The Indian long-term growth story has ensured a manifold increase in Non-Resident Indians’ (NRIs) investments in equity markets in India. NRI investment in Indian equity markets is either through direct investment in stocks or through equity Mutual Funds.
To ensure sufficient inflow of investments from NRIs, the Indian government has flexed the process for NRIs to start equity trading while implementing stricter norms on holding and trading the equities. A Trading directly in equities in India, for both residents and NRIs involves a lot of processes involving opening multiple types of accounts. Though seems an arduous task, on understanding the rationale behind the process and the need for many accounts, the entire investment process looks less complicated and effortless.
How to start investing in Equity Markets?
In India, to invest directly in Equity markets, three types of accounts are needed for both residents as well as NRIs.
- Bank Account – The funds needed to buy shares and to receive the funds on selling them a bank account is needed, which is linked to the trading and demat account.
- Trading Account – This is a special account through which transactions can be done on the stock exchange. This account can be opened through a brokerage firm which is a member of the stock exchanges – NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) in India.
- Demat Account – This account acts as a storage account for all the shares held by a person. Demat or Dematerialized account is an account where all the shares or debentures traded on an exchange are held in digital form. This account can be opened through a firm or a bank, which is a depository participant on NSDL (National Securities Depository Limited) or CDSL (Central Depository Services Ltd.)
It is crucial to understand how all the above-mentioned accounts work in relation to each other when trading in equities on Indian stock exchanges. When a person wishes to buy shares of a company in the secondary market, the funds needed to make the purchase should be available in the bank account. The person has to place an order to buy shares from the trading account and on the successful purchase, the shares will be transferred to the demat account. Similarly, when selling the shares, the shares are fetched from the demat account and sold on the exchange through the trading account. The sale proceeds of the transaction are credited to the linked bank account.
How should NRIs start investing in the stock market?
For NRI investors in equity markets, the Reserve Bank of India (RBI) has introduced a scheme called Portfolio Investment Scheme (PIS) to facilitate stock trading on recognized stock exchanges in India. It is mandatory for an NRI to open a PIS account with RBI before buying any direct stocks or convertible debentures, as it complies with the Foreign Exchange Management Act (FEMA) rules.
Where to open the PIS account?
An NRI can approach a designated branch of a bank to open a PIS bank account. At a time, an NRI can have only one PIS account with any one of the designated banks. A separate Non-Resident External (NRE) /Non-Resident Ordinary (NRO) account has to be opened for PIS purpose only and all purchase/sale transactions should be routed through the designated branch of the bank only. Apart from the PIS bank account, NRIs are required to open a trading account with a recognized stock broker and a demat account with a depository participant. Facilities are available for NRIs to make investments on both repatriation and non-repatriation basis.
An important thing to remember about PIS account is only for investments done through the secondary market. For all investments purchased from the primary market, investment can be done through direct subscription.
What are the rules and regulations for NRIs to invest in Equity Markets in India?
PIS was introduced to ensure better compliance with FEMA regulations by NRIs. The rules and regulations that are applicable to NRI PIS accounts are below:
- Only one PIS account is allowed to be opened in any one of the designated bank branches and all transactions on stock exchange should be routed through that account only.
- Trading on the stock exchange is not allowed on an intra-day NRIs can trade only on delivery basis, i.e. no speculative trading is allowed.
- No adjustments of purchase will be done by the brokerage house against the sales transactions of NRIs. Bill-Bill payments have to be done with 100% funds available at the time of purchase.
- NRIs in total, can own only 10% of the paid-up value of an Indian company on both repatriation and non-repatriation basis.
- NRIs in total, can own only 10% of the value of each issue of convertible debenture on both repatriation and non-repatriation basis.
- Sale or maturity proceeds of the investments which are held on repatriation basis by NRIs can be credited to either NRE/NRO or FCNR accounts, after deducting applicable taxes. If the investments are held on non-repatriation basis, the sale or maturity proceeds will be credited to NRO account only.
- NRIs are permitted to invest in derivatives approved by Stock Exchange Board of India (SEBI) on a non-repatriable basis, out of Rupee funds held in India only.
- NRIs cannot invest in equity markets through funds borrowed in India.
