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As on March 31, 2008, these funds had pumped in $68,007 million into the Indian equities market, but a year later, their net investment stood sharply eroded at $51,669 million - a decline of $11,826 million.
"In 2008, it was more due to liquidity pressure back home than anything else that FIIs sold out. This was the case throughout the global markets and not just Indian markets," said Shiv Kumar Goel, promoter-director of financial services and broking house Bonanza.
"They sold out even from profitable ventures. These funds tried to consolidate resources globally to ease the cash crunch of parent entities," added Goel.
SEBI data further shows that save for April, December and March, the months during which Indian equities staged some recovery, FIIs were net sellers in each of the remaining months.
The bulk of the selling during the last fiscal, worth some $3,804.60 million, was in October, followed by $2,502.9 million in June, $2,052.4 million in September, $1,242 million in May and $1,052.3 million in January.
This was the primary reason behind the sensitive index (Sensex) of the Bombay Stock Exchange falling 5,918.12 points, or 37.87 percent, between April 1, 2008 and March 31, this year.
As on date, there are 1,638 registered FIIs in India, with as many as 5,035 sub-accounts, which are dedicated investment funds maintained on behalf of overseas clients, who are themselves not registered as FIIs.
Another reason for FIIs seeking to pull out of Indian markets was SEBI's move to curb participatory notes in the futures and options trading, while restricting its use in the cash segment in October 2007.
Participatory notes are instruments used by investors that are not registered with the SEBI to invest in Indian securities. FIIs issue participatory notes to individuals, who can then trade them just as stocks.
"The curb on participatory notes did have an impact on FII sentiment as it was viewed as a step backwards," associate director of KPMG advisory services, Apurva Mehta, told IANS.
The total market capitalisation of India Inc is estimated around $550 billion, down from a peak of $1.5 trillion in January 2008.
"FIIs accounted for almost 30 percent of the peak total market capitalisaion. This has gone down to about 15 percent as a result of the pressure on them to relocate funds back to parent entities," said Mehta.
However, industry watchers also feel foreign money may return to the Indian stock markets sooner than later. "The problems being faced by these funds are now getting sorted out. We can see it from the Goldman Sachs results and Citibank showing operating profits during the January-March period," said Goel.
Analysts, nevertheless, remained divided over how long it would take for foreign funds to start investing in bigger
chunks.
"A lot of FII money came in during 2003-07, when they poured in around $55 billion. For Indian bourses to see that kind of foreign money will take some time," said Jagannadham Thunuguntla, equity head at stock brokerage SMC Capitals. "It all depends on how soon western economies stage a comeback and how fast businesses generate surplus that can be deployed elsewhere."
Though economists argue that a developing country should be more interested in foreign direct investment in projects and not foreign capital through equity markets, most analysts believe FIIs have made their mark in the Indian financial system.
"The financial muscle of FIIs cannot be compared to domestic financial institutions.
They wield great influence as can be seen from the fact that the recent sell-off by FIIs led to a similar reaction from Indian investors," said Mehta.
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