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Though the domestic market has recently been showing signs of weakness, India continues to remain an attractive destination for foreign funds.

So far in the new year, 13 new foreign institutional investors (FIIs) have registered with the Securities and Exchange Board of India. Of this, 9 FIIs registered in January and four in the first week of February. Among these new FIIs, seven are from the US, three are from the UK and the others are from Luxembourg, Singapore and Japan. The total number of FIIs operating in India now stands at 531.

These new funds are entering at a time when there are worries that FII inflows may fall on account of Sebi's move to curb issuance of participatory notes (PN).

These funds include Singapore-based Legg Mason Asset Management (ASIA) PTE, UK-based Lloyds TSB Group Pension Trust, US-based Lord Abbett Series Fund, US-based Mason Hill Asset Management, three funds of Merrill Lynch, Tokyo-based Master Trust Bank Of Japan and Union Investment Luxembourg. Ever since the market started moving up from the end of April '03, the number of FIIs has increased.

The 3,000-point rally in the market has been largely driven by the foreign funds which have poured in over $6.5 bn in the past year. This is one of the largest inflows by foreign funds into the country.

Despite the uncertainty over participatory notes, FIIs have remained net investors in India. In January '04 foreign funds have invested $697m, while in February, FII inflows continued to be positive with a total investment of $58m in the first week.

Interestingly, the new FIIs are registering with Sebi at a time when the market regulator has imposed curbs on foreign fund flows into the country through participatory notes.

Sebi, in the middle of last month, had directed FIIs not to issue PNs to unregulated regulated entities from February 3 onwards. This may have contributed to heavy selling in the market, which caused the Sensex to fall by over 600 points as there were worries that hedge funds will be banned from the country.

However, Sebi is now considering a move to allow hedge funds to invest in the domestic market as a sub-account with FIIs. The regulator is expected to come out with a paper outlining its plans.

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