Participatory Notes (P-Notes), Offshore bonds vs Onshore Bonds

 

Participatory Notes (P-Notes):

• P-Notes are instruments issued by a SEBI registered Foreign Institutional Investors (FII) to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator, SEBI. 
• The underlying Indian security instrument may be equity, debt, derivatives or may even be an index.
• They are easy to operate rather than the cumbersome rules that India has for its foreign investors.

 Features of P-Notes:

• The investor in PN does not own the underlying Indian security, which is held by the FII who issues the PN.
• Investors in PNs derive the economic benefits of investing in the security without actually holding it.
• Investors benefit from fluctuations in the price of the underlying security since the value of the PN is linked with the value of the underlying Indian security. 
• The PN holder also does not enjoy any voting rights in relation to security/shares hold through PN.

 Controversary about P-Notes :

• P-notes have been controversial instruments since the very inception as these are freely traded overseas without any control of SEBI.
• P-Notes remain opaque as the identity of the investor is known only to FII and not to the SEBI.
• It is understood that P-notes are being used for money laundering. even by promoters of listed companies.
• Whenever government attempted to regulate them, market start tumbling, which prevents the government to take the harsh step. 

Participatory Notes Crisis of 2007:-- 

On 16th October 2007, SEBI proposed curbs on P-Notes but mere proposal resulted in sharp fall of 1744 points on 17th October 2007 followed by further volatilities.

Offshore bonds: 

                                

• Raising of debt by Indian Companies from global market in Rupee denominated /Dollar denominated is referred to as Offshore bonds. 
• It enables borrower to have access to foreign currency investments.
• These bonds are subjected to different tax rules depending upon tax treaties between countries.
• Offshore markets exposure may induce improvements in domestic bonds markets such as strengthening of domestic market infrastructure, improving investor protection and removing tax distortions that hinder domestic market development etc.

Onshore Bonds: 

                                           

• Onshore bonds are issued by financial entities to raise money from the investors located within the borrower 's home country.
• It is typically in local currency.