Impact of Restrictions on Participatory Notes on the Indian Stock Market

Abstract

Securities and Exchange Board of India (SEBI) has recently decided to tighten screws on “Participatory Notes” also known as “P-Notes”. P-Notes, or off-shore derivative instruments (ODIs), are instruments issued by foreign portfolio investors (FPIs) to overseas investors who wish to invest in Indian stock markets without registering themselves with SEBI. This makes P-notes susceptible to use for money laundering and round tripping. SEBI’s current move aims to curb these activities by making P-notes a more regulated instrument and thereby making it less attractive. This paper examines the possible effect of a decrease in foreign investment through P-notes on the Indian stock market and finds that investments through P-Notes do not seem to have a significant impact on the Indian Stock Market.