The move by the securities market regulator Securities and Exchange Board of India (Sebi) to moderate capital flows by the foreign institutional investors (FIIs) has begun to show results. The Sebi move to ban FIIs investment in the derivatives segment through participatory notes (PNs) has resulted in average daily turnover in this segment gradually coming down since October 2007.

According to the figures released by National Stock Exchange (NSE), the total average turnover value has dipped from Rs 83,348 crore in October, 2007 to Rs 53,6,32 crore in January, 2008. This has further come down sharply to Rs 10,705 crore in february and to Rs 9,997 crore in March till date.

Sebi has enforced a ban on the foreign fund flow in the derivatives market on October 25. The regulator has taken this decision following the criticism from a section of the market the high volatility in the market is due to FIIs participation in the derivatives market.

This decision of the regulator has witnessed a reduction in the average trading value in the derivative segment on month on month basis. The average value has come down from Rs 8,33,48 crore in October to Rs 6,70,64 crore in November and Rs 6,32,12 crore in December.

The value has further come down to Rs 5,36,32 crore in January this year.

Sebi also proposed a measure to reduce FII exposure in the derivatives market by suggesting that they and their sub-accounts not be allowed to issue or renew ODIs with underlying derivatives with immediate effect. Sebi has proposed giving 18 months to FIIs to wind up their current positions, during which it will review the situation. Sebi has also said that FIIs currently issuing ODIs with a notional value of PNs outstanding (excluding derivatives) as a percentage of their Assets Under Custody (AUC) in India of less than 40% would be allowed to issue further ODIs only at an incremental rate of 5% of their AUC in India.

Sebi said the rise in ODIs, the comfort it gave issuers and the copious inflows by foreign investors had engaged the government?s attention as well as that of regulators like Sebi and RBI.