P Note: Please take a Note

P Notes are synonymous with market fall in India. In October 2007, SEBI had proposed restraints on P Notes that accounted to nearly 50 per cent of FII investment. The terms of SEBI were not clear but the intention was to highlight the identity of holders of the underlying asset and hedged funds that caused market volatility. That day the Indian markets witnessed the greatest decline.

Participatory Notes came in the limelight after the government amended its 32 year pending tax treaty with Mauritius. The foreign investors who have been investing in Indian markets through the Mauritius route to avoid capital gains tax, will now be taxed by the government at half the rate prevailing in domestic market, though the execution is far-off.

P Notes is entirely a separate topic which is not to be linked to the treaty. P Notes are issued by registered FIIs to overseas investors who need not reveal their identities to SEBI. However, recently SEBI has announced that it is likely to bring more stringent rules for the participatory notes (P Notes) with a view to check black money flow into the stock markets. SEBI would put KYC (know your client) mandate on P Notes and some more rules on P Notes in the meeting to be held on May 20.

According to Rakesh Jhunjhunwala, there shouldn’t be any near term impact on the P Notes investment till the year end at least. However, during January 2017, P Notes may see some sell-off when linked with the GAAR (General anti-avoidance rule) rollover. Currently the companies with highest exposure to P Notes may witness a selling pressure ahead of the procedures.