P-NOTES

P-notes are offshore derivative instruments on Indian stocks sold by big brokerage houses to their foreign clients for a substantially higher fee than what the investors would have paid had they invested directly in the market, that is through the Sebi-registered FII route. However, a large number of foreign investors prefer Pnotes which protect their identity and give them easy entry-exit opportunity. Market veterans warned investors to be careful about such short-term money finding its way into India.

A Securities and Exchange Board of India proposal to tighten the rules for purchase of shares and bonds in Indian companies through the participatory note route took the breath away of the Indian stock market and it suffered its biggest fall in history.
So what are these participatory notes? And why do they have this huge impact on the Indian securities markets?

Participatory Notes -- or P-Notes or PNs -- are instruments issued by registered foreign institutional investors to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India.
Financial instruments used by hedge funds that are not registered with Sebi to invest in Indian securities. Indian-based brokerages to buy India-based securities / stocks and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.

Why P-Notes?
Since international access to the Indian capital market is limited to FIIs. The market has found a way to circumvent this by creating the device called participatory notes, which are said to account for half the $80 billion that stands to the credit of FIIs. Investing through P-Notes is very simple and hence very popular.