Foreign funds can issue P notes to investors: What is it, why this matters

P-Notes are financial instruments that allow foreign investors to invest in the Indian stock market without directly registering with Indian regulators

Foreign funds registered with India's markets regulator and with operations at GIFT City can now issue  participatory notes. 

What are P-Notes?

P-Notes, short for Participatory Notes, are financial instruments that let foreign investors indirectly invest in the Indian stock market without registering with the market regulator, Sebi Here's a breakdown of how they work:

 P-Notes act like a substitute for underlying Indian company shares. When you buy a P-Note, you're essentially investing in the performance of those Indian shares.
 

Benefits for foreign investors: Avoids the hassle of registering with SEBI and offers anonymity.
 

What's new?

Previously, only banks registered with GIFT City could issue P-Notes. Now, foreign funds registered with Sebi and operating in GIFT City can also issue them. Foreign funds issuing the notes would need to meet compliance requirements of IFSCA and the Securities and Exchange Board of India.

 

Why is this significant?

More options for foreign investors: This gives foreign investors more choices for investing in Indian stocks through P-Notes.

Potential for GIFT City: This move could attract more foreign funds to set up shop in GIFT City, boosting its development as a financial hub.

Challenges of P-Notes:

Opacity: P-Notes are criticized for being opaque, meaning the ultimate owner of the Indian stocks might be hidden.

Stricter regulations: Due to these concerns, Indian regulators have imposed stricter compliance rules on P-Notes in the past.

Possible benefit:

Analysts believe this relaxation might incentivize some P-Note structures to shift from overseas jurisdictions to GIFT City, bringing them under Indian regulations.

 The government aims for GIFT City to become a major international financial center.

Easing Norms:  The authorities are making things easier for foreign investment firms (funds) that establish themselves in GIFT City by relaxing regulations or requirements. Just recently, they allowed foreign funds in GIFT City to accept investments from Non-Resident Indians (NRIs). 

"While the fine print of the regulatory framework is yet to be issued, it is noteworthy that the enhanced contribution limit also requires increased KYC from individual investors – both, for direct (individual) and indirect (non-individual) holdings.  Documents such as PAN, details of economic interest of investors, and details of beneficial ownership are to be disclosed by the FPI. The KYC requirements have been further relaxed for FPIs in terms of IFSCA’s framework – for example, where funds are pooled in one investment vehicle, investment decisions are made by an independent investment manager or diversification of investments to name a few," said Suhana Islam Murshedd, Partner, AQUILAW.

With inputs from Reuters