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NRI Investment (Part Two): Investment In Stock Market, shares, bonds and IPOs

NRIs are allowed to purchase shares or convertible debenture of an Indian Company through stock exchanges, under the portfolio investment scheme (PIS) of the Reserve Bank of India (RBI)  on repatriation and /or non-repatriation basis. As per the RBI guidelines, NRIs looking to invest in shares of Indian companies are required to approach any of the designated banks authorized by it under PIS to open a NRE/NRO account for routing investments.

NRI/PIO can invest in other securities as well namely

  1. Dated Government securities (other than bearer securities) or treasury bills.
  2. Units of domestic mutual funds.
  3. Bonds issued by a public sector undertaking (PSU) in India.
  4. Shares in Public Sector Enterprises being disinvested by the Government of India.

Indian equity market is a highly remunerative platform for NRI investors. It produced striking returns in 2017 after two disappointing years in a row. In 2017, Nifty 50 gave 28.6 % return compared to 3% in 2016 and a negative return of 4% in 2015. Furthermore, in 2017, Mid-cap and Small-cap gave higher returns when compared to Large-cap stocks with BSE Mid-cap and Small-cap giving  48% and 60% returns respectively. Additionally, the recent fall in the value of rupee may have been a great cause of concern for many investors, but the community of NRIs is one such that has certainly rejoiced from the said on-goings. On a year-to-year basis, the American dollar has been growing swiftly. One dollar was equivalent to Rs. 63.6697 in the beginning of 2018 and as of the beginning of 2019, it is already valued at 71.10 INR. Needless to say, things are looking up NRIs looking to invest or already invested in Indian Stock Exchange. Furthermore, Buying blue-chip Indian equities that are known to offer secure investment at higher returns is much more lucrative than investing in similar shares listed with major foreign stock markets. 

Present note seeks to address the following issues pertaining to NRIs investing in  Indian stock exchange –

  1. Step by Step procedural guide; and
  2. Frequently raised queries
  • Step by Step procedural guide
  • Step 1 – Open an NRE Account

As per the Reserve Bank of India and Indian Government Rules, NRIs can open 3 types of bank accounts namely –  

  1. Non-Resident Externa (NRE) Account
  2. Non-Resident Ordinary (NRO) Account
  3. Foreign Currency Non-Resident Account (FCNR)

Of the above mentioned, NRIs can utilize NRO and NRE accounts to invest in Indian stock market. In order to invest in stocks, NRIs first need to remit funds in INR to their NRO/NRE accounts held at designated banks. Additionally, the remittance has to be made through routine banking channels such as online banking, demand drafts, cheques or wire transfer. In certain cases, the investor may be required to annex a Foreign Inward Remittance Certificate (FIRC) issued by a foreign bank.  The purpose of annexing FIRC is merely to ensure that the funds being remitted by the NRIs are coming from a legal or regular income abroad. This requirement prevents utilization of funds for money laundering or any other illicit business/transaction involving foreign currency in India.

  • Step II – Open demat Account

Every individual intending to invest in the Indian Stock exchange needs to open a De-materialized (Demat) Account. A demat account can be opened with the assistance of the investor’s bank or reputed stock brokerages that provide such facilities or through any asset management company.

The reason that holding a demat account is compulsory for anyone looking to invest in Indian stock market is due to the simple fact that companies no longer issue paper certificate of the shares that an investor buys. Instead, shares are now held electronically in demat accounts.

  • Step III –  Trading Account

A trading account is compulsory for individuals looking to invest in Indian stocks. The trading account will have to be of a bank or Asset Management Company or stock brokerage company. The investor’s NRE/NRO accounts are required to be linked with their demat account and trading account for them to be able to seamlessly transact in the Indian stock exchange.

