UPSC Prelims 2019 Q67: Indian Economy – Financial Markets & Capital Markets
- (a) Certificate of Deposit
- (b) Commercial Paper
- (c) Promissory Note
- (d) Participatory Note
Answer: (d) Participatory Note
Explanation
Participatory Notes (P-Notes)
| Instrument | Purpose |
|---|---|
| Certificate of Deposit | Short-term debt issued by banks (money market) |
| Commercial Paper | Short-term unsecured promissory notes by corporates |
| Promissory Note | Debt promise instrument (general) |
| Participatory Note (P-Note) | Issued by registered FPIs to overseas investors who want exposure to Indian equities/derivatives without registering with SEBI as an FPI directly |
P-Notes are derivative instruments with Indian securities as underlying, issued by registered FPIs to overseas clients. Used to gain anonymous exposure to Indian markets. SEBI has tightened P-Note rules over the years due to concerns over misuse for round-tripping and money laundering.
Answer: (d) Participatory Note.
Why each option is right or wrong
- (a) Incorrect. Certificate of Deposit is a bank money-market instrument - not FPI-issued.
- (b) Incorrect. Commercial Paper is corporate short-term debt - not FPI-issued.
- (c) Incorrect. Promissory Note is a general debt instrument - not the specific FPI-issued vehicle for anonymous foreign investment.
- (d) CORRECT. Participatory Notes (P-Notes) are issued by SEBI-registered FPIs to overseas clients who want exposure to Indian securities without directly registering with SEBI.
Key point
P-Notes = FPI-issued derivative instruments for overseas investors seeking Indian market exposure without direct SEBI registration. SEBI has tightened rules to prevent misuse.
Remember
Participatory Notes (P-Notes) are issued by SEBI-registered Foreign Portfolio Investors (FPIs) to overseas investors who want to participate in the Indian stock market without registering themselves directly with SEBI. P-Notes are derivative instruments with Indian securities as underlying.
Common mistakes
- Confusing P-Notes with FCCBs (Foreign Currency Convertible Bonds) - different instruments.
- Assuming P-Notes are debt - they are derivatives with equities/bonds/derivatives as underlying.
- Not knowing SEBI's 2017 tightening: P-Note issuance banned for derivatives (except hedging), KYC strengthened.
Exam tip
FPI instruments in India: Direct FPI investment (via SEBI registration), FCCB, ADR/GDR (depositary receipts), Masala Bonds (INR-denominated offshore bonds), P-Notes (offshore derivatives). SEBI regulates all.
Sources
- SEBI - FPI Regulations and P-Note guidelines
- RBI - Financial Stability Report (FPI flows)