What are participatory notes? How does it feed black money monster?

Market regulator Securities and Exchange Board of India (Sebi) on Thursday tightened the rules for participatory notes (P-Notes) holders in order to check on the black money menace.

Dalal Street feared the move may spook the domestic markets in Friday's trade, but the flat movement on the benchmark indices suggest investors may have taken the changed rules in their strides.

Economic Affairs Secretary Shaktikanta Das, in fact, said Sebi's decision on P-Note will add strength to Indian markets.

" Sebi Board's decision on P-Notes will add strength to our markets. Genuine investors and p-note holders will find it easy to comply," Economic Affairs Secretary Shaktikanta Das said in a tweet.

Below is your 10-point guide to understand everything about P-Notes and the recent Sebi move on the same:

1. Participatory notes are the financial instruments through which individual foreign investors or hedge funds who do not want to disclose their identity can invest in Indian markets, otherwise registration with Sebi is a must to get an exposure into Indian equities.
2. Registered foreign institutional investors (FIIs), foreign banks and brokerages based in India issue P-notes to foreign investors and invest in Indian stocks on their behalf. Any dividends or capital gains collected from the underlying securities go back to the investors.
3. While a common investor has to fill up several KYC (know your customer) forms, provide PAN number and proof of address, etc, a P-Note investor can invest anonymously. This makes it a 'legal' way to route unaccounted wealth in Indian equities, thus feeding the black money monster.
4. Other than politicians, bureaucrats or business-persons, even terror financiers are feared to misuse the P-Note route to fulfil illegal objectives.
5. A Special Investigation Team (SIT) appointed by the Supreme Court, a few months ago, came out with a report on black money and exposed the links between Indian stock market and international tax havens.
6. A flurry of suggestions SIT made to tackle the black buck menace, including cancelling the  participation in the Indian markets by way of P-notes altogether.
7. Taking cues from the suggestions, Sebi has now made it mandatory for the P-Notes holders to adhere to Indian Know your customer (KYC) or anti-money laundering (AML) norms. 
   
8. Sebi has also put curbs on the transfer-ability of P-notes between two foreign investors. Further, it has also increased the frequency of reporting by P-notes issuers.
9. Brokerage Angel Broking said the new set of rules is likely to tighten the round tripping of money by Indian investors, but might see some slow down in the incremental funds flow in to Indian markets.
10. The brokerage, however, believed foreign investors with a long term horizon in India should have no issues adhering to the new set of norms.