Additional Requirements/Information –

  • KYC Requirement

As per the RBI and Indian government laws, all financial transactions in India including stock trading is to be mandatorily governed by the Know Your Customer (KYC) Regulations. The formalities required to be completed for KYC include –  

  • Copies of India passport (NRIs)/foreign passport (OCI). The copies shall include pages wherein the individual’s picture, passport number, date of issuance and finally, permanent address appear.
  • Residence proof of residence country such as place of residence/ work permits.
  • Correspondence address of residence country.
  • Aadhar Card

Under existing rules of Unique Identity Development Authority of India (UIDAI), NRIs are not compulsorily required to apply for Aadhar card. However, if they have lived in India for 182 days or more, they may apply for an Aadhar and utilize the same for KYC.

  • Permanent Account Number (PAN) Card

NRIs need not mandatorily avail the Permanent Account Detail or PAN issued by Income Tax Department of India. However, A PAN card is mandatory if the investments from stock trading is taxable as per Indian laws. An application for PAN can easily be made online.

Note: Holding a PAN and Aadhar makes the KYC process easier as it saves the hassle of performing KYC manually, using passport and hence it is at times recommended that despite their non-compulsory nature, willing investors do the needful to have them.

  • Subscribing to IPOs

NRIs can buy Initial Public Offerings (IPOs) through a designated bank, Asset Management Company or Stock brokerage company. The application for IPOs has to be done through NRO/NRE account linked to the respective demat and trading account.  Kindly note that certain companies may have a cap for NRI investors which should be inquired on a case to case basis.

  • Stock Trading at BSE and NSE

Indian law prohibits investors from directly trading in BSE and NSE stocks and hence an arrangement needs to be entered into between the willing investor and a stock brokerage company. By means of such agreements, investors basically empower the company to trade on their behalf. Notably, such agreements need to be notarized to avoid future disputes. Generally, a sub-broker is assigned by the stock broker in order to personalize the services being rendered and to further advice the investor on Indian stock market. An investor may also gain access of their user account and password to deal in stocks on their own.

  • Proxy Investments

Investors have the option of authorizing an individual to trade on their behalf by means of a Power of Attorney. The investor will be required to provide relevant certificate to the designated banks/asset management company/brokerage company to proceed with proxy investment.

  • Frequently raised queries
  • How can NRIs Invest in Indian shares?

Ans – As state earlier, NRI’s wishing to invest in shares in India are required to approach any of the designated bank branch authorized by RBI. A designated bank branch is a branch of a dealer bank that has been authorized by RBI to conduct the business under Portfolio Investment Scheme (PIS) on behalf of NRIs and all transactions (sale/purchase) are to be routed through such designated branch. The designated branch will then open a NRE (Non Resident External) /NRO (Non Resident Ordinary) account under the scheme for the purpose of routing Investments.

  • What is a portfolio investment scheme?

Ans. Portfolio Investment Scheme is an RBI scheme under which NRIs can purchase and/or sell shares/convertible debentures of Indian companies on stock exchanges.

  • What are the documents required to be collected from Investor to open a NRI/PIO/OCI trading account and other formalities to be taken care of while registering NRI/PIO/OCI Clients?

Ans. Following is a list of documents required while registering NRI/PIO/OCI individuals –  

  • Document ensuring status of entity
  • In case of Indian passport – Valid passport, Place of birth as India, Valid Visa – Work/Student/employment/resident permit etc.
  • In case of foreign passport : Valid passport and any of the following
    • Place of Birth as India in foreign passport
    • Copy of PIO / OCI Card as applicable in case of PIO/OCI
  • PIS Permission Letter from the respective designated bank
  • PAN Card
  • Overseas Address Driving License/ Foreign passport /Utility Bills/Bank statement (not more than 2 months old)/ Notarized copy of rent agreement/ leave & license agreement/ Sale deed.
  • Photograph of Investor.
  • Proof of respective bank accounts & depository accounts.

Additional formalities include – In case of NRI/PIO/OCI client, registration documents require self-attestation and not by that of a power of attorney holder. Additionally to that, In case of in-person verification of NRI/PIO/OCI client, the DB will obtain from such clients: the KYC attested documents, attested by one of the following – Indian Embassy/Consulate general in the residence country of the client, Notary Public, Court, Magistrate, Judge or Local banker.  

