Economics
P – Notes
·
Participatory Notes (P-Notes) are instruments issued by
registered FIIs (Foreign Institutional Investors) to overseas investors, who
wish to invest in the Indian stock markets without registering themselves with
SEBI.
·
Investing through P-Notes is very simple and hence very popular
amongst FIIs
·
P-Notes mainly used in stock markets
·
They are not used within the country
·
They are used outside India
What is P-Notes /Participatory Notes?
·
Tom Cruz wants to get maximum return on the investment in
quickest possible time.
·
For this, Tom will have to find risky securities (shares/bonds)
in third world countries, then invest money from one country to another
quickly, depending on how share market moves.
·
In India
·
But if Tom tries to get PAN card and DEMAT account in each third
world country, then his profit will decline- given the cost of running branch
office, staff salary, DEMAT fees etc. in each country.
·
So, to take a shortcut, Tom will contact some ‘middleman’ who is
already registered as an FII, has PAN card & DEMAT in India
·
Tom gives money to HSBC, with instruction “buy A, B and C
shares/bonds in X, Y and Z quantity.”
·
HSBC buys Indian shares. They’ll be stored in DEMAT account of
HSBC, and won’t be given to Tom.
·
But HSBC then gives a receipt to Tom listing the shares/bonds
purchased on his behalf and stored in HSBC’s DEMAT account.
·
This receipt is called Participatory Note.
·
Technically, it is called “offshore derivative instrument”.
Observe the words
OFFSHORE (Because foreigner owning something in India , without coming to India or opening office in India
DERIVATIVE (Because this receipt doesn’t have value
of its own; It “derives” its value from the market value of shares/bonds held
by HSBC. Today it may be worth $1000, tomorrow $12000 depending on how the
prices of Indian securities move)
INSTRUMENT (Self-explanatory- this is one type of
financial instrument to invest abroad)
·
1992: SEBI had permitted P-notes, to boost foreign investment in India
·
P-note owner doesn’t own the shares. (because they’re in the
DEMAT account of that intermediary FII)
·
P-Note owner doesn’t have voting rights in the shareholder
meetings
Why Ban Participatory Notes (P-notes)?
·
As of March 2014, Foreigners invested ~Rs. 2 lakh crore in India India
·
As such the FII has to disclose P-note owner data to SEBI on
quarterly basis (every 3 months). But often, within 3 months the P-notes would
have changed many hands (e.g Tom to Jerry to Micky to Goofy).
·
Thus P-note investments are Anonymous. Hard to trace the owner.
Can be used for money laundering and terror financing.
·
Hot Money: can leave Indian market very soon based on just one
phone call from Tom Cruz to HSBC. Hot money creates heavy rise or fall in share
market, so even genuine investors’ money is lost.
·
e.g. Tom continuously buys Infosys shares, they goup to Rs.3000
per share. So, you (indian) also buy, thinking “Infosys will go even higher to
3500, and I’ll make profit”.
·
But suddenly tom sells everything, to invest in China
·
Now Infosys sells not even for 2000. Then you (Indian investor)
lost 1000.
P-Notes,
Money laundering & Terror Financing:
·
Finance Ministry Whitepaper: Indians first send their money to
Cayman Islands, British Virgin Islands , Switzerland , or Luxembourg
·
Ex-National security Advisor MK Narayanan: Terrorists are using
P-notes to invest in Indian stock market, and using the same profits to finance
terror operations against India Pakistan
·
RBI’s Tarapore Committee: Recommended Banning P-notes for
national security and to stabilize stock exchanges
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