UPSC Prelims 2007 Q102: Indian Economy – Financial Markets & Capital Markets

UPSC Prelims 2007, General Studies Paper I · Indian Economy

Participatory Notes (PNs) are associated with which one of the following?

Answer: (b) Foreign Institutional Investors

Explanation

Participatory Notes (P-Notes)

Feature	Fact
What	Offshore Derivative Instruments (ODIs) with Indian shares as the underlying asset
Issued by	Registered FIIs / FPIs
Issued to	Foreign investors who do not register with SEBI
Concern	Anonymity — risk of black money round-tripping and money laundering
Regulator	SEBI — tightened rules in 2007, 2017 and later (KYC, no naked derivatives)

An unregistered foreign investor gets exposure to Indian stocks through a registered FII/FPI.

Answer: (b) Foreign Institutional Investors.

(a) Incorrect. The Consolidated Fund is the government's main account (Art 266) — unrelated.
(b) CORRECT. P-Notes are issued by FIIs/FPIs to overseas investors to invest in Indian markets.
(c) Incorrect. UNDP has nothing to do with P-Notes.
(d) Incorrect. The Kyoto Protocol deals with carbon credits, not P-Notes.

P-Notes = Offshore Derivative Instruments issued by registered FIIs/FPIs to unregistered foreign investors; regulated by SEBI.

Participatory Notes are linked to Foreign Institutional Investors.

Confusing P-Notes with carbon credits (Kyoto) because both are 'tradable instruments'.
Thinking P-Notes are issued by the RBI — they are issued by FPIs and watched by SEBI.
Forgetting the core concern: anonymity → round-tripping of black money.

P-Note = 'Proxy Note' — a foreign investor invests in India by proxy, through an FPI.

SEBI (Foreign Portfolio Investors) Regulations, 2019
Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995, Regulation 15A (offshore derivative instruments)
SIT on Black Money — Reports