  • What is the ceiling of investments under PIS?

Ans.  

  1. NRIs can invest up to 5% of the paid-up capital/paid-up value of each series of debentures of listed Indian companies through designated Authorized Dealers (AD) on repatriable or non-repatriable basis under PIS
  2. It is not allowed that the aggregate paid-up value of shares/convertible debentures  purchased by all NRIs exceeds 10% of the total paid-up capital/ value of each series of debentures of the company.
  3. The aggregate ceiling of 10% can further be increased to 24% but only by means of a special resolution to that effect by the General Body of the Indian Company.
  • How are payments for stocks purchased on stock exchange to be made by NRIs?

Ans.

  1. Repatriation basis – Payment for shares/debentures on repatriation basis needs to be made by way of inward remittance of foreign exchange either through normal banking channels or out of the funds held in NRE/Fixed Deposit Foreign Currency (FCNR) bank accounts maintained in India.
  2. Non-repatriation basis – In addition to the modes mentioned above, NRIs can utilise the funds in their NRO accounts to purchase shares on non-repatriation basis.
  • How can NRIs/PIOs remit sale proceeds?

Ans.

  1. Repatriable – proceeds of repatriable investments may be credited to NRE/FCNR(B)/NRO accounts of the NRI/PIO
  2. Non-repatriable – Proceeds of non-repatriable investments can only be credited to NRO account.
  • Can shares purchased under PIS be transferred to other private arrangements?

Ans. Shares purchased on stock exchange can only  be sold on stock exchange. Such Shares cannot be transferred either by way of sale under private arrangement or by way of gift to a person residing in India or otherwise without prior approval of RBI (exception: NRIs can gift such shares to their relatives as defined in Section 6 of Companies Act, 1956 or to a charitable trust duly registered under the laws in India).

  • Are intra-day transactions permitted in cash segment?

Ans. No. NRI investors are required to accept delivery of shares purchased are required to give delivery of shares sold and hence short selling is not permitted.

  • Is trading in currency derivative segment allowed for NRIs/PIOs?

And. No. Only “a person resident in India” as defined in section 2(v) of FEMA Act 1999 can participate in currency derivative segment of the Exchange.

  • Can a trading account be opened for NRIs who have been allotted shares under Employees Stock Option Scheme (ESOP) Scheme?

Ans. Listed companies have the grant to issue stocks under ESOPs to its employees or to the employees of its JV or wholly owned subsidiary abroad who are NRIs (exception: Citizens of Pakistan). The only purpose for which trading accounts for persons residing outside India can be opened   is for selling of shares acquired under ESOP Scheme.

  • What is the monitoring mechanism in place for NRI investments?

Ans. RBI monitors other investment position of such individuals with listed companies, as reported by designated banks, on a day to day basis. When the total holdings of NRIs/FIIs under PIS reaches the cap of 2 % below the sectoral cap, RBI issues a notice, also referred to as a caution list, to all designated branches cautioning that any further purchases of shares of the given Indian company will compulsorily  require prior approval of RBI.

Once the shareholding by such investors reaches the ceiling / sectoral cap /statutory limit, RBI places the company on a ban list. Once that happens, no NRI can purchase the shares of the company under PIS. List of caution/banned RBI scrip is available at http://www.rbi.org.in/scripts/BS_FiiUSer.aspx

  • If NRIs eventually becoming residents of India, are they required to change the status of their holding from non-resident to resident?

Ans. Yes it is compulsory for such individuals to inform regarding the change in status to the designated dealer branch through which they had invested in the PIS and the Depository Participant (DP) with whom they had opened the demat account. Eventually, a new demat account in the resident status will have to be opened and securities will have to be transferred from the NRI demat account to the resident demat account and finally the NRI demat account will have to be closed.

  • In case a non-resident Indian becomes a resident India or conversely, will they be required to open a new trading account?

Ans. Yes. The Trading member will be required to open a new trading account which needs to be uploaded with the new category code (01 – Resident Individual) & (11 – NRI) as may be applicable on case to case basis.

 

About Gunjan Richharia

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