Participatory note: Difference between revisions
NubKnacker (talk | contribs) No edit summary |
GreenC bot (talk | contribs) Rescued 1 archive link. Wayback Medic 2.5 per WP:URLREQ#newindianexpress.com |
||
(63 intermediate revisions by 54 users not shown) | |||
Line 1: | Line 1: | ||
{{ |
{{Use dmy dates|date=December 2017}} |
||
{{ |
{{Use Indian English|date=December 2017}} |
||
A '''participatory note''', commonly known as a '''P-note''' or '''PN''', is an instrument issued by a registered foreign [[institutional investor]] (FII) to an overseas investor who wishes to invest in Indian stock markets without registering themselves with the market regulator, the [[Securities and Exchange Board of India]] (SEBI).<ref>{{Cite news|url=https://economictimes.indiatimes.com/everything-you-want-to-know-about-p-notes/articleshow/53442336.cms|title=Everything you want to know about P-Notes|last=Rekhi|first=Dia|date=2016-07-29|work=The Economic Times|access-date=2019-03-20}}</ref> |
|||
'''Participatory notes''' ('''PNs / P-Notes''') are instruments used by investors or [[hedge fund]]s that are not registered with the [[SEBI]] (Securities & Exchange Board of India) to invest in [[India]]n securities. '''Participatory notes''' are instruments that derive their value from an underlying financial instrument such as an equity share and, hence, the word, 'derivative instruments'. [[SEBI]] permitted FIIs to register and participate in the indian stock market in 1992. |
|||
SEBI permitted foreign institutional investors to register and participate in the Indian stock market in 1992. These notes are a unique Indian invention started in 2000 by SEBI to enable foreign corporates and high networth investors enter the Indian market without having to go through the process of registering as Foreign Institutional Investor (FII).<ref>{{Cite news|url=https://www.indiatoday.in/magazine/economy/story/20071105-purging-the-p-note-734393-2007-10-25 |title=Purging the P-Note |author=Malini Bhupta|date=October 25, 2007|work=India Today}}</ref> |
|||
Indian based brokerages buy Indian-based securities and then issue PNs to foreign investors. Any [[dividend]]s or [[capital gain]]s collected from the underlying securities go back to the investors. |
|||
Investing through P-notes is very simple, and hence very popular amongst foreign institutional investors. The absolute value of P-notes investments rose to a record of {{INRConvert|4.5|t|lk=r|year=2007}} in October 2007. However, mainly due to SEBI's strengthening of the regulatory framework for P-notes, their investments fell to a record low of {{INRConvert|1.25|t|year=2017}}. The amount of foreign portfolio investments (FPIs) via P-notes decreased from a high of 55% to 4.1% between October 2007 and August 2017.<ref>{{cite news|title=P-Note investments plunge to 7-1/2-year low of Rs 1.25 lakh cr|url=http://m.thehindubusinessline.com/markets/stock-markets/pnote-investments-plunge-to-712year-low-of-rs-125-lakh-cr/article9877499.ece|access-date=28 September 2017|date=28 September 2017}}</ref><ref>{{cite news|title=P-Note investments fall to 30-month low of 2 lakh cr in Oct|url=http://www.thehindubusinessline.com/markets/pnote-investments-fall-to-30month-low-of-2-lakh-cr-in-oct/article9377812.ece|access-date=28 September 2017}}</ref><ref>{{cite news|title=Investment via Participatory Notes slips to Rs 2.54 lakh crore in November {{!}} Latest News & Updates at Daily News & Analysis|url=http://www.dnaindia.com/money/report-investment-via-participatory-notes-slips-to-rs-254-lakh-crore-in-november-2159480|access-date=28 September 2017|work=dna|date=25 December 2015}}</ref> |
|||
⚫ | |||
==Background== |
|||
⚫ | In the Indian context, foreign institutional investors (FIIs) and their sub-accounts mostly use these instruments for facilitating the participation of their overseas clients, who are not interested in participating directly in the Indian stock market. For example, Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. |
||
⚫ | Participatory notes are instruments used for making investments in the [[stock market]]s. However, they are not used within the country; they are used outside of India for making investments in stocks listed on Indian stock markets, which is why they're also referred to as offshore derivative instruments. |
