Participatory notes are issued to the foreign investors by the brokerages, fund houses, hedge funds that are not registered with SEBI.
These brokerages buy listed Indian securities and then issue Participatory Notes to foreign investors. This is almost like informal ADRs. Any dividend, capital gains generated on the underlying securities is given to the investors.
Since investing in Indian markets is limited to the registered FIIs, PNs provide the alternative though ineligible route for foreign investors to enter Indian markets.
The hedge funds are not registered directly with the SEBI but can operate through sub-accounts in FIIs. These funds are said to operate through issuance of PNs. SEBI is not happy because it does not know who is the underlying owner of the security.
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