Investment made by foreign investor in Indian market can be classified as – Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII). By both FDI and FII, foreign investors can invest their money into Indian market. Although investment made by foreign investors infuses foreign money into Indian market which helps in the growth of industries and capital market but this is not as easy as it sounds. As the apex regulator SEBI has lay down detailed guidelines which needs to be followed by foreign investors to get approval to enter into the Indian market.
In case of FIIs the number of guidelines are lesser than FDI’s to get regulatory approval due to short term investment. But, in both the cases regulatory approval is must without which foreign money cannot enter into Indian markets.
What Are Participatory Notes?
Participatory Notes (PNs) or P-Notes are financial instruments issued by registered Foreign Institutional Investors (FIIs) or hedge funds to those overseas investors who want to invest in the Indian stock markets without disclosing their identity or get registered with SEBI. The value of P-Notes depends upon the value of the underlying shares.
Functioning Of Participatory Notes
- FIIs issue participatory notes to the foreign investors with detail information of the listed security that can be bought and expected returns over specific periods of time.
- If foreign investor agrees, he/she deposit fund with the overseas branch of the FII.
- Then Indian members of the FII proceeds with the transaction, buying the stocks for these investors from their proprietary account in the Indian market.
In complete process, details of the overseas investors remains anonymous to Indian market and SEBI..
Advantages Of Participatory Notes
- All the benefits like capital gain or dividend arising for the underlying shares will belong to the investors.
- Foreign investors can invest in Indian market without getting registered with SEBI.
- As in case of P-Notes, the identity of the foreign remains hidden which helps them to save from Indian tax law.
- Participatory notes are easily transferable by endorsement (by writing on the back of a note) and delivery.
Why Indian Regulators Are Not In Favour Of Participatory Notes?
- The identity of the owner remains anonymous from regulators.
- Regulators fear that hedge funds acting through Participatory Notes will cause economic volatility in India’s exchanges and has the potential to pave the way for black money to enter into the system.
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