Participatory notes (P-Notes) are financial instruments used by hedge funds not registered with Sebi.
* Hedge funds invest in Indian stocks through custodians in India
* P-Notes are issued by registered FIIs to overseas investors who want to invest in India without registering
How do P-Notes work?
* India-based brokerages buy India-based securities and then issue P-Notes to foreign investors
* Any dividends or capital gains collected from the underlying securities go back to the investors
Why do FIIs use the Mauritius route?
* India has a double taxation avoidance agreement (DTAA) with Mauritius
* As per law, entities registered in Mauritius need not to be taxed in India
* Capital gains from the sale of shares is taxable in the country of residence of the shareholder
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