Participatory Note 2003
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Transcript of Participatory Note 2003
PARTICIPATORY NOTES PARTICIPATORY NOTES
Presented By :- Jyoti kumari Tripti Majhi Noopur
MEANINGMEANING Participatory Notes or P-Notes are
financial instruments that are issued by FII’s to investors and hedge funds who wish to invest in Indian stock markets, but who are not registered with SEBI (Securities and Exchange Board of India).
Other name of P note is offshore derivative instruments.
? In your mind? In your mind
Why P-Notes?
How does it work ?
Who gets P-Notes?
Who can invest in P-notes?
What are hedge funds?
What is an FII?
Why P-Notes ?Why P-Notes ?
Since international access to the Indian capital market is limited to FIIs. The market has found a way to circumvent this by creating the device called participatory notes, which are said to account for half the $80 billion that stands to the credit of FIIs. Investing through P-Notes is very simple and hence very popular
Who gets P-Notes Who gets P-Notes ??
P-Notes are issued to the real investors on the basis of stocks purchased by the FII. The registered FII looks after all the transactions, which appear as proprietary trades in its books. It is not obligatory for the FIIs to disclose their client details to the Sebi, unless asked specifically.
Morgan Stanley , Credit Lyonnais, Citigroup ,Goldman Sachs, Macquarie and Standard Chartered Bank who are registered in India with SEBI issue Participatory Notes.
Who can invest in P-notes?Who can invest in P-notes?
Any entity incorporated in a jurisdiction that requires filing of constitutional and/or other documents with a registrar of companies or comparable regulatory agency or body under the applicable companies legislation in that jurisdiction
Any entity that is regulated, authorised or supervised by a central bank, such as the Bank of England , the Hong Kong Monetary Authority, or any other similar body.
Any entity that is regulated, authorised or supervised by a securities, such as the Financial Services Authority (UK), the Securities and Exchange Commission, Trading Commission, the Securities and Futures Commission.
Cont…….Cont……. Any entity that is a member of securities or
futures exchanges such as the New York Stock Exchange (Sub-account), London Stock Exchange (UK), provided that they are ultimately accountable to the respective securities / financial market regulators.
Any individual or entity (such as fund, trust, collective investment scheme, Investment Company or limited partnership) whose investment advisory function is managed by an entity satisfying the criteria of above.
How does it work How does it work ??FIIs who issue/renew/cancel/redeem P-Notes,
are required to report on a monthly basis. The report should reach the Sebi by the 7th day of the following month.
The FII merely investing/subscribing in/to the Participatory Notes -- or any such type of instruments/securities -- with underlying Indian market securities are required to report on quarterly basis (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec)
FIIs who do not issue PNs but have trades/holds Indian securities during the reporting quarter (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec) require to submit 'Nil' undertaking on a quarterly basis
What are hedge funds?What are hedge funds?
Hedge funds , are those which invest through participatory notes, borrow money cheaply from Western markets and invest these funds into stocks in emerging markets. This gives them double benefit: a chance to make a killing in a stock market where stocks are on the rise; and a chance to make the most of the rising value of the local currency
What is an FII?What is an FII?
An FII, or a foreign institutional investor, is an entity established to make investments in India
However, these FIIs need to get registered with the Securities and Exchange Board of India
Entities or funds that are eligible to get registered as FII include pension funds; mutual funds; insurance companies / reinsurance companies; investment trusts; banks; international or multilateral organisation or an agency thereof or a foreign government agency or a foreign central bank; foundations (serving broader social objectives); and charitable trusts / charitable societies.
Cont…….Cont…….
The following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs:
Asset Management Companies Investment Manager/Advisor Institutional Portfolio Managers Trustees
Advantages of P-Notes Advantages of P-Notes
Convenient for foreign investors, because participatory
notes are like contract notes transferable by approval
P-note provide high degree of anonymity.
Some of the entities want their investment through P notes to
take advantage of the tax laws of certain preferred countries.
It is important source of investment in Indian capital market
It strengthen rupee against the dollar.
KYC NORMKYC NORM "Know Your Customer” (KYC) procedure is the key principle for
identification of an individual/corporate opening an account.
The customer identification should entail verification through an
introductory reference from an existing account holder/a person known
to the bank
Or on the basis of documents provided by the customer.
Came into existence after UBS scam.
The objectives of the KYC framework is:
(i) To ensure appropriate customer identification and
(ii) To monitor transactions of a suspicious nature.
Role of P-notes in Indian Role of P-notes in Indian security market security market
Huge inflow of foreign funds into Indian stock market
On April , 2003, a bearish market turned into a bull market
with index had jumped 55 % ,major reason for this was P-
notes and total contribution of FII was around 5 billion
The contribution of participatory notes in 2003 was estimated
to be $ 1.5 billion and approx $ 9 bn in 2009
P-Notes accounted for as much as 55% or more than half of
total inflow into India
Cont…Cont… In 2005 P-notes rose dramatically from 30.6% in April (the
Sensex was 6,605 ) to 46.73% in August (the Sensex was
7,805 ) and it crosses 9000 in that year.
Participatory notes account for over 42% pc of FII inflows
till Sep. 2009
Participatory Notes Crisis of Participatory Notes Crisis of 20072007
P-notes crisis took place on 16th of October, 2007
proposals of SEBI were not clear and this led to a knee-jerk
crash
Sensex crashed by 1744 points in a single day.
P.Chidambaram issued clarifications, that the government
was not against FIIs and was not immediately banning PNs
Major reasons for investors Major reasons for investors investing in P-Notesinvesting in P-Notes
Tax Regime: Some countries like Taiwan, Hong
kong,Srilanka, singapore do not have any tax on short term
capital gains.
Whether participatory note Whether participatory note be abolished?be abolished?
It is also called problematic note
Capital market regulators dislike p-notes
It gives rise to illegal activities.As it is associated with Benami
transaction which is not allowed in indian stock market
The income tax deptt has proposed to tax participatory holders
P-note creates a mirage that the market is booming
UBS securities scam