In a year of stock market slump, a bulk of the capital gains has been generated in the process of sell-outs by Indian promoters to their foreign partners. Besides, the spurt in shares prices of the FMCG, pharma and IT sectors has provided a windfall to investors.

What is noteworthy is that the Rs 400-crore inflow is a conservative estimate based on data collected from six private sector AMCs. The details of estimates from UTI are not available.

``The sources of these investments include individualsand companies selling assets and mergers and acquisition activities. Besides, many companies have been rendered uncompetitive because of their low economies of scale,'' says Prem Khatri, vice-president, marketing, Kothari Pioneer.

``There have been several instances in 1998 when foreign partners have increased stake in the Indian company or the domestic promoters selling their stake to their foreign partners,'' says an official at Birla Mutual Fund. However, Ganesh Iyer at Sundaram Newton disagrees. ``Bulk of investments under section 54EA comes from sale of real estate.''

Under section 54EA, the principal and capital gains arising from the sale of an asset have to be invested for a period of three years in order to make that investment tax-free. ``In terms of benefit to the fund, it is stable money locked in for three or seven years as the case may be and thus, gives stability to the mutual fund,'' Sundaram Newton's Iyer. ``It helps the fund manager to plan and execute right investment strategies,''points out Kothari Pioneer's Prem Khatri. ``Since it is long-term money, fund managers can put the money in long-term securities,'' adds the Birla Mutual Fund official.

Given the current interest rate scenario, debt fund managers get leverage once they get investments under sections 54EA and also 54EB, where money is locked-in for seven years. ``This money is all the more useful for debt funds since fund managers can invest in instruments of medium-to-long term maturities which helps them earn that extra bit,'' adds a fund analyst.

Consider for instance, Kotak Mahindra AMC's K-Gilt. The fund had 25 per cent investments under section 54EA out of its total corpus of Rs 140 crore as on February 13 which is equal to Rs 35 crore.

``The source of this money is manifold, especially the rally in stocks from the three sectors of IT, FMCG and pharma. While investments under section 54EA is not much in K-30, money has flowed in K-Gilt. My impression is that since capital gains have come after a long-time,investors do not want to take any undue risk with equities,'' says Shekhar Sathe, CEO, Kotak Mahindra AMC.

``The sources of these investments are many including sale of property, sale of shares and sale of companies itself,'' adds Ajay Srinivasan at Prudential-ICICI.

The trends available from the six funds suggest that investments under sections 54EA and EB has come mainly from individual investors. ``There are no corporates but only individuals and proprietory concerns,'' says Sandeep Dasgupta, vice-president, Alliance Capital. However, these individuals have a fair share of high ticket investors who have sold out their stake in companies or have offloaded a part in favour of collaborators. ``There are no corporate investors under section 54EA since any sale of investments will get knocked off the gross block. Unless the gross block turns zero, it will not be considered capital gains,'' says the Birla MF official.

Consider Kothari Pioneer's break-up. The AMC has 1109 accounts under section 54EA ofwhich only 23 are corporates while 1086 are individuals. The AMC manages a total of Rs 34 crore under section 54EA. In the case of Sundaram Newton, the split between corporates and individuals is in the ratio of 30-70, respectively.