Inception Of P-Notes: The story of the collapse of India’s foreign exchange reserves in 1990-91 following a combination of withdrawal of foreign currency bank deposits by NRIs, the collapse of the Soviet Union and the oil-price rise in the wake of the (first) Iraq War and how this forced the process of economic reform is well known. After the 1991 BoP crisis, FIIs were allowed to invest in India. The process of foreign investments in India was boosted by initiation of P-Notes. It went on to entrench itself as the primary tool of FIIs in India.
Definition: P-Notes are a type of Offshore Derivative Instrument (ODI). Regulation 15A of SEBI Regulations, 1995 defines ODI as an instrument “which is issued overseas by a foreign institutional investor (FII) against securities held by it that are listed or proposed to be listed on any recognised stock exchange in India.” These ODIs can also be issued against derivatives, resulting in leveraged exposure to the Indian stock market.
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