Central Idea

Indian capital markets witnessed a significant increase in investments through participatory notes (P-notes), reaching ₹1.31 lakh crore by the end of November.

What are Participatory Notes?

	Details
Nature of Instrument	Offshore derivative instruments with Indian shares as underlying assets.
Issuers	Issued by registered Foreign Institutional Investors (FIIs) to overseas investors.
Purpose	To allow foreign investors to invest in Indian stock markets without direct registration.
Anonymity	Provide anonymity for foreign investors; beneficiary details are not disclosed to Indian regulators.
Regulatory Oversight	Governed by the Securities and Exchange Board of India (SEBI).
Compliance	FIIs issuing P-Notes are required to adhere to KYC norms and other regulatory standards.
Controversies	Associated with risks of money laundering and contributing to market volatility.
Regulatory Reforms	SEBI has tightened norms over time, including enhanced KYC and disclosure requirements.
Economic Impact	Significant source of foreign portfolio investment; influences market sentiment and foreign investor behavior.
Impact of Regulatory Changes	Changes in regulations have affected the flow of investments through P-Notes.

P-Notes and FPI Trends: The investment through P-notes typically mirrors the trends in foreign portfolio investor (FPI) flows.
Global Risk Influence: In times of global risk, investment through P-notes tends to increase, and the opposite occurs when the risk subsides.

U.S. Treasury Bond Yields: The decline in U.S. treasury bond yields is believed to have redirected FPIs’ attention to the Indian market for potentially higher returns.
IPO Attraction: The listing of Initial Public Offerings (IPOs) in India has also been a factor in attracting foreign investors back to the market.