It is defined under the SEBI Institutional Investors Regulations, as any instrument, by whatever name called, which is issued overseas by a FII against securities held by it that are listed or proposed to be listed on any recognized stock exchange in India, as its underlying.
Under SEBI Regulations, 1995, as amended by the SEBI (FII) Regulations, 2008, FIIs registered with SEBI may not issue or deal in derivative instruments viz. P-Notes directly or indirectly, unless
1. Such offshore derivative instruments are issued only to persons who are regulated by an appropriate foreign regulatory authority
2. Such offshore derivative instruments are issued after compliance with “Know Your Client” norms.