Participatory Notes (P-Notes) For India Foreign Institutional Investors

Participatory notes (PNs / P-Notes) are instruments used by foreign investors that are not registered with the SEBI (Securities & Exchange Board of India) to invest in Indian securities. Participatory notes are instruments that derive their value from an underlying financial instrument such as an equity share (derivative instruments). SEBI permitted FIIs to register and participate in the Indian stock market in 1992.
Indian based brokerages buy Indian-based securities and then issue PNs to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.

Therefore, Participatory notes (P-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 that country. That is why they are also called offshore derivative instruments.

So for example, if you are in London, you can approach Barclays Bank or HSBC in London and ask for their offer of P-Notes for India. The minimum investment size varies by the issuer of the P-Notes. However, it is possible to start from just a few thousand dollars.

Under Regulation 15A(1) of the Securities Exchange Board of India (Foreign Institutional Investors) Regulation, 1995, as amended, foreign institutional investors as defined under SEBI Guidelines, or their sub-accounts (together referred to as “FIIs”), including FII affiliates of the Joint Global Coordinators and Book Running Lead Managers may issue, deal in or hold, off-shore derivative instruments such as participatory notes, equity linked notes or any other similar instruments against Equity Shares allocated in this Issue (all such off-shore derivative instruments referred to herein as “P-Notes”), for which they may receive compensation from purchasers of such instruments.

Prospective investors interested in purchasing any P-Notes have the responsibility to obtain adequate disclosure as to the issuer(s) of any P-Notes and the terms and conditions of any such P-Notes from the issuer(s) of such P-Notes.

Usually, neither SEBI nor any other regulatory authority reviews or approves P-Notes. Prospective investors are urged to consult with their own financial, legal, accounting and tax advisors regarding any contemplated investment in P-Notes, including whether P-Notes are issued in compliance with applicable laws and regulations.

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