What are Participatory Notes or the P-Notes?

There are many online resource available, however, there are some complicated definition all over. Therefore, I am extracting the simplest of it.

1. What are Participatory Notes? Participatory Notes are instruments used by foreign funds, not registered in India for trading in the domestic market. The investor who buys PN, deposit fund in the international FII against the security deposit like in US or Europe, and in turn the FII buys stock in India. Thus the FII acts like an exchange since it execute the trade and uses its internal account to settle this.
2. Why investor uses Participatory Notes?
   1. It keeps the investor anonymous
   2. It saves cost of record keeping, transaction cost, and regulatory compliance overseas especially for small investors.
   3. Thus investor use PN to enter the Indian market in a small way and then when they are established, they shift to full-fleged FII structure.
3. What are the Problem with the instrument? It is tough to establish the beneficial ownership or the identity of original investor. The investor may sell the PN to others, and thus further layers. PN is also becoming favorite with many Indian Money Launderers, who use it to first ship out money of country through Hawala and then get it back using PNs.
4. What is the extent to which PN's are used? Over the years the use of PNs have increased from 17 FII issuing it in 2005 to over 2 dozen funds now.Merrill Lynch, Morgan Stanley, Credit Lyonnais, citigroups and Goldman Sachs are the biggest issuers. Currently 51.4% of all assets under FII are under PN now a days.