The Legal And Regulatory Framework Governing Participatory Notes In India: An Analysis Of SEBI’s Role
- IJLLR Journal
- May 26
- 2 min read
Chinmay Madaan, National Forensic Sciences University
I. Introduction
The liberalization of the Indian economy during the early 1990s ushered in a new era of heightened capital flow and market presence of foreign investors. Of the many financial tools instituted to support such investments, Participatory Notes (popularly called P-Notes) have been innovative but contentious. These overseas derivative instruments (ODIs), which are offered by registered Foreign Portfolio Investors (FPIs) to non-registered foreign entities, facilitate investment in Indian securities without explicit registration with the Securities and Exchange Board of India (SEBI). Whereas P-Notes have made foreign capital available through a channeled route, they have also attracted serious regulatory attention due to their lack of transparency and misuse possibilities for money laundering, round-tripping, and tax avoidance.
The appeal of P-Notes lies in their flexibility as well as their anonymity. For hedge funds and institutional investors generally, particularly those who are bearish on procedural nuances, the instruments provide a cost-effective channel to access Indian capital markets. But it is this same characteristic—failure to disclose the ultimate beneficial owner—that has led the regulators to worry about system risks and money laundering. The response of the regulators to these issues has changed considerably, with SEBI being at the forefront of strengthening the oversight mechanisms and implementing reforms to enhance transparency and investor accountability.
This paper aims to critically examine the legal and regulatory framework governing P-Notes in India, focusing specifically on SEBI's role as the primary regulator of the securities market. It assesses the effectiveness of SEBI’s measures in curbing misuse while facilitating legitimate investment. The study further explores the historical development of P-Note regulation, key legislative and regulatory instruments, and enforcement challenges. In doing so, it situates SEBI’s regulatory strategies within a broader comparative and policy framework to identify areas of improvement and reform.
