Participatory Notes Issue: Fear of Stock Market !

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Participatory Notes or popularly P-Notes issue has dogged Indian stock market for quite long . The issue of P-notes is once again scaring the Dalal Street . Mr Mukherjee’s statement in the Lok Sabha on Tuesday “ There will be no blanket use of the proposed anti-tax avoidance rules. They will be used only to counter “aggressive tax avoidance schemes”, is considered by many  to soothe the nerves of FIIs that fear a tax hit on Participatory Notes (PNs).

What is Participatory Notes ?

Participatory Notes or P notes  is a kind of financial instrument or one can say a contract (derivative contract) whose value is represented by underlying shares .   Thus , an FII who is registered pnotes_picturewith SEBI , buys the shares in India and then issues contracts called Participatory Notes to foreign investors. Thus under the said derivative contract , any dividend or capital gains arising on shares underlying therein is belonging to the foreign investor.

What are benefits of P-Notes ?

All FII who want to invest in India , have to be registered with Securities Exchange Board of India  ( SEBI) which regulates Indian stock market.SEBI , through various regulatory rule also monitor the source of fund used for investing in stock market.

Thus distinct benefit attached to foreign investors when they invest in Indian stock market through Participatory Notes is that  , they are not regulated by SEBI . This is so, because for P Notes participation , they are not required to be registered with SEBI. As such , there is absolute secrecay of source of funds used for participation in Indian stock market.

The second gain is on account of saving themselves from Indian Tax Laws. Since , the gain and dividend are actually earned by FII and are accounted in their name, but actual gains are the participants of P-Notes. This saves them from taxation impact and regulation.

The third gain is allegedly of use of black money which is first taken out through hawala route and then reinvested through P –Notes in Indian stock Market.