Question

The Securities Market regulator Securities and Exchange Board of India (SEBI) has tightened the Participatory Notes (P-note) norms. The main purpose of this decision is to keep
1. Vigil on production of counterfeit notes in India
2. Foreign printed notes from coming into circulation in India.
3. A track on the global remittance flows to India.
4. Vigil on foreign investments to curb black money inflows in the country.

Answer 1

Correct Answer - Option 4 : Vigil on foreign investments to curb black money inflows in the country.

 The correct answer is Vigil on foreign investments to curb black money inflows in the country.

• Participatory Notes are offshore/overseas derivative instruments (ODIs) issued by registered foreign institutional investors (FII) to overseas investors.
• P-Notes are issued to overseas investors who wish to invest in the Indian stock markets without registering themselves (anonymous) with the market regulator SEBI.
• P-Notes are used by money launderers. They first take funds out of the country through hawala and then get it back using P-Notes.

• They provide liquidity to the investors as they can transfer the ownership by endorsement and delivery.
• While the FIIs have to report all such investments each quarter to SEBI, they need not disclose the identity of the actual investors. 

What are the govt & regulator’s concerns?

• The primary reason why P-Notes are worrying is because of the anonymous nature of the instrument as these investors could be beyond the reach of Indian regulators.
• Further, there is a view that it is being used in money laundering with wealthy Indians, like the promoters of companies, using it to bring back unaccounted funds and to manipulate their stock prices.