The allegations made by All India Anna Dravida Munnetra Kazhagam General Secretary Jayalalithaa that investments through participatory notes is largely responsible for the sudden and unexplained fluctuations in the stock market indices are totally baseless, said a finance ministry statement.

Jayalalithaa had accused Finance Minister P Chidambaram of having a vested interest in jeopardising India's security and sponsoring economic terrorism in India, who was turning a blind eye towards the inflow of terror funds through participatory notes.

She also said that 'dirty' money was finding its way into the country through PNs while demanding invoking of provisions of the Benami Transactions (Prohibition) Act to find out the genuineness of these p-notes.

The statement, approved by Finance Minister P Chidambaram, said, "The allegations made by Ms Jayalalithaa, General Secretary of the AIADMK, are totally baseless besides betraying a complete lack of understanding of the FII regime that is in force."

"The statement of the General Secretary of the AIADMK appears to have been made not after gathering information or a careful study of the subject but purely out of a malicious design to spread misinformation," Chidambaram said.

Pointing out that the foreign institutional investors were allowed to invest through P-notes under the supervision of market regulator Sebi, the ministry statement said, "FIIs are required to report at the end of every month, in a prescribed format, all information relating to PNs issued by them including the names of subscribers to the said PNs."

Finance ministry said FIIs are also required to give an undertaking that they or their associates have not issued, subscribed or purchased any PNs to/from Indian residents or NRIs or PIOs or OCBs during the reporting period.

It also pointed out that PNs are market instruments that are created and traded overseas. Hence, the government cannot ban or control the issue of PNs. They can only be regulated, and they are indeed being regulated by Sebi.

When a PN is traded on an overseas exchange, the regulator in that jurisdiction would be the authority to regulate that trade.

Referring to Sebi guidelines issued by the Sebi on PNs last year, the ministry said on the issue of terrorist funds finding their way into the stock markets, the matter has been clarified in the Parliament.

Information available with the government and the regulators does not indicate any surreptitious entry of terrorist outfits into the stock market. Besides, there are adequate provisions in the laws such as Fema and PMLA to deal with unauthorised or suspicious transactions involving currency or foreign exchange, it added.

Jayalalithaa had also said after the United Progressive Alliance came to power, Mauritius has emerged as the largest foreign investor in India, resulting in annual losses of about Rs 4,000 crore (Rs 40 billion).