||
⚫ | In the Indian context, foreign institutional investors (FIIs) and their sub-accounts mostly use these instruments for facilitating the participation of their overseas clients, who are not interested in participating directly in the Indian stock market. For example, Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. |
||
Any entity investing in participatory notes is not required to register with SEBI (Securities and Exchange Board of India), whereas all FIIs have to compulsorily get registered. Trading through participatory notes is easy because participatory notes are like contract notes transferable by endorsement and delivery. Secondly, some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries. Thirdly, participatory notes are popular because they provide a high degree of anonymity, which enables large hedge funds to carry out their operations without disclosing their identity. |
|||
==Results== |
|||
Participatory notes in brief is as follows : |
|||
===Anonymity=== |
|||
What are participatory notes or PNs? |
|||
Any entity investing in participatory notes is not required to register with SEBI (Securities and Exchange Board of India), whereas all [[Foreign Institutional Investor|FIIs]] have to compulsorily get registered. It enables large hedge funds to carry out their operations without disclosing their identity. |
|||
Participatory notes are instruments used by foreign funds which are not registered to trade in domestic Indian Capital Markets. PNs are derivative instruments issued against an underlying security permitting holders to get a share in the income from the security. |
|||
===Ease of trading=== |
|||
How does it work? |
|||
Trading through participatory notes is easy because participatory notes are like contract notes transferable by endorsement and delivery. |
|||
Investors who buy PNs deposit their funds in US or European operations of Foreign Institutional Investors (FII) operating in India . The FII uses its proprietary account to buy stocks. |
|||
===Tax benefits=== |
|||
Why do investors use PNs? |
|||
Some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries. |
|||
Reason for using PNs is to keep investor name anonymous, some investors have used them to save transaction and overhead costs. |
|||
===Money laundering=== |
|||
P-notes 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 P-notes.{{fact|date=June 2019}} |
|||
===Other uses=== |
|||
'''Participatory Notes Crisis of 2007''' |
|||
P-notes are not necessarily just for the India market. In general terms, P-notes are used for any market/share classification whereby there are restrictions for foreign investors (i.e. require a Foreign Investor-type license for non-locally domiciled brokerages). The notable markets include Shenzhen and Shanghai for China A-shares, some MENA markets and Korea in addition to India. |
|||
==Crisis of 2007== |
|||
On |
On 16 October 2007, SEBI proposed curbs on participatory notes which accounted for roughly 50% of FII investment in 2007. SEBI was concerned about P-notes because it is not possible to know who owns the underlying securities and hedge funds acting through P-notes might therefore cause volatility in the Indian markets.<ref>{{cite news|url=http://www.thehindubusinessline.in/2007/10/24/stories/2007102450800800.htm|title=Why Participatory Notes are dangerous|first=R. |last=Vaidyanathan|work=The Hindu|date=24 Oct 2007|access-date=22 February 2011}}</ref> |
||
However the proposals of SEBI were not clear and this led to a |
However, the proposals of SEBI were not clear and this led to a sudden crash when the markets opened on the following day (17 October 2007). Within a minute of opening for trade, the [[BSE SENSEX]] crashed by 1744 points or about 9% of its value{{mdash}}the biggest intra-day fall in Indian stock-markets in absolute terms. This led to an automatic suspension of trading for 1 hour. In the meantime, Finance Minister P. Chidambaram issued clarifications that the government was not against FIIs and was not immediately banning P-notes. After the markets opened at 10:55{{nbsp}}a.m., they staged a comeback and ended the day at 18 715.82, down just 336.04 from Tuesday’s close after tumbling to a day’s low of 17 307.90. |
||
This was, however not the end of the volatility. The next day (October |
