MUMBAI: India's stock market regulator tightened investment rules for unregistered foreigners as expected yesterday by clamping down on issuance of indirect investment notes to stem inflows of anonymous money.

Analysts thought in the long run the new rules would not deter foreign funds from the world's second fastest-growing economy after China, especially as the Securities and Exchange Board of India (Sebi) has pledged to speed up registration of foreign institutional investors (FIIs).

The new regulations restricting issuance of so-called participatory notes (P-notes) come into effect immediately.

Sebi says P-notes allow foreigners to make a backdoor entry into the market without registering with Indian authorities and it wants them to register to create transparency on inflows.

"We are saying that we are fast-tracking the system of registration," Sebi chairman M Damodaran said after its board approved the new regulations.

"What we are doing is to clean up the regulatory environment."

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.

The new rules follow the lines of a draft issued by Sebi .

Indian shares, which have been volatile since Sebi first made its plans public last week, ended up 1.4 per cent ahead of the announcement, with investors optimistic the rules would largely be as the regulator had already outlined.

Analysts thought shares would react positively but said there could be volatility as P-note positions were wound down.

"All the poison is out of the market now and it will give a thumbs-up sign tomorrow," said Suraj Saraogi, managing director, Key Note Capitals. India has battled a surge of foreign capital this year, which has pushed the rupee to its strongest against the dollar since 1998