Is repatriation of funds allowed for NRI equity investors?
NRIs are permitted to invest on both repatriable and non-repatriable basis. If an NRI makes any investments through PIS account on repatriation basis, payments for the purchase of shares or debentures should be made by inward remittance of foreign exchange through regular banking channels or through funds held in NRE or FCNR accounts in India. If investing on non-repatriation basis, payments can be done either through NRE, NRO or FCNR accounts, but the sale or maturity proceeds will be credited to NRO account only.
Any income, such as interest earned or dividend earned by an NRI on the portfolio investments can be repatriated after deducting applicable taxes, irrespective of whether the investment was done on repatriable or on a non-repatriable basis. However, capital gains on the sale of an investment can be repatriated only if the investment was done on repatriable basis.
Are there any limits to the shares/debentures that can be owned by NRIs?
For NRI investments in equities and debentures of an Indian company in the secondary market, there is a ceiling of an overall investment of 10% of the paid-up capital for equities and 10% of the value of each issue of convertible debentures, inclusive of purchases on both repatriable and non-repatriable basis. This total ceiling can be raised to 24% subject to the approval in the general body meeting of the company.
The Reserve Bank of India (RBI) monitors the ceiling on NRI investments in Indian companies on a daily basis. Once the aggregate holdings of NRIs in a company reaches the cutoff point, which is 2% below the approved limit, RBI issues a notice to all designated banks, not to make any further purchases of the securities or debentures of the respective company without prior consent from RBI. The RBI also informs the general public about the ‘caution’ and the ‘stop purchase’ in such companies on its website.
In case an NRI purchases any investment in the secondary market, which is beyond the prescribed limit, the excess holdings have to be compulsorily offloaded and losses, if any have to borne by the NRI.
However, for any investments purchased from primary markets, there is no ceiling prescribed and also a PIS account is not necessary.
Can NRIs invest in IPOs?
Yes. NRIs are eligible to invest in Initial Public Offer (IPO) of an Indian company. Since it is an offer in the primary market by the company and not through a stock exchange, the purchase need not be through a PIS account. For all investments through public offer, private placement, or rights issue, NRIs can invest without any upper limit on non-repatriation basis.
Can NRIs have Non-PIS accounts?
Yes, for all investments that are not purchased from stock exchanges, a non-PIS account is needed for NRIs. If an NRI had equity shares or debentures as an ordinary resident, the change in tax status has to be intimated to the broker and the designated bank, on which the existing investments will be transferred to a new non-PIS trading and a non-PIS demat account, which can be linked to an existing non-PIS NRO account.
- Both NRE and NRO Non-PIS accounts can be opened.
- After becoming an NRI, a person cannot make any new purchases on the stock exchange through the non-PIS account.
- Shares allotted under public issue or through gift or inheritance, or through a bonus issue, or acquired as an Indian resident has to be sold under a non-PIS account only.
- Sale of equity shares acquired as a resident would be credited to Non-PIS NRO account only and cannot be repatriated.
- Mutual Fund Investments can be done through non-PIS accounts by NRIs.
What is the taxability on Equity Investments by NRIs?
The tax treatment of equity investments for NRIs is same as that of residents, but for the Tax Deducted at Source (TDS) rules. All profits made on any investments by NRIs are subject to TDS which is 100% of the total tax liability on the transaction.
Any dividend paid by the company to the shareholder is tax-free. If the equities are sold after being held, at least for 12 months, it is treated as a long-term gain and is tax-free. If the equities are sold within 12 months of purchase, it is treated as short term gain and taxed at a flat rate of 15% of the gains. For all NRIs, the broker will deduct the entire tax liability as TDS and credit the net gains to the linked bank account.
For sale of shares allocated in the primary markets, such as an IPO or bonus issue through a non-PIS account, the proof of acquisition date and cost should be submitted to the broker failing which TDS will be deducted on the entire sale proceeds.
Should NRIs invest in Indian equities?
The Indian equity market offers tremendous opportunities for long-term growth and is the best among the emerging markets of the world. Though the procedure to start investing looks complex initially, it is a one-time exercise and the intermediaries take care of the accounts opening formalities, ensuring smooth set up of the required financial base to start investing in Indian companies.