This was, however, not the end of the volatility. The next day (18 October 2007), the SENSEX tumbled by 717.43 points{{sndash}}3.83 percent{{sndash}}to 17 998.39, its second biggest fall. The slide continued the day after, when the SENSEX fell 438.41 points to settle at 17 559.98 at the end of the week after touching the lowest level of that week at 17 226.18 during the day. |
||
The SEBI chief, M.Damodaran held an hour |
The SEBI chief, M. Damodaran, held an hour-long conference on 22 October to clear the air on the proposals to curb P-notes where he announced that funds investing through P-notes were welcome to register as FIIs, whose registration process would be made faster and more streamlined. The markets welcomed the clarifications with an 879-point gain{{sndash}}its biggest single-day surge{{sndash}}on 23 October, thus signalling the end of the P-note crisis. SEBI issued fresh rules regarding P-notes on 25 October 2007, which said that FIIs cannot issue fresh P-notes and existing exposures were to be wound up within 18 months. The SENSEX rebounded the next day (Friday, 26 October) by re-crossing the 19 000 barrier with a 428-point surge. The subsequent Monday (29 October 2007), history was created when the SENSEX leaped 734.5 points to cross the hallowed 20 000 mark. |
||
==Trends== |
|||
According to an expert group constituted by the Ministry of Finance in India, in August 2004, participatory notes constituted about 46 percent of the cumulative net investments in equities by [[Foreign Institutional Investor|FIIs]]. According to Dr. [[Subramanian Swamy]], the P-notes contribute about 60% of investment by FIIs.<ref>Ministry of Finance, Report of the Expert Group on Encouraging FII Flows and Checking the Vulnerability of Capital Markets to Speculative Flows, November 2005</ref> |
|||
Participatory notes were never phased out completely as initially hinted by SEBI,<ref name="Sebi to ban participatory notes">{{cite news|title=Sebi to ban participatory notes|url=http://www.financialexpress.com/news/sebi-to-ban-participatory-notes/229281/0|access-date=26 October 2012|newspaper=Financial Express|date=17 Oct 2007}}</ref> while FII registration was streamlined and both cash as well as derivative markets moved to the latter platform. This stabilised inflows as well as increased FII participation. As a result, FII participation through P-notes was down from 51% to 16% over three years. The primary causes cited are:<ref>{{cite news|url=http://www.thehindubusinessline.in/2011/01/28/stories/2011012850320900.htm|title=The fading allure of P-notes |
|||
|first= S.K. |last=Lokeshwarri|work=Business Line|publisher=The Hindu|date=28 Jan 2011|access-date=22 February 2011}}</ref> |
|||
* ''Regulatory changes''{{sndash}}SEBI banned Overseas Derivative Instruments and asked FIIs to decrease P-note participation to 40%. |
|||
* ''Alternatives''{{sndash}}FII registration was made easier. |
|||
In June 2012, SEBI ordered FIIs to report monthly details of P-note transactions within 10 days. Earlier, FIIs were given a time of six months for such reporting. This move came just a few weeks after the [[Government of India]]'s [[white paper]] on [[Indian black money|black money]] identified P-notes as one of the routes through which [[black money]] transferred outside India comes back through a process called [[Round-tripping (finance)|round-tripping]].<ref name="Sebi tightens reporting norms for participatory notes">{{cite news|title=Sebi tightens reporting norms for participatory notes|url=http://www.business-standard.com/india/news/sebi-tightens-reporting-norms-for-participatory-notes/476781/|access-date=26 October 2012|newspaper=Business Standard|date=9 Jun 2012}}</ref> |
|||
On 24 November 2014, SEBI issued new norms to curb the inflow of illegal funds. The new norms will enhance [[Know your customer|KYC]] regulations and shut out entities that form non-transparent structures to filter the kind of money that flows into the country.<ref name="New P-Note Norms Seek to Curb Illegal Funds Inflow">{{cite news|title=New P-Note Norms Seek to Curb Illegal Funds Inflow|url=http://www.newindianexpress.com/business/news/2014/11/26/New-P-Note-Norms-Seek-to-Curb-Illegal-Funds-Inflow/article2540702.ece|archive-url=https://web.archive.org/web/20141222182639/http://www.newindianexpress.com/business/news/2014/11/26/New-P-Note-Norms-Seek-to-Curb-Illegal-Funds-Inflow/article2540702.ece|url-status=dead|archive-date=22 December 2014|access-date= 26 November 2014|newspaper=The New Indian Express|date=26 November 2014}}</ref> |
