By Patturaja Murugaboopathy and Gaurav Dogra

Aug 27 (Reuters) - Foreign investors are unloading their

holdings of expensive Indian stocks and turning instead to new

listings in primary markets as they seek cheaper exposure to the

market and better returns.

Their selling has been driven by profit booking as Indian

stocks trade at record highs, and at valuations topping

those of most major stock markets.

Investors are pumping money instead into initial public

offerings (IPOs), whose valuations are lower and where there is

less of a scramble for stocks.

Foreigners have so far sold a net $3.42 billion worth of

equities in the secondary market. They purchased a net $1.47

billion through primary market issuances so far this month,

according to India's Central Depository Services Ltd.

A Societe Generale (SG) report showed foreigners have bought

more than $6 billion of stocks on the primary market this year,

the highest since 2021.

"Foreign investors are shying from deploying funds into

secondary market for long term and seeing better and faster

return prospects in the primary market," said Rajat Agarwal,

Asia equity strategist at SG.

They are sellers in the secondary market this year partly

because earnings growth prospects have moderated, he said.

India's NSE Nifty 50 index has risen 14% this year,

and the 12-month price-to-earnings ratio for its large-and-mid

cap stocks stands at 24 times, the highest among major global

markets, according to LSEG data.

Meanwhile, the Indian primary market has been busy, with IPO

listings of $7.3 billion so far this year - the highest in Asia,

followed by China's $5.1 billion, according to Dealogic data.

Foreigners are lured by the cheapness of stocks in primary

markets.

Jon Withaar, head of Asia Special Situations, Pictet Asset

Management, said the valuations tend to be lower in primary

markets due to lack of competition from retail, index, ETFs and

most types of institutional investors.

"Companies offering IPOs or rights issues tend to price

their shares conservatively to ensure a successful launch and

attract more investor interest," said Michael Collins, chief

executive officer of WinCap Financial.

"This lower valuation may also be seen as an opportunity for

foreign investors who believe that these companies have

potential for significant growth in the long run".

With the Fed poised to lower interest rates and investors

looking to enter riskier markets for higher returns, analysts

expect foreigners will continue to use this route to own Indian

stocks.