Participatory notes:

Participatory notes: These were issued in 1992 by then commerce minister P.chidambram. The main moto behind these was to increase the FII presence in India, in this scheme the FII could invest in stock market as invisible intentity. I will explain the working of this scheme. The FII at any foreign country will approach a broker in his country (some foreign brokers were registered by Govt of India for this purpose) to buy X shares of a Y company listed in Indian stock exchange and will give the amount of money he wants to invest, the broker will then ask its subordinate broker in India to buy those shares. When this Indian broker will confirm the purchase the foreign broker will issue participatory notes of the same value(as invested by FII) of behalf of Govt of India to the FII. Thus now FII will now become the owner of X shares of Y companies without SEBI knowing about it. SEBI will know only the Indian broker as the purchaser. The foreign broker will be the person whom the FII will deal for the profits, saleing of those shares. Advantages: Indeed this was a dilligent move as it led to surge in the FII investment in India, the country which was then running short of foreign currency got that in plenty. Also the investment by FII's in Indian companies soared their share values and thus enhanced their capital which was then to be used for investment and thus Indian economy rekindled very soon. Disadvantages: It was an easy method of conversion of converting black money to white. People used Hawala to transfer money from India to Tax heaven countries like mauritious from there they invested in Indian stocks. This also led to an increased investment in Indian companies by terrorist organisations.