Participatory notes

Indian Economy glossary

Also called: P-notes, Offshore derivative instruments, ODI · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT

Meaning

A participatory note (P-note), also called an Offshore Derivative Instrument (ODI), is issued abroad by a registered FPI (Foreign Portfolio Investor, a foreigner who buys Indian shares or bonds only as an investment, without taking control of the company). A foreign investor who buys it earns the returns on Indian securities without registering in India.

  • Why it matters: P-notes bring foreign money into Indian markets. But they also hide who the real investor is, so they are linked to black money and round-tripping (Indian money that goes abroad and comes back looking like foreign investment). For this reason SEBI has repeatedly tightened the rules on them.

Explanation

How a P-note works

  • Step 1: A foreign investor wants to earn from Indian shares, but does not want to register with SEBI.
  • Step 2: A registered FPI buys the actual Indian shares in its own name.
  • Step 3: Outside India, the FPI issues a P-note to that investor.
  • Step 4: The investor's gains or losses follow the price of those Indian shares. The FPI passes on these returns.
  • Key point: the FPI holds the actual Indian shares. The P-note holder only gets exposure (the returns). The holder never appears in Indian records as the owner.

Why it is called a "derivative"

  • A derivative is a contract whose value comes from something else, called the underlying asset.
  • A P-note has no value of its own. Its value comes from the Indian shares the FPI holds.
  • It is issued outside India, so it is offshore. This is where the name Offshore Derivative Instrument comes from.

The three parties

Party Role
Registered FPI (issuer) Registered with SEBI; buys and holds the Indian securities; issues the P-note abroad
P-note holder (subscriber) Foreign investor; gets the returns; is not registered in India
Underlying Indian securities The shares or other securities whose price decides the P-note's value

Concerns, and why P-note use has fallen

  • Hidden beneficial owner: the real person who owns the money and profits from it cannot be seen. The regulator sees only the FPI.
  • Round-tripping:
  • Indian black money is sent abroad.
  • It buys P-notes.

  • It comes back into Indian markets looking like "foreign" investment.

  • The Special Investigation Team (SIT) on black money flagged P-notes as a concern.

  • SEBI curbs in 2007 and 2017:
  • SEBI charged a fee on each instrument.
  • It banned P-notes used only for speculation (bets on price changes) in derivatives.

  • Each curb made P-notes costlier or narrower, so fewer investors used them.

  • Trend: P-notes made up about half of FPI assets in 2007. They have since fallen to low single digits.

In India

  • Regulator: SEBI controls which FPIs may issue P-notes and on what terms.
  • Link to the FPI regime: in 2014, the older FIIs (Foreign Institutional Investors) and QFIs (Qualified Foreign Investors) were merged into one FPI regime. Today P-notes are ODIs issued by registered FPIs.
  • Policy path:
  • The SIT on black money flagged P-notes.

  • SEBI curbed them in 2007 and again in 2017 (fee per instrument, and a ban on P-notes used only for speculation in derivatives).

  • Wider context (2025-26):

  • FPIs kept selling Indian shares.
  • Domestic institutional investors (DIIs) absorbed this selling with a record cumulative net inflow of ₹8.5 lakh crore [1].
  • By March 2026, FPI ownership of Indian equity had fallen to a 15-year low of 15.8%, while DII holdings reached 17% [1].
  • P-notes are one route for foreign money, and that money now matters less to Indian markets than before.

Don't confuse with

  • Direct FPI investment: here the FPI registers with SEBI and owns Indian securities in its own name. With a P-note, the end investor is not registered in India and owns only a contract, not the shares.
  • ADR/GDR (American/Global Depository Receipts): these are issued abroad by an Indian company (through a depository bank) to raise capital. A P-note is issued by an FPI, and the Indian company is not involved at all.
  • FDI (Foreign Direct Investment): this is a long-term stake that often comes with some control of the company. A P-note is a portfolio exposure with no control, and it can be sold quickly.
  • FII: this is the old name, used in NCERT's LPG chapter. Since 2014, the correct term is FPI. P-notes are issued by FPIs.

Prelims Hooks

  • P-note = ODI (Offshore Derivative Instrument). It is issued abroad by a registered FPI, not by an Indian company or by SEBI.
  • The FPI holds the actual Indian shares. The P-note holder only gets the returns and is not registered in India.
  • The main worries are round-tripping and a hidden beneficial owner. The SIT on black money flagged P-notes.
  • SEBI curbed P-notes in 2007 and 2017: a fee on each instrument, and a ban on P-notes used only for speculation in derivatives.
  • P-notes were about half of FPI assets in 2007. They are now in the low single digits.
  • Trap: "P-notes are issued by FIIs" is outdated wording. FIIs and QFIs were merged into the FPI regime in 2014.

Mains Points

  • Capital inflow vs transparency:
  • P-notes let foreign money reach Indian markets easily, which adds liquidity.
  • But the hidden beneficial owner creates black-money and round-tripping risks.

  • SEBI's curbs in 2007 and 2017 show a step-by-step approach: keep genuine foreign money coming in while shutting down misuse.

  • Less need for opaque foreign money:

  • Household savings are now flowing into mutual funds through SIPs.
  • This helped DIIs absorb ₹8.5 lakh crore of FPI selling, and DII holdings (17%) overtook FPI holdings (15.8%) by March 2026 [1].

  • With a strong domestic investor base, India can afford stricter rules on opaque routes like P-notes without hurting market stability much.

  • Governance link (GS-III, internal security and economy):

  • Money whose real owner cannot be seen can be used for tax evasion or to manipulate share prices.
  • The SIT's concern links P-notes to the wider fight against black money.
  • Stronger rules on revealing beneficial owners help both market integrity and tax enforcement.

Related concepts

Read more

Sources

  1. 1SEBI Annual Report 2025-26, Chapter 1: Introductionsebi.gov.in · tier 1