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How NRIs can invest in Indian Stock Markets
The FDI policy, announced by the Department of Industrial Policy and Promotion (DIPP) and the provisions of Foreign Exchange Management Act (FEMA), 1999 governs foreign direct investment in India.
Under the FDI scheme, the PIOs, NRIs and the NRs can invest is India either by making new investments or through taking up already existing equity shares and compulsorily convertible preference shares (CCPs) or compulsorily convertible debentures (CCDs) of an Indian company via the two channels, namely the automatic route and the government route.
- Under the automatic route, the NRI investor or the foreign company do not need to seek any prior approval from the Government of India for investing in India.
- Prior approval is required from the FIPB under the government route.
However there are certain restrictions regarding investment in India, such as:
• Foreign investment in any form in a company or a partnership firm or a proprietor or an entity, whether engaged, not engaged or proposes to engage, is prohibited in the following operations:
1. Business of chit fund
2. Agricultural and/or plantation activities
3. Nidhi company
4. Real estate business or construction of farm houses
5. Trading in transferable development rights
6. Retail Trading
7. Atomic Energy
8. Gambling and betting, including casinos
9. Various kinds of lottery business, including government, private and online lotteries.
10. Activities and sectors inaccessible by private sectors
11. The manufacture of tobacco or tobacco substitutes, cigars or cigarettes, cheroots
• The partnership firms or proprietor concerns with investments in tune with the FEMA regulations prohibited to engage in print media sector.
• Foreign investment in trusts apart from investments by SEBI registered Foreign Venture Capital Investors (FVCI) in domestic VCFs is not allowed.
There are certain cases where transfer of equities from residents to NRIs through sale needs prior approval from the Reserve Bank of India:
- Transactions that fall within the purview of SEBI Regulations, 1997
- Activities of Indian companies whose capital instruments are translated
- Transfer of equity shares of Indian companies involved in financial sector services, NBFCs, insurance sector and stock exchanges
- Equity shares transferred as gift to a person residing abroad.
According to Foreign Exchange Management Act (FEMA), 1999, "an NRI is a person resident outside India who is either a citizen of India or a person of Indian origin (PIO)."
| Who is a NRI | KYCs for NRI | |||
| 1. A person who has resided in India for 182 days or more during a financial year and 365 days or more during the preceding four financial years can be said to be a resident of India. | 1. Passport submission is compulsory. Relevant pages of passport bearing the name, age, photo and address need to be submitted. | |||
| 2. NRIs can enjoy their non-resident status in India if they are present for 60 days but less than 182 days in a financial year, even if they stay in India for 365 days or more during the previous four financial years. | 2. The address of the NRI residing abroad is compulsory. Either the permanent or the correspondence address must be overseas. | |||
| 3. A person also qualifies as NRI if he is deputed abroad for over 6 months. | ||||
After US and Japan, India has the largest investor base. Shares in Indian Stock market are traded through National Stock exchange (NSE) and Bombay Stock Exchange (BSE) either online, over phone or with the help of an intermediary agent.
The eligibility criterions for the NRIs to invest in Indian Stock Markets are:
- An NRI can invest in Indian Markets subject to the FDI policy, except for a resident of Pakistan.
- An entity or a citizen of Bangladesh can invest in India with prior approval of FIPB and under FDI scheme.
Equity shares can be issued by Indian companies according to the pricing norms or valuation rules established by the FEMA regulations. The pricing of the shares need to be decided at the time of issuing. Investment by NRIs can be done in both repatriation as well as non repatriation basis.
| Investment on non repatriation basis | Investment on repatriation basis | |||
| If an NRI wants to bring US $ into India and then decides to stay back, they can invest the money without engaging in much paper work especially in case of taxation. | If an NRI wants to take out the principal amount including the profits, they need an NRE account and withdraw after paying the required taxes. | |||
NRIs can invest in Indian Stock market under the Portfolio Investment Scheme (PIS) of RBI. To ensure that some dos and don'ts to be followed while investing in Stock market:
| Dos | Don'ts | |||
| 1. NRI needs to open NRI/NRE (Non Resident External Rupee) account with RBI entitled Indian bank as the money will be deposited in those accounts. | 1. Total investment cannot cross 10% of paid-up capital in Indian company. | |||
| 2. An individual can open only one PIS account for stock transaction and needs to invest in local currency. | 2. An NRI cannot do any trading in India without a stock broker. | |||
| 3. One needs to open a demat account and a trading account with a brokerage firm authorised under SEBI or a SEBI registered mutual fund advisor. | 3. NRIs cannot transact on non-delivery basis in India. | |||
| 4. A stock bought can only be sold after two days. An NRI can nominate a power of attorney who can do the transaction in India on their behalf. | 4. An NRI should not appoint a broker without assessing their reputation and balance sheet and check through BSE, SEBI or NSE whether he has defaulted earlier. | |||
NRIs need to open NRI/NRE account to subscribe to Initial Public Offerings (IPOs), which does not come under PIS and thus shares purchased through IPOs can be sold without a PIS account.
Investment options for NRIs:
There are several possible channels in which NRIs can invest their money in India, such as:
- Bank deposits
- Secondary markets via Portfolio investment in equity shares or convertible debentures
- Non-convertible debentures
- New issues such as shares or convertible debentures
- Mutual funds only if the investment is made either out of NRE/NRO/FCNR account or through 'inward remittance'.
- Propriety concern in India
- Bonds only if the investment is made either out of NRE/NRO/FCNR account or through 'inward remittance'.
- Domestic NRO funds invested through deposits in Indian companies, including RBI registered NBFCs, on non repatriation basis up to duration of 3 years, subject to some formalities by the concerned companies.
- Immovable property subject to the fact that the amount is not invested for purchasing plantation property, agricultural land or farm house and that the investments are made through existing NRE accounts or inward remittances.
Tax Liabilities of NRIs:
Tax is deducted at source for an NRI even though the tax liabilities are similar to that of an Indian resident.
| Tax forms | Equity Shares |
| Short term capital gains tax | 15% |
| Long term capital gains tax | Nil |
| Dividend distribution | Nil |
Paid up capital limits for NRIs
There are 89 companies in which the NRIs are allowed to invest up to a limit of 24% of their paid up capital whereas there is only one company where NRIs are allowed to so. NRI investments have reached to 8% of their paid up capital in 5 companies and further purchases will need prior approval from Reserve Bank of India. On the other hand in 7 companied NRI investments have reached 10% already where no more purchases by NRIs are approved. Investment up to 30% and 40% of paid up capital are authorized in 19 and 14 companies respectively.
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