The 1,940-point decline in the Sensex on Friday may have rattled nerves and revived concerns about large FPI (Foreign Portfolio Investors) outflows, but data reveal that investors need not worry too much on that account. An analysis of category-wise FPI inflow data show that the quality of inflows has improved over the past year with more funds coming from transparent and stable FPIs.

Equity assets of Category-I FPIs, which includes central banks, sovereign wealth funds and multi-lateral agencies, have increased 84 per cent to ₹35.16-lakh crore as of January 2021 from ₹19.13-lakh crore as of end-March 2020.


Category-II FPIs

In contrast, growth in equity asset under custody of Category-II FPIs fell nearly 3 per cent to ₹1.99-lakh crore from ₹2.05-lakh crore during the same period. Category-II FPIs include appropriately regulated funds not eligible as Category-I FPIs, endowment funds, charitable organisations, family offices and high networth individuals from high-risk jurisdictions or tax havens. This category has to undergo more stringent KYC compliance and are under greater scrutiny.

The increase in assets of Category-I FPIs and reduction in the assets of Category-II FPIs means the fund flow is from more stable sources now. “It can only mean that now we have better transparency about the final ownership,” said Deepak Jasani, Head of Retail Research at HDFC Securities.

While FPIs in both categories have pulled money out of debt, it has been higher by Category-II FPIs at 48 per cent.

Over the years, the government and SEBI have brought in several measures to curb tax evasion and round-tripping of funds through safe havens such as implementation of General Anti-Avoidance Rule (GAAR) in April 2017 and OECD’s base erosion and profit shifting (BEPS) recommendations to improve the quality of overseas fund flow into India.

Within Category-I, assets of long-term FPIs such as central banks, sovereign wealth funds and pension funds have all grown 70-88 per cent. Appropriately regulated funds, which have the highest asset size under Category-I, saw their assets grow 82 per cent to ₹19.12-lakh crore (₹10.49-lakh crore) between March 2020 and January 2021.

“Typically, the investment horizon of Sovereign Wealth and Pension Funds ranges 5-20 years because the liability profile of the pension fund, for instance, starts only after the person retires or becomes due so they can afford to be patient investors unlike hedge funds and mutual funds or even proprietary traders,” said independent analyst Ajay Bodke.

Two investment categories

He also added that these long-term investors look at two categories for investing: Stability and secular growth stories (like consumer staple) and growth (like emerging technologies) that can become multi-baggers in the long run.

Under Category-II, assets of ‘Appropriately regulated funds not eligible as Category-I FPI’ fell by 30 per cent to ₹93,660 crore (₹1.34-lakh crore) in the last 10 months. This category includes mutual funds, hedge funds among others.

Similarly, assets of ‘Corporate Body’ under Category II FPIs have dropped 34 per cent to ₹8,330 crore (₹12,689 crore) while assets of unregulated funds from partnership and Trust have increased 67 per cent to ₹43,378 crore.