Govt paves way for IFSC units to issue P-notes to foreign investors

With an aim to boost business activities in the international financial hub GIFT IFSC, the government in the Budget paved the way for IFSC units to issue participatory notes or offshore derivative instruments to foreign investors.

Participatory notes (P-notes) are issued by registered foreign Portfolio Investors (FPIs) to overseas investors who wish to be part of the Indian stock market without registering themselves directly. They, however, need to go through a due diligence process. Till December 2022, the value of P-note investments in Indian markets -- equity, debt, and hybrid securities -- was at Rs 96,292 crore, data with the Securities and Exchange Board of India (Sebi) showed.

Finance Minister Nirmala Sitharaman in her Budget speech on Wednesday recognised "offshore derivative instruments (ODIs) as valid contracts" in order to enhance business activities in the Gujarat International Finance Tec-City (GIFT City). In line with the Budget's announcement, it is likely that necessary changes will be made to the IFSC regulations to allow Indian Financial Services Centre (IFSC) units to issue P-notes or ODIs to foreign investors, Rajesh Gandhi, Partner, Deloitte India, said.

There is already some interest in enabling IFSC funds to issue P-notes and it will be interesting to see whether the benefit will be restricted only to offshore banking units of foreign banks or extended to other entities like alternative investment funds (AIFs) set up in IFSC as well, he added.