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19. What is the Role of FII’s in P-Note Mechanism and Role of Sub Accounts in P-Note Mechanism?


Foreign Institutional Investors (FIIs) act as the registered primary issuers and buyers of Participatory Notes (P-Notes), handling direct Indian market trades for offshore clients. Sub-accounts are the underlying individual funds, hedge funds, or clients on whose behalf the FIIs invest, holding the specific economic benefits of the P-Notes. [1, 2, 3]


The Role of FIIs in the P-Note Mechanism


FIIs (now commonly registered as Foreign Portfolio Investors, or FPIs) serve as the vital bridge between the Indian capital markets and international investors.
  • Primary Issuers: FIIs are the registered entities that issue P-Notes (also known as Offshore Derivative Instruments) to overseas investors.
  • Market Execution: The FII buys and holds the underlying Indian securities (equities, bonds, derivatives) in the Indian market using their own proprietary accounts.
  • Derivatives Structuring: They create P-Notes whose value is tethered to the performance of these underlying Indian securities.
  • Compliance & Reporting: FIIs are responsible for adhering to strict Securities and Exchange Board of India (SEBI) regulations. They must conduct rigorous Know Your Client (KYC) checks on the ultimate investors and report P-Note issuance data to SEBI. [11, 12]
The Role of Sub-Accounts in the P-Note Mechanism


Sub-accounts are essentially the underlying end-investors or overseas institutional portfolios (such as foreign hedge funds or pension funds) that utilize the P-Note mechanism to gain market exposure.
  • Beneficial Ownership: Sub-accounts provide the funds to purchase the P-Notes and receive all economic benefits (dividends, capital gains) from the underlying Indian securities, without directly owning them.
  • Maintaining Anonymity: By using a sub-account structure routed through an FII, international investors can participate in the Indian market without publicly disclosing their identities or undergoing the lengthy, direct SEBI registration process.
  • Investment Limits: Sub-accounts are subject to specific investment ceilings; for example, the investment made by a single sub-account is typically capped as a percentage of the total issued capital of an Indian company.
  • Indirect Regulation: While sub-accounts are screened through the FII's due diligence, they do not have a direct regulatory relationship with SEBI, which is why Indian regulators heavily monitor the FIIs to prevent market misuse. [12, 19, 20]



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