There has been a lot of concern of late over foreign portfolio investors (FPIs) selling their holdings in Indian equity markets due to demands for minimum alternate tax slapped on them.

But these fears appear overdone when we consider the activity of foreign investors not just on the Indian exchanges but through other routes such as participatory notes and trading in Nifty futures on the Singapore Stock Exchange.

FPIs have net purchased shares worth $1.8 billion in April, the month where the tax demand issue came to a boil. These numbers were bolstered by the $2.6-billion deal in the shares of Sun Pharma on April 22. But even if this number is excluded, the net sale was less than $1 billion last month.

Strong flows in Q1

Foreign portfolio flows in the first quarter of this calendar have been among the strongest in recent times. FPIs purchased stocks worth $5.9 billion between January and March, 62 per cent higher than the inflow recorded in the corresponding period of 2014.

Besides FPIs registered with SEBI who invest directly in India, other foreign investors (not registered in India) have also shown higher interest in Indian stocks in the first quarter of 2015. This is reflected in the increased activity in the Nifty futures traded on the Singapore Stock Exchange.

Between January and March 2015, 5.7 million contracts of the Nifty futures were traded on this exchange. This is 38 per cent higher than the 4.1 million contracts traded in the first quarter of 2014. These contracts can be freely traded by any overseas investor, including hedge funds.

Another indication that foreign investors are using multiple routes to take position in Indian stocks is reflected in the increased activity in participatory notes (p-notes).

P-note issuance has been at a seven-year high since this January; consistently staying above ₹2,72,000 crore in the first three months of this year. These are derivative contracts issued by FPIs to overseas investors not registered with SEBI. More than three-fourth of the p-notes have stocks as their underlying and such contracts were up 43 per cent in March 2015 compared to a year ago.

Higher growth

So why are foreign investors making a beeline for Indian equity despite faltering corporate earnings and the government’s patchy record so far on the reforms front? One reason could be the superior growth prospects of the Indian economy. The sharp decline in commodity prices, especially crude oil, in the last six months has roiled the near-term prospects of many emerging economies.

With China slowing and US growth extremely weak in the first quarter of 2015, India’s growth number of 7.5 per cent for FY-16, appears more investment-worthy.

Increased activity in p-notes need not be decried since this money is ultimately flowing into the Indian stock market. Why are FPIs shifting their trading base outside India?

The fear of General Anti Avoidance Rules, whose implementation has now been postponed by two years, could be one reason. P-notes would be preferred by some FPIs since they are outside the ambit of GAAR. The stricter KYC checks on foreign individuals and overseas corporate bodies under the new FPI regime are another irritant that some foreign investors might wish to avoid.

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