|||
==References== |
==References== |
||
<references /> |
<references /> |
||
[[Category:Investment]] |
|||
[[ml:പാര്ട്ടിസിപ്പേറ്ററി നോട്ട്]] |
Latest revision as of 03:40, 17 February 2024
A participatory note, commonly known as a P-note or PN, is an instrument issued by a registered foreign institutional investor (FII) to an overseas investor who wishes to invest in Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India (SEBI).[1]
SEBI permitted foreign institutional investors to register and participate in the Indian stock market in 1992. These notes are a unique Indian invention started in 2000 by SEBI to enable foreign corporates and high networth investors enter the Indian market without having to go through the process of registering as Foreign Institutional Investor (FII).[2]
Investing through P-notes is very simple, and hence very popular amongst foreign institutional investors. The absolute value of P-notes investments rose to a record of ₹4.5 trillion (equivalent to ₹14 trillion or US$160 billion in 2023) in October 2007. However, mainly due to SEBI's strengthening of the regulatory framework for P-notes, their investments fell to a record low of ₹1.25 trillion (equivalent to ₹1.8 trillion or US$21 billion in 2023). The amount of foreign portfolio investments (FPIs) via P-notes decreased from a high of 55% to 4.1% between October 2007 and August 2017.[3][4][5]
Background
[edit]Participatory notes are instruments used for making investments in the stock markets. However, they are not used within the country; they are used outside of India for making investments in stocks listed on Indian stock markets, which is why they're also referred to as offshore derivative instruments.
In the Indian context, foreign institutional investors (FIIs) and their sub-accounts mostly use these instruments for facilitating the participation of their overseas clients, who are not interested in participating directly in the Indian stock market. For example, Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.
Results
[edit]Anonymity
[edit]Any entity investing in participatory notes is not required to register with SEBI (Securities and Exchange Board of India), 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
[edit]Trading through participatory notes is easy because participatory notes are like contract notes transferable by endorsement and delivery.
Tax benefits
[edit]Some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries.
Money laundering
[edit]P-notes 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 P-notes.[citation needed]
Other uses
[edit]P-notes are not necessarily just for the India market. In general terms, P-notes are used for any market/share classification whereby there are restrictions for foreign investors (i.e. require a Foreign Investor-type license for non-locally domiciled brokerages). The notable markets include Shenzhen and Shanghai for China A-shares, some MENA markets and Korea in addition to India.
Crisis of 2007
[edit]On 16 October 2007, SEBI proposed curbs on participatory notes which accounted for roughly 50% of FII investment in 2007. SEBI was concerned about P-notes because it is not possible to know who owns the underlying securities and hedge funds acting through P-notes might therefore cause volatility in the Indian markets.[6]
However, the proposals of SEBI were not clear and this led to a sudden crash when the markets opened on the following day (17 October 2007). Within a minute of opening for trade, the BSE SENSEX crashed by 1744 points or about 9% of its value—the biggest intra-day fall in Indian stock-markets in absolute terms. This led to an automatic suspension of trading for 1 hour. In the meantime, Finance Minister P. Chidambaram issued clarifications that the government was not against FIIs and was not immediately banning P-notes. After the markets opened at 10:55 a.m., they staged a comeback and ended the day at 18 715.82, down just 336.04 from Tuesday’s close after tumbling to a day’s low of 17 307.90.
