A few months ago there were reports from a foreign fund which subtly doubted on the quality of inflows from foreign institutional investors. Some have hinted that the inflows from foreign funds may actually be Indian black money finding its way into the Indian market, through foreign funds operating out of tax havens like Mauritius.
The term often used for illicit black money finding its way into the markets is called "round-tripping" usually done through tax friendly nations like Mauritius.
In a report titled titled "Where is the money coming from" Portuguese Broking firm Espirito Santo questioned the quality of inflows from FIIs into the Indian markets. The report led many to start thinking on whether the fund flows into the Indian markets were indeed genuine or was it blackmoney stashed abroad finding its way into the Indian market, through FIIs.
Now, according to a PTI report the capital market watchdog Sebi is looking into the possible use of Protected Cell Companies (PCCs) from places such as Mauritius, Cayman Islands and Seychelles for use of round-tripping of Indians' money back into the capital market here in the form of overseas funds.
In 2010, Sebi had barred PCCs to invest in Indian markets through FII (Foreign Institutional Investor) route after it came across instances where certain Indians had used these entities to route their money back into markets as FII funds.
However, the market regulator now fears that funds structured as PCCs, which are legal entities in places like Mauritius, might be looking at a re-entry into Indian markets through routes like Foreign Venture Capital Funds and other avenues for the purpose of round-tripping of funds, the PTI report has stated.
There is every reason to believe that the possibility of "round tripping" could be genuine. For one, almost every top broking firm has downgraded Indian GDP and have generally been appalled by the government's performance over the last few years. Despite this, there have been staggering investments made and in fact, in September we have already received Rs 9,000 crores net inflows into Indian equities from foreign funds. In fact, on Tuesday alone net investment from FIIs was a staggering Rs 5000 crores. If FIIs are downgrading Indian GDP, why are they investing? Reports of Indian black money stashed abroad finding its way into Indian markets cannot be discounted.
Pertinently, the surge in flows has come despite a weakening and volatile currency, which foreign investors are generally weary off.
In any case the markets have been fuelled by FII money - genuine or otherwise. Small investors need to act wisely and exercise caution, before investing as things might end up like they did in 2008-2009.