FII[1] means an entity established or incorporated outside India which proposes to make investment in
India. FII have to act in parlance with the
guidelines framed by SEBI, (Foreign Institutional Investors) guidelines, 1995 and they also have to
comply with regulatory notifications of RBI, as RBI acts directly on them, for matters specifically concerning foreign exchange. Any boom in stock market is generally attributed to the FIIs participation in the Indian stock market. But still FIIs are looked with a word of caution and a sense of worry for market regulators. India being one of the vibrant and emerging economies of the world is an attractive destination of investment for them. Indian financial system or regulatory compliance does not allow foreign entities or individuals to directly participate in the capital markets. Foreign entities or individuals may not invest directly or otherwise in Indian market enter the markets through participatory notes.

Participatory Notes (PNs)

Participatory notes are instruments used by foreign funds / investors who are not registered with the SEBI but are interested in taking exposure in Indian securities.

Participatory notes are generally issued overseas by the domestic brokerages. Brokers buy or sell securities on behalf of their clients on their proprietary account and issue such notes in favour of such foreign investors. Participatory Notes are simple derivative instruments that investors not registered in India or Mauritius use to trade in Indian markets. These investors place their order through brokerage houses that have Mauritius-based FII accounts.