Participatory Notes on IT scanner

Participatory Notes on IT scanner

Participatory notes are not used within the country. They are used outside India for making investments in shares listed in the Indian stock market.

Foreign investment in India is categorized as:

  1. Foreign direct investment (FDI) and
  2. Investment made by foreign institutional investors (FIIs).

Here, in the above cases, foreign money enters the Indian markets, paving way for the growth of economy, industries and capital market.  However, with the number of increasing regulations in India, it is not easy for foreign money to enter the markets since there are strict guidelines laid down by market regulator SEBI (Securities and Exchange Board of India) for seeking approvals and documentation for FDI and also for removal of money invested.

On the other hand, FII is mainly characterized as portfolio investment i.e. quick money entering the Indian capital market for short-term. Due to its short-term nature, they are governed only by fewer guidelines than on FDI. But, the fact remains that foreign money cannot enter Indian markets without regulatory approvals.

So, what happens to all those overseas investors, who want to invest in the Indian stock markets without getting into the regulatory approval process and other hassles? Thus comes the answer PARTICIPATORY NOTES.


  • They are also called as P-Notes
  • They are offshore derivate instruments with Indian shares as underlying assets.
  • The instruments here are used for investments in stock markets and are not used within the country.
  • These are used outside India, for investments in Shares listed in the Indian stock market..
  • They are otherwise known as Offshore Derivate Instruments.
  • Here, Indian-based brokerages buy India-based securities and issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.
  • Investment in P-Notes is simple and easy
  • No KYC guidelines are strictly adhered to in such investments
  • It enables large hedge funds to carry out their operations without disclosing their identity.
  • Investment in P-Notes is made to take advantage of the tax laws of certain preferred countries.

Now let us see as to what the Income Tax department has proposed to do?  The IT department suspects that the P-Notes are being used to legalise unaccounted money.  This was revealed when the taxmen observed certain disagreements in the disclosures made by the Offshore Derivate Instruments (ODI) issuers.  The details specified in the KYC disclosures were not matching with the tax authority’s database.  Hence the authorities have called for more particulars.

It may be noted that the Government has recently made amendments in tax treaties with Mauritius and Singapore, and the investments coming from these countries were exempt from short term capital gains (STCG) tax.  Taking advantage of the situation, several investors from various parts of the world invested in Indian equities through shell entities in these countries.

It is further learnt that the IT has an eye on those who have shifted/contemplating to shift to other countries, to avoid paying tax in India.  Investment in Indian market via these countries would hamper the tax collection portfolio of Indian Government.


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