Economy Updates – Oct-2014

Participatory Notes

  • Foreign Investments in India can broadly be classified into two categories :
    • Foreign Direct Investment (FDI) and
    • investment made by Foreign Institutional Investors (FIIS).
  • However, there are number of restrictions in place which makes it difficult for foreign money to enter Indian markets and hence many investors prefer P-Note route to park their money in India.

Meaning of P-Notes?

  • P-Note is a tool used by foreign investors to invest in Indian securities.
  • Investors purchase the participatory notes from brokerage houses in India and these notes give the investors the designated share in the designated security.
  • Investors remain anonymous to market regulators, which is one of the major differences when comparing participatory notes to the American Depositary Receipt.

Why P-Notes?

  • Investing through P-Notes is very simple and hence very popular amongst FIIS.
  • As per regulations In India, in order to invest in stock market one needs to have permanent Account Number (PAN), DEMAT account, i.e. registration and compliance with various authorities. Overseas investors who are not registered with SEBI have to go through a lot of scrutiny, such as know-your-customer norms, before investing in Indian shares. To avoid these hurdles, foreign investors take this route.
  • Trading through participatory notes is easy because participatory notes are like contract notes, transferable by endorsement and delivery.
  • Some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries.

How System Works?

  • Foreign investor gives money to brokerage house in India, with instruction to buy certain shares/bonds. The investment is made on behalf of these foreign investors by brokerage firms or FIIS.
  • The Brokerages firms or FIIS in turn issues a receipt to foreign investor, it is called P-Note. It is also known as “offshore derivative instrument”

Adverse Impact of P-Notes

  • Huge amount has been invested in Indian stock markets via P-notes. Sudden withdrawal of funds by can create panic in stock market. Such amount Invested is also referred as Hot money.

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Financial Management