Sticking to its original proposal to slap curbs on participatory notes (PNs or P-Notes), the Securities and Exchange Board of India (Sebi) today approved new rules for investment by foreign investors that will force them to come through “the front door” and reduce the flow of unregulated funds into the stock markets. The Sebi board asked foreign investors to wind up P-Notes in the derivative segment within 18 months and put restrictions on the use of PNs — issued to foreign investors who are not registered with the Sebi — in the cash market.

“The proposal that foreign institutional investors and their sub-accounts should not issue P-notes with underlying as derivatives has been approved by the board. The related decision that the current position would be wound up over 18 months has also been approved by the board,” Sebi chairman M Damodaran said after a board meeting here.

“The board also decided that further issues of P-notes by the sub-accounts would be discontinued with immediate effect, and they would be required to wind up their current position over 18 months. During this period, SEBI would review the position from time to time as has been indicated in our draft proposal,” he said.

On the other hand, the regulator has also decided that FIIs will not be allowed to issue P-Notes more than 40 per cent of their assets under custody. The reference date for calculating such assets will be September 30, SEBI said. The provision will come into immediate effect.

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