At a time when the UPA government is making efforts to allay fears of Foreign Institutional Investors over participatory notes, its key left ally, CPI (M) on Friday demanded a complete ban on these instruments.
"The CPI(M) is of the firm opinion that PNs should be prohibited, as has been recommended by the RBI," a statement issued by the CPI (M) Politburo said, coinciding with the market meltdown on the SEBI's proposals to curb such offshore derivatives.
The CPI (M) said massive pull-out of funds which induced a huge fall in the market reflected defiance of regulatory institutions by the FIIs.
Asking the government to move towards insulating the financial system from speculative capital inflows, the party said financial markets globally are already witnessing turmoil following the sub-prime mortgage crisis in the US.
"Financial entities that are unwilling to meet the disclosure norms should not be allowed to participate in the Indian capital markets," the politburo said in its statement.
The government should realise that the surge in FII inflows, encouraged by rupee appreciation and interest rate hikes can eventually have serious implications, it said.
As per the SEBI proposals, derivatives-based PNs should be wound up within 18 months. It has also proposed to lay curbs on derivatives based on assets under management of FIIs.
On Thursday, Finance Minister P Chidambaram had explained to FIIs at length that the government did not propose a complete ban on PNs.
The politburo called the SEBI's discussion paper as reflective of tentative attitude of the government in regulating financial entities.
The apex bank has for long voicing its apprehensions over PNs. Its Tarapore Committee last year had recommended phasing out of PNs.
"The recommendations of the Tarapore Committee of phasing out PNs altogether has not been accepted," the politburo said asking the government to accept the suggestions.