Almost half of the foreign portfolio investments this year has been through participatory notes. Chunk of such investments has come from hedge funds which are using this method of investing in Indian equities rather than wait for long-drawn regulatory registrations.

Officials at the Securities and Exchange Board of India said that they were not yet worried by the large amount of money which is flowing in through PNs but "if a lot of smaller hedge funds are involved, which are in the momentum play, then we need to exercise some caution."

Meanwhile, registered foreign institutional investors are racing towards the $10 billion in investments mark in the Indian markets as they frenziedly churn their portfolios to remain invested in India as well as book profits for their investors by selling to newly registered foreign investors.

According to figures released by the Sebi, as on December 10, 2004, FIIs have pumped in a total $8.36 billion into the Indian markets, including both debt and equity. During the current month alone, in a matter of just eight trading sessions, FIIs have put in a combined $1.4 billion in Indian equity and debt.

Sebi officials did not respond to a Business Standard questionnaire, but unofficially sources said the regulator was still analysing the data (of inflows) and preliminary analysis had shown that nearly half of the money had come in through participatory notes, credit notes and other such derivative instruments.

Industry circles said this year had witnessed the maximum number of hedge fund registering as foreign institutional investors with Sebi. Current Sebi regulations do not allow hedge funds to register in the country.

"But there are others who are impatient to wait till such time as they get registration, and have therefore, put in money through derivative instruments."

Srinivasan Varadarajan, managing director and head of markets, J P Morgan Chase Bank in India said FIIs are buying across the board.

"It is widespread," he said, pointing out that they were focusing on the large caps and the slightly larger mid-cap stocks. The larger FIIs reportedly have an allocation of 15 per cent out of their total portfolio for investment in mid-caps.

The sectors, which are attracting foreign investors are steel, cement and shipping, while infrastructure has recently caught their fancy. The smaller FIIs are in fact totally focussing on mid-cap stocks, which have also seen a significant rally.