Pros and cons of P-notes

♤ Participatory notes are easily traded overseas through endorsement and delivery. They are popular because investors anonymously take positions in Indian markets, and hedge funds may anonymously carry out their operations. Some entities route their investments

through participatory notes to take advantage of tax laws that are available in certain countries.

♤ However, because of the anonymity, Indian regulators face difficulty determining a participatory notes original owner and end owner. Therefore, substantial amounts of unaccounted for money enters the country through participatory notes. This flow of untracked funds has raised some red flags. Also, it can be used for round-tripping of black money.

♤ To quote Manmohan Singh – “The PN system is blatantly discriminatory and seems to favour ghost investors. Any self-respecting market, if it discriminates at all, does so against outsiders. But we have done the unthinkable. We should recognise and internalise the fact that funds are in search of markets, and not the other way.”