In Today’s News:
- Investments via P-Notes rise to Rs.63000 crores.
1. Investments via P-Notes rise to Rs.63000 crores.
Investments via P-Notes in domestic capital increased for the fourth consecutive time in July. The value of P-note investments in Indian markets — equity, debt, hybrid securities, and derivatives — stood at ₹63,288 crores till July-end according to SEBI.
Prelims GS – Economic Development
(Note: In 2019 prelims, UPSC asked for the expansion of P-Notes)
- Participatory notes are often referred to as PNs or P-Notes.
- These are financial instruments used by investors and hedge funds to invest in the Indian securities.
- A Participatory Note (PN or P-Note) in the Indian context, is a derivative instrument issued in foreign jurisdictions, by a SEBI registered Foreign Institutional Investor (FII) or its sub-accounts or one of its associates, against underlying Indian securities.
- Participatory notes are derivative instruments of underlying Indian assets.
- The underlying Indian security instrument may be equity, debt, derivatives, or may even be an index.
- The investor in PN does not own the underlying Indian security, which is held by the FII who issues the PN.
- Thus the investors in PNs derive the economic benefits of investing in the security without actually holding it.
- They benefit from fluctuations in the price of the underlying security since the value of the PN is linked with the value of the underlying Indian security.
- The PN holder also does not enjoy any voting rights in relation to security/shares referenced by the PN.
Concerns raised in P-Notes:
- PNotes are derivative instruments and freely tradable. This implies that P-Notes can be easily transferred. This creates multiple layers, thereby obscuring the real beneficial owner. This raises concerns about the identity of the ultimate beneficial owner and the source of funds.
- For the reason that such instruments are issued outside India, these transactions are outside the purview of SEBI surveillance and it is the FII that acts as mini-exchange overseas. The actual transactions in the underlying are executed by the FIIs only at its discretion, as and when necessary and there is no one-to-one correspondence between transactions in the underlying instruments and issuance of PNs.
For more information on P-Notes, click here to visit Arthapedia (official website for Indian Economy concepts)
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