Offshore Derivatives Instruments (Participatory Notes)

Offshore derivatives instruments (ODIs) are investment vehicles used by overseas investors not registered with the SEBI for an exposure in Indian equities or equity derivatives. They may not be registered with SEBI, either because they do not want to, or due to regulatory constraints for which they are not allowed to. It is a registered FII that makes purchases on behalf of these investors and the FII s affiliate issues those ODIs. ODIs include equity-linked notes, capped return notes, participating return notes, etc.

Participatory Notes (P-Notes) is one of the categories of ODIs. The underlying asset class could be stocks, and returns would be directly related to the appreciation in prices of those stocks. India based brokerages to buy India-based securities / stocks and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. Since international access to the Indian capital market is limited to FIIs. The market has found a way to circumvent this by creating participatory notes

Securities and Exchange Board of India (SEBI) regulation for issuance of offshore derivative instruments:

  • Offshore derivative instruments are issued only to persons who are regulated by an appropriate foreign regulatory authority; after compliance with the stated ‘know your client’ norms