This was, however, not the end of the volatility. The next day (18 October 2007), the SENSEX tumbled by 717.43 points – 3.83 percent – to 17 998.39, its second biggest fall. The slide continued the day after, when the SENSEX fell 438.41 points to settle at 17 559.98 at the end of the week after touching the lowest level of that week at 17 226.18 during the day.
The SEBI chief, M. Damodaran, held an hour-long conference on 22 October to clear the air on the proposals to curb P-notes where he announced that funds investing through P-notes were welcome to register as FIIs, whose registration process would be made faster and more streamlined. The markets welcomed the clarifications with an 879-point gain – its biggest single-day surge – on 23 October, thus signalling the end of the P-note crisis. SEBI issued fresh rules regarding P-notes on 25 October 2007, which said that FIIs cannot issue fresh P-notes and existing exposures were to be wound up within 18 months. The SENSEX rebounded the next day (Friday, 26 October) by re-crossing the 19 000 barrier with a 428-point surge. The subsequent Monday (29 October 2007), history was created when the SENSEX leaped 734.5 points to cross the hallowed 20 000 mark.
Trends
[edit]According to an expert group constituted by the Ministry of Finance in India, in August 2004, participatory notes constituted about 46 percent of the cumulative net investments in equities by FIIs. According to Dr. Subramanian Swamy, the P-notes contribute about 60% of investment by FIIs.[7]
Participatory notes were never phased out completely as initially hinted by SEBI,[8] while FII registration was streamlined and both cash as well as derivative markets moved to the latter platform. This stabilised inflows as well as increased FII participation. As a result, FII participation through P-notes was down from 51% to 16% over three years. The primary causes cited are:[9]
- Regulatory changes – SEBI banned Overseas Derivative Instruments and asked FIIs to decrease P-note participation to 40%.
- Alternatives – FII registration was made easier.
In June 2012, SEBI ordered FIIs to report monthly details of P-note transactions within 10 days. Earlier, FIIs were given a time of six months for such reporting. This move came just a few weeks after the Government of India's white paper on black money identified P-notes as one of the routes through which black money transferred outside India comes back through a process called round-tripping.[10]
On 24 November 2014, SEBI issued new norms to curb the inflow of illegal funds. The new norms will enhance KYC regulations and shut out entities that form non-transparent structures to filter the kind of money that flows into the country.[11]
References
[edit]- ^ Rekhi, Dia (29 July 2016). "Everything you want to know about P-Notes". The Economic Times. Retrieved 20 March 2019.
- ^ Malini Bhupta (25 October 2007). "Purging the P-Note". India Today.
- ^ "P-Note investments plunge to 7-1/2-year low of Rs 1.25 lakh cr". 28 September 2017. Retrieved 28 September 2017.
- ^ "P-Note investments fall to 30-month low of 2 lakh cr in Oct". Retrieved 28 September 2017.
- ^ "Investment via Participatory Notes slips to Rs 2.54 lakh crore in November | Latest News & Updates at Daily News & Analysis". dna. 25 December 2015. Retrieved 28 September 2017.
- ^ Vaidyanathan, R. (24 October 2007). "Why Participatory Notes are dangerous". The Hindu. Retrieved 22 February 2011.
- ^ Ministry of Finance, Report of the Expert Group on Encouraging FII Flows and Checking the Vulnerability of Capital Markets to Speculative Flows, November 2005
- ^ "Sebi to ban participatory notes". Financial Express. 17 October 2007. Retrieved 26 October 2012.
- ^ Lokeshwarri, S.K. (28 January 2011). "The fading allure of P-notes". Business Line. The Hindu. Retrieved 22 February 2011.
- ^ "Sebi tightens reporting norms for participatory notes". Business Standard. 9 June 2012. Retrieved 26 October 2012.
- ^ "New P-Note Norms Seek to Curb Illegal Funds Inflow". The New Indian Express. 26 November 2014. Archived from the original on 22 December 2014. Retrieved 26 November 2014.