The much-debated Participatory Notes (PNs)—an offshore derivative instrument—have been criticized for all recent major stock market crashes, thereby raising concerns of the Sebi and the RBI over their control. Investment through PNs may not always be good. This article tries to focus on several effects of PNs on the Indian capital market.

In the current globalization regime, everyone is looking for opportunities worldwide. The capital market is the most happening place for making money in short-term. Investors, issuers and brokers are the most dominating characters in the capital market. Once we recall Foreign Institutional Investors (FIIs), most influencing nature in Indian capital market, automatically Participatory Notes (PNs) come into picture. PNs have always been known for the controversies they create. Every now and then, the Securities and Exchange Board of India (Sebi) and Reserve of India (RBI) have been making regulations and putting restrictions on PNs. PNs have been associated with Indian capital market for a long time but they are unable to gain the confidence of investors. What is the reason behind that? How are PNs affecting the capital market and who are benefiting the most from these notes?

In the last few months, the Sebi has been taking several steps against an enemy—hedge funds, that trade in the Indian stock market through the PNs. These are offshore financial instruments which are mostly used by foreign fund investors who are not registered with the Sebi. Those who are interested in investing indirectly in the vibrant and emerging Indian capital market use the PNs. PNs are generally issued overseas by the FII sub-accounts or India-based foreign brokerage to get an exposure in the Indian capital market. Brokers issue PNs based on Indian underlying securities in favor of the foreign investors and then brokers buy and sell securities on behalf of their clients. Investors place their orders through brokerage houses and these houses repatriate the dividend and capital gain to their clients. However, the houses do not disclose the name of their clients.

Indian Capital Market, Participatory Notes, PNs, Foreign Institutional Investors, FIIs, Securities and Exchange Board of India, Sebi, Reserve of India, RBI, Indian stock market, Inforamation technology, IT sector, P Chidambaram, Portfolio Investment, PI, Foriegn direct investment, FDI.