Participatory notes (p-notes) are offshore derivative instruments that allow foreign institutional investors (FIIs) to invest in Indian securities without needing to register with the Securities and Exchange Board of India (SEBI). While they facilitate anonymity, ease of trading, and potential tax benefits, p-notes have been linked to money laundering and market manipulations, notably contributing to the 2004 Sensex crash. The system has faced criticism for favoring undisclosed investors and creating disparities in the market.

1. PARTICIPATORY
NOTES

2. INTRODUCTION
Definition: P-Notes are a type of
Offshore Derivative Instrument (ODI).
Regulation 15A of SEBI Regulations,
1995 defines ODI as an instrument “
which is issued overseas by a foreign
institutional investor (FII) against
securities held by it that are listed or
proposed to be listed on any
recognised stock exchange in India.”

3. • FII: Foreign Institutional Investor (FII) means an
institution established or incorporated outside
India which proposes to make investment in
securities in India. They are registered as FIIs in
accordance with Section 2 (f) of the SEBI (FII)
Regulations 1995.

4. HOW IT WORKS

5. CHARACTERISTICS
• Anonymity: Any entity investing in participatory
notes is not required to register with SEBI, whereas
all FIIs have to compulsorily get registered. It
enables large hedge funds to carry out their
operations without disclosing their identity.
• Ease of Trading: Trading through participatory
notes is easy because participatory notes are like
contract notes transferable by endorsement and
delivery.

6. • Tax Saving: Some of the entities route their
investment through participatory notes to take
advantage of the tax laws of certain preferred
countries.
• 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.

7. “Black Monday” crash in May, 2004.
•
• In May, 2004 Sensex crashed by 842 points. SEBI
unmasked the culprit behind this crash. It was none
other than PNs. UBS, one of the largest sellers of
shares, carried out large scale selling orders on
behalf of unidentified clients. These clients
transacted in Indian stocks through UBS, but hid
behind a maze of investment deals extending all
the way from India to Mauritius. What happened in
2004 was a double whammy

9. P NOTES CRISIS 2007

11. NOTIONAL VALUES

14. • “The PN system is blatantly
•
• discriminatory and seems to favour
•
• ghost
•
• investors. Any self-respecting
•
• market, if it discriminates at all,
•
• does so against outsiders. But we
•
• have done the unthinkable. We
•
• should recognise and internalise the
•
• fact thatare in search of
•

15. By
SAIRAJ.