October 18, 2007 (LPAC) - India's Securities and Exchange Board (SEBI) is taking measures to regulate the "offshore derivative instruments" (ODIs) used by hedge funds and other hot money operations to get into the Mumbai stock exchange. When the SEBI announced yesterday that these ODIs (known as "Participatory Notes") would be curbed beginning Oct. 25, the Bombay exchange plunged by 9.2%, wiping off $100 billion worth from Indian stocks. The exchange was closed down in the middle of the day, until Finance Minister Palaniappan Chidambaram put out a statement that "We have not banned P-notes. We have simply placed a cap on the proportion of money coming through these [notes]," after which the market rose again.

Foreign investors, of which at least half are hedge funds, use the "Participatory Notes" to invest, but avoid registration with the SEBI. The London Times today quoted an Indian fund manager saying that "the kind of money flows we've seen in the last couple of months has got regulators and the Government worried." Foreign investors have put $17 billion into Indian stocks so far this year, $4.6 billion just this last month, compared with a full-year record of $10.7 billion in 2005. The SEBI said foreign institutional investors should stop issuing or renewing participatory notes on underlying derivatives and extinguish existing participatory notes within 18 months.

Today, New Delhi's The Hindu's lead editorial endorsed the restrictions on P-Notes, saying that the Reserve Bank of India has "for long argued that the anonymity that this route provides goes against transparency and makes the task of monitoring capital inflows onerous."