ Ministry of Finance, Report of the Expert Group on Encouraging FII Flows and Checking the Vulnerability of Capital Markets to Speculative Flows, November 2005
  3. ^ "Sebi to ban participatory notes". Financial Express. Oct 17, 2007. Retrieved 26 October 2012. 
  4. ^ Lokeshwarri, S.K. (Jan 28, 2011). "The fading allure of P-notes". Business Line. The Hindu. Retrieved February 22, 2011. 
  5. ^ "Sebi tightens reporting norms for participatory notes". Business Standard. Jun 9, 2012. Retrieved 26 October 2012. 
  6. ^ "New P-Note Norms Seek to Curb Illegal Funds Inflow". The New Indian Express. November 26, 2014. Retrieved 26 November 2014.