The government's policy inaction in the earlier half of 2012 and a controversial proposal to tax foreign investors had an adverse impact on foreign institutional investors' (FIIs) registrations during the year.
Year-end data showed a lesser number of FIIs registered with the Securities and Exchange Board of India (Sebi) in 2012, which saw the second-highest yearly inflow ever, than the previous year. As many as 1,759 FIIs were registered with Sebi as of yesterday, as against 1,767 on the same day in 2011 and 1,718 in 2010.
This is the first time FII registrations have declined over a year since the securities market regulator started disclosing this detail a decade earlier. FIIs poured $23 billion (Rs 1.26 lakh crore) into the country in 2012.
Though the decline is moderate in absolute terms, consultants and market players said the lower registrations showed the government had been only partly successful in showcasing pro-business measures to potential investors. "This decline has not come as a surprise," said Gautam Mehra, executive director-tax and regulatory services, PricewaterhouseCoopers. "The indirect transfers and GAAR (General Anti-Avoidance Rules) developments at the start of the fiscal may have contributed to the absence of any increase in FII registrations."
Growth in gross domestic product (GDP) fell to 5.3 per cent in July-September from the same period a year before. The growth was almost eight per cent in the same period a couple of years earlier.
The GAAR, a tax proposal announced in the 2012-13 Budget, was introduced to check evasion in the case of investments through Mauritius.
Investors feared this would have given unbridled powers to the tax department on collection. The plan to tax indirect transfer of Indian assets abroad also worried investors, who felt this proposal had scope for wide interpretation.
They were relieved following the deferral of these controversial norms in September, after P Chidambaram took charge of the finance ministry from Pranab Mukherjee, under whom these rules were proposed. This, coupled with the government's moves to open the country's multi-brand retailing sector to foreign supermarket giants and the increase in diesel prices in September, triggered a fresh rush of money into Indian equities.
But the policy steps did little on FII registration. The number declined from a record 1,781 in February to 1,754 on August 30; it failed to show any major increase in the subsequent months.
Sub-account registrations, however, saw an increase in 2012 to 6,358 from 6,278 in the previous year.
A consultant to FIIs said foreign funds register to open sub-accounts because they are cheaper and ensure they have an investment route open in case they start a fund. He said many sub-accounts were dormant.