Consider the following statements regarding Participatory Notes

1. These are instruments issued by registered foreign institutional investors (FII) to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the SEBI.
2. They are used within the country.  

Select the correct answer using the codes given below:
a) 1 only
b) 2 only
c) Both are correct
d) Neither is true

Answer-a

Explanation:- Participatory Notes

• Participatory Notes commonly known as P-Notes or PNs are instruments issued by registered foreign institutional investors (FII) to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India.
• Participatory notes are instruments used for making investments in the stock markets.
• However, they are not used within the country. They are used outside India for making investments in shares listed in the Indian stock market. That is why they are also called offshore derivative instruments.
• In the Indian context, foreign institutional investors (FIIs) and their sub-accounts mostly use these instruments for facilitating the participation of their overseas clients, who are not interested in participating directly in the Indian stock market.
• For example, Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.
• Indian regulators are not very happy about participatory notes because they have no way to know who owns the underlying securities.
• Regulators fear that hedge funds acting through participatory notes will cause economic volatility in India’s exchanges.