By Patturaja Murugaboopathy and Gaurav Dogra

(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 (OTC:SCGLY) (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.