Stock Exchange Watchdog SEBI has proposed that some urgent measures need to be taken to curb the use of some categories of derivates instruments by FIIs. SEBI may ban the use of Participatory notes which are issued using stock futures or options. Finance minister recently expressed his concerns regarding over-stretched Indian Stock Markets. Indian Stock markets are trading at all-time highs. The SEBI move to ban P-notes may have negative impact on Stock Markets.
As per SEBI records, 34 FIIs issue Participatory notes. In August 2007, the value of Participatory notes was nearly 51% of total assets under FIIs in India. As SEBI allowed P-Notes, the exposure of FIIs in P-Notes increased of 20% in March, 2004 to 51% during August, 2007.
As reported earlier that the move of Stock Market Watchdog SEBI to curb stock market rise by hot-money invested by some FIIs, the stock markets have reacted very badly to the news. SEBI proposed a ban on P-Notes after the recent rally in stock markets. FIIs investments through P-Notes accounts for nearly 51% of their total investment as per the August 2007 records. The Stock markets opened with a huge gap and immediately went down to touch the lowest level of 5107 for NSE Nifty. 
The capital markets regulator, Securities and Exchan
