Screws On P-Notes Tightened

Capital market regulator SEBI has further reduced room for manoeuvre for foreign investors buying Indian equity through offshore derivative instruments (ODI), the most popular of which are P-notes (participatory notes), in a decision taken at its board meeting.

For starters, P-note holders will now be subject to the same Know Your Client (KYC) requirements as domestic investors.

Earlier, the KYC norms of the jurisdiction of the beneficial owner or of the ODI (P-note) issuer would have been sufficient. The frequency of the KYC review will be based on the risk profile of the subscriber, with reviews now becoming necessary every year for all but low-risk investors.

Second, if a certain beneficial owner holds more than 25% of the company or 15% of the trust/firm that issued the note, then the issuer should identify such an owner.

Also, an owner or subscriber will have to now inform the ODI issuer if he/she is transferring the ODI to another offshore investor.

Additionally, the ODI issuer has to inform SEBI of every single ownership transfer that happens among its subscribers on a monthly basis.


A P-note is an instrument used by a foreign portfolio investor to buy Indian stocks without registering itself with the Securities and Exchange Board of India (SEBI).

While this was done to encourage foreign investments into Indian stock markets, the regulator found it difficult to identify the ultimate beneficial owner of a P-note or how ownership has transferred.

Hence, SEBI has been slowly tightening norms from 2011 to restrict who can issue a P-note and reduce the opacity in its structure.

Because of these restrictions, the notional value of such investments in the assets of FPIs fell from a high of 55.7% in June 2007 to 10% in March 2016.