Investments in domestic capital markets through participatory notes (P-Notes) have plunged to a 41-month low of Rs 1.57 lakh crore in December.

Market experts believe that the trend is likely to continue as SEBI may further tighten the regulations governing P-Notes amid persisting concerns that this route is being used for illicit fund flows.

P-Notes are issued by registered foreign portfolio investors (FPIs) to overseas investors who wish to participate in Indian markets without registering themselves directly. But they still need to go through a proper due diligence process.

According to SEBI data, the total value of P-Note investments in Indian markets — equity, debt and derivatives — plunged to Rs 1,57,306 crore at December-end from Rs 1,79,648 crore at the end of November.

This was the lowest level since July 2013 when the cumulative value of such investments stood at Rs 1,48,188 crore.

Investment through the route has been falling since September last year, when it was at Rs 2,12,509 crore. It fell to Rs 1,99,987 crore at October-end and further in November.

Of the total, P-Note holdings in equities were at Rs 1.01 lakh crore at December-end and the remaining holdings were in debt and derivatives markets.

The quantum of FPI investments via P-Notes decreased to 6.7 per cent in December from 7.5 per cent in the preceding month.

Last week, a senior SEBI official had said the regulator is looking at further tightening the norms for P-Notes to address the concerns raised by the Special Investigation Team (SIT) on black money.

SIT is constantly monitoring P-Notes data and is not very comfortable with the current process of issue and administration of such instruments, the official said.

Last year, the markets regulator had put in place a stricter Know Your Client (KYC) and disclosure regime for P-Notes. The move was to ensure that it becomes tougher to use these offshore instruments without disclosing the money-trail and details of their users.

These changes were ushered in after taking into account the suggestions made by SIT to ensure that the P-Notes route is not used for money laundering.

The share of P-Notes has been falling over the years as SEBI has tightened the disclosure norms and other related regulations.

It used to be much higher at 25-40 per cent in 2008, while the reading was as high as 55 per cent at the peak of the stock market bull run in 2007.

In absolute terms, the value of P-Notes investment rose to a record Rs 4.5 lakh crore in October 2007, but dropped to Rs 3.22 lakh crore in February 2008 and Rs 60,948 crore in February 2009.