There has been an outcry from sections of the capital markets on the Sebi move to restrict the flow of money through the participatory note route. Market experts are divided on the steps (including the timing of the move) suggested by the capital market regulator, which has given the participants as little as four days to send their feedback. It is likely that most of the recommendations will be approved by the Sebi board, which is meeting next Thursday.

Rajesh Abraham gives a snapshot of the arguments for and against various aspects of Sebi's move:

Timing
FOR:
The timing of the move was not right. The markets will crash.
AGAINST: Stocks have moved at a frenzied pace since the Fed rate cut last month. If this is not the right time to curb the 'anonymous money' flowing into the capital markets, then when? Anyway, most of the PN money is coming into stocks that are not in the blue-chip category. This means the source of the money is questionable and the investments are not driven by fundamentals.

Delays in FII registrations and high costs
FOR: There is a huge delay in registering FIIs.The costs are also high. Sebi has to speed up the process of registrations.
AGAINST: There are over 1,100 FIIs registered in the country and the number is getting bigger. Even if the costs are higher and registrations slow, there is nothing stopping these anonymous investors from buying and selling through any one of the 1,100-plus FIIs registered in India. Though the costs are higher by say 1-5 per cent, the investors are looking at a much higher rate of return from Indian stocks. If they still prefer to invest through their own brokerages, they can either wait for registrations or take positions through the existing FIIs and transfer their holdings to their 'favourite FIIs' once they get registrations.

Foreign money will dry up
FOR: Foreign portfolio money coming into the stock markets will dry up, or even fly to other destinations.
AGAINST: Investors, who are convinced about the India growth story and fundamentals of the economy, will continue to come in. They are not coming in because India is a safe haven and this was proved before the close of markets on Wednesday. After a 10 per cent lower circuit, the Sensex rose by over 1,400 points from the low of the day.

Tough disclosure norms for FIIs
FOR: The disclosure norms for being registered as FIIs are higher.
AGAINST: Not true. Sebi only insists that the applicant is regulated in his home country. If the regulations are stringent, why not? The know your client (KYC) norms are much tighter for the domestic retail investor. The retail investors have to sign on at least 70 documents, according to Motilal Oswal, chairman of Motilal Oswal Financial Services, a domestic brokerage. So, why should there be different standards for foreign and domestic investors?