SEBI said foreign institutional investors (FIIs) and their sub-accounts cannot issue fresh P-Notes and will have to wind up their current position in 18 months.

In spot market, FIIs will not be allowed to issue P-Notes for more than 40 per cent of their assets under custody. SEBI also set the reference date for calculating such assets at 30 September.

SEBI chairman M Damodaran announced the decision after a meeting of the board. The new rules would come into effect from the close of trading hours today.

Those FIIs that have issued P-Notes of more than 40 per cent of their assets, could issue such instruments only if they cancel, redeem, or close their existing P-Notes. Those FIIs who have issued P-Notes less for than 40 per cent of their assets under custody (AuC) can issue additional instruments at the rate of five per cent of their assets.

P-Notes are issued by FIIs registered in India to unregistered overseas investors. Registered FIIs buy Indian securities and issue the notes based on the underlying asset.

These instruments give foreign investors a backdoor entry into the market without registering with the authorities and SEBI wants them to register so as to have transparency on inflows.

The government also wants to moderate the flow of foreign funds into the country and avoid a stock market bubble.

India, the world''s fastest-growing major economy after China, saw a surge of foreign capital this year, which has pushed the rupee to its strongest against the dollar since 1998 and helped power the stock market to a series of record highs.

Shares, which have been volatile since SEBI first made its plans public last week, ended up 1.4 per cent ahead of the expected announcement.

Meanwhile, the Reserve Bank of India had sent a note to the finance ministry seeking a complete ban on P-Notes or at least restrictions on their use for investments in real estate and financial services. RBI deputy governor V. Leeladhar is a member of SEBI''s board.

Net foreign portfolio investments in the country so far this year rose to more than $16.5 billion, against the full-year inflow of $10.7 billion in 2005. More than $8 billion of foreign funds flowed in the weeks after the United States cut interest rates in mid-September.