According to latest figures, the share of participatory notes (PNs) in the total foreign institutional investors (FIIs) in the country fell to 7.9 per cent, which is its lowest level in seven years since the government started releasing the data.

Capital market regulator, Securities and Exchange Board of India (Sebi) released the figures that indicate that the government clarification that it would not tax PN holders did not help in boosting investor confidence. India's union finance minister Pranab Mukherjee had earlier said that the investors holding participatory notes, or P-notes would not have any tax liability in the country.

He pointed out that the tax authorities in the country would determine the tax that the financial institutional investors (FIIs) are liable to pay in the country. They will not find out any additional information about the holders of participatory notes. Thus there will be no tax liability for such holders under the Indian laws. Foreign portfolio investors that are registered with the Indian market regulator issue p-notes. They can also be issued by their sub-accounts for foreign investors, who often invest in the scheme anonymously.

Mukherjee has proposed the GAAR as part of the union budget presented on March 16 for the year starting on April 1, 2012. The GAAR is aimed at avoid the aggressive tax avoidance schemes that exploit the liberal tax laws in investments between countries like India and Mauritius. The implementation of GARR has now been deferred after investors expressed serious concerns.

The experts had warned that the introducing taxation for Participatory notes would shut down the avenue for investments to flow into the country.