Markets regulator SEBI today tightened P-Note norms by levying a fee of $1,000 on each instrument and barred their issuance for speculative purposes to check any misuse for channelising black money.

At the same time, SEBI decided to relax the entry norms for foreign portfolio investors willing to invest directly in Indian markets rather than through participatory notes.

However, the regulator is not looking to completely ban these instruments as some new investors tend to use them to test the Indian markets, SEBI Chairman Ajay Tyagi told reporters after its board meeting here today.

The new measures, which follow a slew of other steps taken by the regulator in the recent past, come at a time when the value of foreign investments through participatory notes or offshore derivative instruments (ODIs) has already fallen to a four-month low of about Rs 1.68 lakh crore in April—end.

While such investments used to account for more than half of overall foreign portfolio investments at one point of time, their share has now fallen to just 6 per cent. Still, concerns remain that P-Notes are misused by some to channelise black money from abroad into the country through the stock markets.

Tyagi said the board has approved a proposal to tighten the rules for participatory notes through imposition of a regulatory fee on issuers of such instruments.

He, however, added there is no proposal to completely ban these instruments as they can be useful for new foreign investors looking to test the Indian markets.

“SEBI would want foreign investors to come directly but P-notes also have their usefulness,” Tyagi told reporters.

The regulator has decided to levy a “regulatory fee” of $1,000 on each ODI subscriber, to be collected and deposited by the issuing FPI once every three years, starting from April 1, 2017.

“SEBI shall amend SEBI (FPI) Regulations, 2014 to implement the decision taken by the board,” the regulator said.

Also, the board has decided to prohibit ODIs from being issued against derivatives, except those which are used for hedging purposes. The regulator would issue a circular in this regard.

The regulator said quite a few ODI subscribers invest through multiple issuers and the proposed fee will discourage them from taking this route and encourage them to directly take registration as an FPI.

Presently, ODIs are issued against derivatives along with equity and debt. As of April 2017, the ODIs issued against derivatives had a notional value of Rs 40,165 crore, which is 24 per cent of the total notional value of outstanding ODIs.

P—Notes are issued by registered foreign portfolio investors (FPIs) to overseas investors who wish to be a part of the Indian stock markets without registering themselves directly. They, however, need to go through a proper due diligence process.

In April, the board of Sebi had tightened the norms by barring resident Indians, NRIs and entities owned by them from making investment through P—Notes.

The decision was part of efforts to strengthen the regulatory framework for P-Notes, which have been long seen as being possibly misused for routing of black money from abroad.

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