The Securities and Exchange Board of India's (SEBI) decision to curb investments in Indian stocks through participatory notes (P-notes) by foreign investors will go a long way in making our capital markets more transparent and safer for investments. SEBI's decision to rein in unregulated foreign investments, which is in line with its draft guidelines announced last week, is a bold act because investment through P-notes derivatives account for nearly 80 per cent of total turnover in BSE and NSE. Stopping P-notes – FIIs will get 18 months time to unwind the investments through this mechanism – is likely to improve the health of the stock markets and is unlikely to dampen the flow of foreign investments in the long run. The suspicion that a bulk of the investments through P-notes was coming from funds which help money laundering, justifies SEBI's act. Stoppage of “rogue capital”which invests only with the objective of short term speculation, will make markets less volatile and help build investors' confidence.

Surely, SEBI is trying to create a better investment environment to make the Indian capital market wider and deeper with a larger investor base. A vibrant capital market is always supportive of a growing economy like ours where there is a large need for capital for supporting investments. The regulator has also allowed large investment entities like pension funds, foundations, college endowments etc to register as FIIs. As and when they come, they will park money for long term, mainly based on fundamentals. Since SEBI now wants only regulated foreign entities to invest in India, it will have to make sure the regulations for registration are simplified and the process is made faster.

Even if flow of foreign capital slows down in the short term, we need not worry much. Given the robust economic growth, low inflation rate, large foreign exchange reserve and appreciating rupee, India will remain a preferred destination for long term global capital. Another noteworthy feature of the fast growing Indian economy is the significant increase in domestic saving and investment rates to around 33 per cent. This in turn will make available large domestic capital for investments if the capital market remains healthy and less volatile. The success of a large number of initial public offers (IPOs) by companies is a proof of appetite for good investment opportunities. Retail and institutional investors love a stable and transparent atmosphere for investment and that is what SEBI is trying to create.