Source: ET
Why in News?
Proposed revisions to the India–France tax treaty may allow India to tax capital gains from equity sales by French investors. This could significantly affect the participatory note (P-note) investment route used by foreign investors.
What are Participatory Notes (P-Notes)?
Participatory Notes (P-Notes) are offshore derivative instruments issued by SEBI-registered Foreign Portfolio Investors (FPIs) to overseas investors who wish to invest in Indian securities without registering directly with SEBI.
They derive their value from underlying Indian assets such as:
- Equity shares
- Bonds
- Derivatives
How Do P-Notes Work?
- An overseas investor buys a P-note from an FPI.
- The FPI invests in Indian securities.
- The returns (capital gains/dividends) are passed on to the P-note holder.
The actual investor remains anonymous to Indian regulators (though disclosure norms have tightened).
Why Were P-Notes Popular?
- Ease of investment
- Minimal documentation
- Faster market entry
- Anonymity
At one time (early 2000s), P-notes accounted for over 40% of FPI investments in India.
Advantages
- Enables foreign capital inflow.
- Increases liquidity in Indian markets.
- Convenient for hedge funds and short-term investors.
