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MUMBAI: The Indian stock market may be the second-worst performing one among emerging markets this year, but that has not deterred a host of foreign portfolio investors who are keen on putting their money in local stocks.

The sustained interest in India, which is perceived to be a long-term economic growth story, seems to be reflected in the growing number of overseas portfolio investors, registering with stock market watchdog the Securities and Exchange Board of India (SEBI) to invest in stocks here. At the last count, the number of foreign institutional investors (FIIs) who have registered with the regulator has risen to over 1,400 while sub-account registrations have topped the 4,000-mark. According to officials, among the new investors who have signed up are some Middle East sovereign wealth funds and several institutional investors from the US, including some pension funds.

The rise in their numbers has also got to do with the fact that SEBI has eased the norms for sub-accounts well over a month ago. While most investors attribute the rise in numbers to the relaxing of entry rules, the closure of the participatory note (P-note) route and keen investment interest among broad-based funds - hedge funds and sovereign wealth funds included - are reckoned to be other compelling reasons, as their interests are usually smaller accounts, which the foreign portfolio investor manages for a smaller group, including partnership firms and individuals for a fee.

SEBI had amended its regulations to widen the definition of foreign portfolio investors, or FIIs, as they are popularly known by allowing non-resident Indians (NRIs) and sovereign wealth funds to trade in Indian shares and government securities through sub-accounts.
The amendments also allowed unregulated university funds, endowments and charitable trusts to register as FIIs. Since then, 244 fresh sub-accounts have been registered with the regulator in 32 days. This takes the total number of sub-accounts registrations of foreign portfolio investors in India to 4,320. There are 1,410 registered FIIs in India now, with 44 having been added since May 22 - the day SEBI eased the norms relating to entry of foreign portfolio investors.

"The recent notification on FIIs and sub-accounts has cleared several ambiguities with regards to investing in India. We can expect several more sub-account registrations, as this is an easier route (than opting for FII registrations) for foreign investors to invest in India," said Kotak Mahindra Bank, head of international business Paul Parambi.

According to Mr. Parambi, who also heads the offshore funds and the FII division of Kotak Mahindra, many of these entrants were investing in India through the P-note route earlier. This means, not all entrants will bring in fresh money, Mr. Parambi said. However, there are some more procedural problems plaguing foreign investors. "The first one is where FIIs have to give an undertaking to SEBI that their sub-accounts have not issued any offshore derivatives instrument, including P-notes, or purchased them from non-resident Indians or resident Indians.

As a result of this clause, several FIIs, who earlier planned to open several sub-accounts, have now shortened their expansion plans. Foreign investors are also not very happy about the declaration (given to SEBI), wherein FIIs take full responsibility for the conduct of sub-accounts," said a senior official at a US-headquartered FII brokerage. According to experts, nearly 60% of new entrants (those who received approvals recently) are investors from the US. The remaining accounts belong to European, Japanese and West Asian investors.