NISM-Series-VI: Depository Operations · Foreign Portfolio Investors (FPI)

Offshore Derivative Instruments and Participatory Notes Explained

Updated 11 October 2026 · Fact-checked

An offshore derivative instrument (ODI) is an instrument issued outside India by a registered FPI, with Indian securities as its underlying. Participatory notes (P-Notes) are the best-known ODI. The holder gets the economic exposure, but the FPI stays the registered investor in India. SEBI regulates who may issue, who may subscribe, and how ODIs transfer.

Understand Offshore Derivative Instruments and Participatory Notes

A foreign portfolio investor (FPI) registers with SEBI through a designated depository participant (DDP) and invests directly in Indian securities. Some overseas investors do not register. They still want exposure to Indian markets. An ODI lets them get it.

An ODI is an instrument issued outside India, by an FPI, against Indian securities held as the underlying. Participatory notes (P-Notes) are the common form. The issuer buys or holds the Indian securities in its own name. The note holder receives returns linked to them. The note holder does not appear in the Indian depository records.

So the key difference is this. An FPI is a registered investor, holds securities in a demat account in its own name, and deals with SEBI-regulated intermediaries directly. An ODI subscriber is an overseas investor who holds only a contract with the issuer. The Indian securities stay with the FPI issuer.

Because the end investor is hidden from Indian records, SEBI controls ODIs closely. Only FPIs registered as Category I can issue ODIs, and only against the conditions set by SEBI. The issuer must carry out KYC on the subscriber, report ODI details to SEBI, and follow limits on transfer. The exact conditions are set out in the SEBI FPI Regulations and circulars, and the NISM workbook is your reference for the precise wording.

For the exam, think of four questions. Who issues? Who subscribes? What checks apply? Can it be transferred? Most MCQs test one of these.

Key formulas to remember

Meaning of ODI: ODI = instrument issued outside India by a registered FPI, with Indian securities as underlying; P-Notes are one type of ODI. The subscriber is not the registered investor in India.
Who issues: Issuer = Category I FPI, registered with SEBI, and permitted to issue ODIs; A Category II FPI is not an eligible ODI issuer. Check this option in MCQs.
Who subscribes: Subscriber = regulated entity that meets SEBI eligibility and KYC norms; The issuer must do due diligence and KYC on the subscriber. Do not assume anonymity.
Reporting: Issuer reports ODI details to SEBI at the prescribed periodic intervals; Learn that reporting is a duty of the issuer. Do not memorise frequency unless your workbook states it.
Transfer: Transfer of ODIs only to eligible persons, with prior consent or notice as prescribed; ODIs cannot be freely passed on to any person. Transfers are restricted.

How to solve Offshore Derivative Instruments and Participatory Notes questions

Use the same short sequence for any ODI or P-Note question. It keeps you from mixing up FPI rules and ODI rules.

1Read the question and decide which of the four areas it tests: meaning, issuer, subscriber or transfer and reporting.
2Identify whose position is asked about: the FPI issuer, the ODI subscriber, or SEBI.
3If it is about meaning, recall that the instrument is issued outside India and the underlying is Indian securities.
4If it is about issuer, check the FPI category. Only Category I FPIs can issue.
5If it is about subscriber, look for KYC, eligibility and due diligence as the issuer's duty.
6If it is about transfer or reporting, choose the option that shows restriction and reporting to SEBI, not free transfer.
7Eliminate options that say the subscriber is registered in India or holds shares in its own demat account.
8Pick the remaining option and check it against the exact wording of the question.

Quickest way: Four-word check: Issue, Subscribe, Know, Transfer

When to use it: Use this when you have under a minute for a statement-type MCQ on ODIs.

Issue: only registered Category I FPIs issue ODIs.
Subscribe: subscribers must be eligible and are KYC-checked by the issuer.
Know: the issuer reports ODI details to SEBI.
Transfer: restricted to eligible persons, never free.
Any option that says the subscriber is a registered FPI or holds securities directly in India is a trap.

Common mistakes in Offshore Derivative Instruments and Participatory Notes

Thinking the ODI holder is a registered investor in India.
The note is linked to Indian securities, so students assume ownership sits with the holder.
Fix: Remember the FPI issuer holds the securities. The holder has only a contractual claim on the issuer.
Saying any FPI can issue ODIs.
Students ignore FPI categories.
Fix: Link ODI issuance to Category I FPIs only. Revise the category chapter alongside this topic.
Believing ODI subscribers are anonymous.
Because the subscriber is not in depository records, students assume no KYC.
Fix: The issuer must do KYC and due diligence, and report to SEBI.
Treating P-Notes as freely transferable.
Students compare them with listed shares.
Fix: Remember transfer is restricted to eligible persons under SEBI conditions.
Treating ODI and P-Note as two different things.
The two names appear separately in questions.
Fix: P-Notes are a type of ODI. ODI is the wider term.

Worked examples

Example 1

Which of the following best describes a participatory note?

A. A share certificate issued by an Indian company to a foreign investor
B. An instrument issued outside India by a registered FPI with Indian securities as underlying
C. A demat account opened by an NRI with a depository participant
D. A bond issued by SEBI to foreign investors

Show the solution

Recall that a P-Note is a type of ODI.
An ODI is issued outside India, by a registered FPI.
Its underlying is Indian securities held by the FPI.
Option A is wrong because the Indian company does not issue it.
Option C is wrong because a demat account is a direct holding.
Option D is wrong because SEBI does not issue such bonds.
Only option B matches the meaning.

Answer: B

Example 2

Which statement about ODIs is correct?

A. The ODI subscriber holds the underlying Indian securities in its own demat account
B. Any FPI category may issue ODIs without conditions
C. The issuer must carry out KYC on the subscriber and report ODI details to SEBI
D. ODIs may be transferred freely to any person

Show the solution

Test A: the FPI issuer holds the securities, not the subscriber. Wrong.
Test B: issuance is limited to eligible FPIs, and conditions apply. Wrong.
Test C: KYC on the subscriber and reporting to SEBI are issuer duties. Correct.
Test D: transfers are restricted to eligible persons. Wrong.

Answer: C

Exam tips

Expect statement-type MCQs. Compare each option with the four-word check before choosing.
Watch for the words 'any', 'freely' and 'anonymous'. They usually signal the wrong option.
Tie this topic to FPI categories. Questions often test who may issue.
With negative marking on NISM-Series-VI, skip only if you cannot remove at least one option.
Check the latest SEBI circular wording in your workbook for exact conditions before the exam.

Practice questions from Foreign Portfolio Investors (FPI)

Offshore Derivative Instruments and Participatory Notes: frequently asked questions

What are participatory notes?

Participatory notes are a type of offshore derivative instrument. A registered FPI issues them outside India with Indian securities as the underlying. The holder gets economic exposure but is not the registered investor in India.

What is the difference between an FPI and a participatory note?

An FPI is registered with SEBI and holds securities directly in a demat account in India. A P-Note is a contract issued by an FPI to an overseas investor. The note holder does not hold the securities directly.

Who can issue ODIs under SEBI rules?

Only eligible FPIs registered as Category I can issue ODIs, and they must follow SEBI conditions. These include KYC on subscribers and reporting to SEBI.

Can participatory notes be transferred?

Transfers are restricted. They are allowed only to eligible persons as the SEBI conditions prescribe. They are not freely tradable like listed shares.