SEBI has proposed limiting the use of participatory notes (PN), which could be bought by anonymous foreigners from registered foreign institutional investors, SEBI chairman M. Damodaran said.

He said SEBI did not want to ban foreign funds coming into the country, but wanted investors to take a direct and transparent route through registration. He said an 18-month grace period proposed by SEBI was sufficient for investors to get registered.

Finance minister P Chidambaram also endorsed the market regulator''s proposals, and said the proposed measures, with possible modifications, would become regulations on October 25.

He said the government was not in favour of banning participatory notes (PN) and the SEBI proposal was not for a ban.

"We have simply placed a cap on the proportion of money coming through PN notes vis-a-vis the total assets under management and the total derivative position," he said. "If some investor wishes to register in India as an FII (foreign institutional investor) and invest, he is most welcome," he added.

Chidambaram said many large foreign funds were still buying shares, although the main stock market index plunged following the SEBI move.

While the SEBI proposals issued yesterday said FIIs should immediately stop issuing or renewing PNs on underlying derivatives, the regulator today clarified that participatory notes issued with underlying derivatives could be renewed but the positions should be closed in 18 months.

"It is made clear that there is no proposed bar on ''overseas derivatives instruments'' contracts, expiring this month or in the following months, being renewed provided the renewal does not go beyond 18 months," the SEBI statement said.

Damodaran said a disproportionate amount of participatory notes were being issued by a limited number of people.

"A significant portion of that has Indian derivatives as the underlying, and we find that lot of leveraging has taken place on that," he said.

"Clearly there are times in life of markets when you look at what happens, what systemic corrections are needed, and we believe this was a systematic correction that was waiting to happen and this was a good time to do that."

He asked investors not to get carried away by rumours and said the proposals on offshore derivative instruments (ODIs) were a well-designed package.

"Investors should see what period they are investing and remain within their set horizon... not be swayed by rumours", he said reacting to the market crash within minutes of the opening of the market.

The proposals, part of a discussion paper seeking comments from the public by October 20, triggered a more than 1,700-point crash in the market, prompting suspension of trade for an hour.

However, the losses were made up by more than half shortly after trading resumed.

Even as the stock market dived, the US Dollar made a sharp recovery ending dearer against the rupee at Rs39.5450 / 5500 per dollar. The pound sterling also finished higher at Rs80.49/51 per pound at the close trading on the interbank foreign exchange market.