Investments through participatory notes in the Indian stock market have been a cause for concern for policymakers. It is argued that P-Notes did play a role in attracting foreign investments, when suitable instruments were unavailable in India. But, today, with new liquid contracts available in Indian equity markets, P-Notes serve no purpose other than providing anonymity to foreign investors, and a potential route for tax evasion. From statistical analysis, it was found that P-Note inflows/outflows seem to be determined by rupee -dollar exchange rate movements, and not by fundamental price-to-earnings ratios, or even sentiment indicators like put-call ratio and advances-to-declines ratio. Policymakers must discourage foreign institutional investors from moving to P-Notes to avoid tax, and in the long term P-Notes must be phased out--the first step could be setting caps on investments through P-Notes at the firm level and at an aggregate level as well.
