Heavy FII inflows since January hint at round-tripping

http://economictimes.indiatimes.com/news/economy/finance/heavy-fii-inflows-since-january-hint-at-round-tripping/articleshow/16344327.cms

 Few on the Dalal Street have bothered to question the quality of foreign flows into Indian stocks in the last few months. The reasons could be lack of evidence or reluctance to become the party-pooper. 

But, as Indian stocks attract fresh flows in 2012 - the highest among Asian peers - despite the economic slowdown and threat of a sovereign ratings downgrade, a section of the market is raising questions about the source of the rush of overseas money into the nation's equity market this year. 

Sebi data shows Indian stocks attracted foreign institutional flows worth about $12 billion since January. While Sebi foreign inflow data does not give investor category details, brokers catering to foreign institutions said a bulk of this money has come from exchange-traded funds (ETFs) and India-dedicated funds on hopes the government will revive the investment climate in the country. 

But, data from EPFR, a global fund flow tracker, shows foreign funds have invested about $1.1 billion so far this year. EPFR, which tracks $17 trillion in total assets across global funds, calculates investments by global funds, Asia funds, emerging market funds, exchange-traded funds and foreign mutual funds, according to its website. Sebi's foreign institutional investor (FII) data includes investments other than institutional money. 

"There are two major challenges here: data accuracy, with questions about Sebi's methodology, and the heterogeneous nature of FII flows which frankly includes round-tripping of money through Mauritius and return of black money through the FII route in response to perceptions about the rupee value," said Nick Paulson-Ellis, country head of Portugese broking firm Espirito Santo, which released a report titled "Where is the money coming from" on Monday. 

Round-tripping involves routing of resident Indians' illicit money back into the country, mostly through tax-friendly nations like Mauritius, to avoid taxes. The previous finance minister Pranab Mukherjee had introduced the controversial General Anti-Avoidance Rule (GAAR) mainly to prevent structures in Mauritius aimed at avoiding taxes. 

But, the committee led by tax expert and economist Parthasarathi Shome has recommended deferring GAAR and doing away with many of the tax proposals in the original document. Out of the $12 billion that flowed into Indian stocks so far this year, it is difficult to account for $5-6 billion of the money, said Sanjeev Prasad, senior executive director and co-head, institutional equities, Kotak Securities.