The decision of the SEBI to relax the restrictions on the issuance of Participatory Notes (PNs) by the FIIs announced yesterday is a retrograde and illogical move. The Reserve Bank of India has been advocating a ban on these non-transparent derivative instruments used by the FIIs to invest money in the Indian capital market on behalf of undisclosed entities and individuals. The SEBI, while refusing to prohibit PNs, had applied a 40% cap on total assets held by FIIs under PNs in October 2007. With the stock market witnessing yet another crash yesterday due to the pull out of funds by the FIIs, the SEBI has summarily removed all its earlier restrictions in one stroke in order to woo the FIIs back. Such an intervention by the SEBI to favour of a set of players, who are holding the market to ransom, is grossly violative of the role of a market regulator.

    SEBI's efforts to appease the FIIs reflect a desperate attempt to shore up the Indian stock market in the backdrop of a global financial meltdown. The RBI has also cut the CRR to ease the credit flow to the capital market. The Indian policy establishment seems to have drawn the worst lessons from the financial crisis in the US. While Governments and policymakers everywhere are discussing ways and means to tighten regulation of financial markets following the crisis, the Indian policymakers seem to be moving in an entirely opposite direction.

     The UPA Government is warned against these steps, which will make the financial system more vulnerable to the dictates of speculative finance and import the financial crisis into India. We also demand that these steps be put on hold and measures to tighten regulation in the Indian financial markets be initiated immediately.