De-Jargoned | Participatory notes

De-Jargoned | Participatory notes

Around mid-2007, the total investment of foreign institutional investors (FIIs) through the participatory note (PN) route was as high as 50%. However, according to reports, it is now down to a seven-year low and is hovering around 10%. The exodus of PNs can be attributed to the proposed general anti-avoidance rule (GAAR) and some other changes in offshore transactions tax rules. However, do you know what PN is and who invests through this route?

What are these?

Why are they used?

Overseas investors who are not registered with Sebi have to go through a lot of scrutiny, such as know-your-customer norms, before investing in Indian shares. Not only is the process gruelling but is also time-consuming for them. To avoid these hurdles, foreign investors take this route. Also, since the end beneficiary of these notes is not disclosed, many investors who want to remain anonymous use it. It is alleged that a lot of unaccounted money made its way to the country through this route.

Why are they drying up?

Of late, Sebi has tightened its norms regarding issuance of PNs. It was of the view that because of its opaque nature, a lot of malpractice was being carried out. Hence, PNs have been on a decline for the most part of the last couple of years. However, the last nail in the coffin was the proposal of GAAR in the last Union budget. Under the proposal, the government said that it will tax overseas transactions of assets located in India that changed hands in India. Though the government later clarified that it has nothing to do with FII transactions, PN issuers need further clarity before issuing more PNs.

Are they good for the markets?

As a retail investor, one should be happy that PN participation is declining. It will keep the health of markets normal and will restrict any sort of malpractice.

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