FIIs invest $9 bn in 3 mths to Mar

This is the highest investment for first three months of a calendar year in more than a decade

Foreign institutional investors (FIIs) have pumped in a little over $9 billion in Indian equities in the first quarter of calendar year 2012. That?s the highest investment for the first three months of a year in more than a decade by this class of investors, who happen to be one of the largest drivers of the Indian equity market.

In January, the inflows were of $2.18 billion, while in February they rose to $5.13 billion. The spike in inflows was largely due to the surge of global liquidity after the European Central Bank flooded the banking system with more than euro 1 trillion of cheap three-year loans to mitigate the euro area debt crisis.

March saw the FIIs pare their net purchases to about $1.8 billion as a disappointing Union Budget and the confusion over the implementation of General Anti-Avoidance Rule (GAAR) spooked investors. Interestingly, FII were net sellers for just seven out of the 61 trading sessions in the first quarter, with the highest net sales of $111 million effected on February 27.

The benchmark BSE Sensex surged about 13% during the quarter, largely on the back of these robust inflows. In calendar year 2011, Sensex had shed more than 24% as FIIs offloaded shares worth about $0.5 billion. In contrast, FIIs had gone on a buying spree in the calendar year 2010, purchasing stocks worth about $29 billion.

According to recent EPFR data, Global-tracked Emerging Markets Equity Funds? overall inflows for the first quarter marked the best start to a year since these funds took in $30.1 billion during the first quarter of 2006. Emerging markets themes regained some ground after a tough 2011 with Frontier and BRIC (Brazil, Russia, India and China) Equity Funds posting inflows.

In the beginning of last year, the escalating crisis in Greece had prompted risk-averse FIIs to flee to developed markets such as the US. That trend seems to have reversed. According to the EPFR data, All Emerging Market Equity Funds posted inflows of $25,596 million in the first quarter of this year, compared with outflows of $23,726 million in the same period last year. In contrast, All Developed Market Equity Funds saw outflows of $10,766 million in the first quarter this year, compared with inflows of $49,313 million in the same period last year.

Typically, FII inflows are higher in the second half of the year. This trend could continue this year as well, if the US Fed decides to inject more liquidity into the system, according to market participants. However, headwinds such as high global crude oil prices and further fiscal slippages could spoil the party.

Moreover, despite the clarification by the finance minister last week that P-notes would not be taxed, the cloud over GAAR and the manner in which FIIs would be taxed hasn?t gone away. ?Many FIIs, whether P-Note issuers or otherwise, still suffer from huge uncertainties about their Indian tax status. This is because more than 50% of FII investments come through Mauritius and GAAR gives the taxman the discretion to tax these investments if he feels that the investment is routed through a Mauritius structure that has no substance and exists only to avoid paying Indian Income Tax,? said UR Bhat, MD, Dalton Capital Advisors (India).

He added that investments routed through Mauritius made up more than half of the FII investments in India whereas the P-note holders accounted for just about a tenth of their investments.