Previous Year Question
Which of the following is issued by registered Foreign Institutional Investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?
Certificate of Deposit
Commercial Paper
Promissory Note
Participatory Note
Correct Answer: D
Detailed Solution
A Participatory Note, commonly called a P-Note, is a type of Offshore Derivative Instrument. At the time of the question, it was issued by a Foreign Institutional Investor registered in India to an overseas investor.
Its general mechanism operates as follows:
The registered FII purchases an Indian share or another permitted security.
It issues a P-Note to an overseas investor with the Indian security as the underlying asset.
The value and return of the P-Note remain linked to the performance of the underlying Indian security.
The overseas investor obtains economic exposure to the Indian market without being directly recorded in the shareholder register of the Indian company.
The FII was the registered holder of the underlying Indian security. The P-Note holder received the associated economic benefits but ordinarily did not obtain direct ownership and voting rights in the Indian company.
Why are the other options incorrect?
A Certificate of Deposit is a negotiable money-market instrument issued by a bank or another eligible financial institution.
Commercial Paper is an unsecured money-market instrument issued by a company with an eligible credit profile for raising short-term funds.
A Promissory Note is an unconditional written promise by one party to pay a specified amount to another.
None of these instruments is specifically designed to provide an overseas investor with indirect exposure to the Indian stock market.
P-Notes have raised concerns relating to opacity of beneficial ownership, money laundering, round-tripping and market volatility. SEBI consequently introduced stricter KYC, reporting and eligible-investor requirements.
Current position (2026)
Under current SEBI terminology, Foreign Portfolio Investor (FPI) has replaced Foreign Institutional Investor, while the broader regulatory expression for a Participatory Note is Offshore Derivative Instrument (ODI).
Under SEBI’s December 2024 framework:
an FPI issuing ODIs must have a separate dedicated registration carrying the suffix “ODI”;
derivatives generally cannot be used as the underlying of an ODI;
an ODI must be fully hedged with the same underlying security on a one-to-one basis;
specified ODI subscribers having more than 50% of their equity-ODI position in a single Indian corporate group are subject to granular ownership disclosures; and
an ODI subscriber with equity positions exceeding ₹25,000 crore in Indian markets may also attract the prescribed additional-disclosure framework.
P-Notes have therefore not been abolished. They continue as regulated ODIs subject to stricter KYC, disclosure, reporting and hedging requirements.