The capital market regulator SEBI is planning new regulations to curb the misuse of Participatory Notes. According to a consultation paper, the regulator would like to end the use of PNs for non-hedging purposes by 2020.
Participatory notes are popular instruments for non-resident Indians to bring back money stored in overseas to make investment in Indian shares and bonds. They are offshore derivative instruments enabling foreign investors who have not registered with SEBI to invest in Indian shares to trade in shares through Indian brokers.
Government’s White Paper on black money and the Special Investigation Team on black money have identified PN as a way to bring back black money from overseas. During the last couple of years, SEBI brought several but minor steps to bring more transparency in the use of PNs.
Another proposal in the new consultation paper is to impose a fee on P -note issuing brokers that ultimately should be shifted to the investors. In this case, the investors may be discouraged to use PNs and may opt for registration with SEBI. Under the present mechanism investors of PN route need not register with SEBI.