For most NRI's the difficult part about knowing how to go about investing in the Indian stock markets is finding one place where they can get all the required information. To start off with, there is definitely quite an amount of paper work. For instance you would need to open bank accounts and complete other related formalities. But what investors prefer is to have an account with a good bank, open an account with a good stock broker and be comfortable that their funds are safe and that all trades would be executed fairly and transparently.
So here are the basics on how an NRI could invest in the Indian stock markets
Q. How do NRI's get started once they decide to invest in the Indian stock market?
A: Firstly they need to open a bank account and decide whether they need to trade on a repatriable or a non repatriable basis. Now those who already have bank accounts should check with their bankers to find out whether those are suitable for stock trading. Know that you can nominate only one bank account for your stock trading. Some of the leading private banks are competent in this regard and can help you open an account through the internet that can be faster.
Q: But isn't that cumbersome paper work?
A There is definitely some amount of paper work to be done. But if you download the application form from the bank's website it will be a lot faster. If you want to do it through the internet, you would have to get copies of your passport, may be some bank statements in original. But the advantage with bigger banks is that all such information would be available on the website so you would not have much of a problem.
Here's an overview of the Indian stock market
With over 20 million shareholders India has the largest investor base in the world after the US and Japan. Investors from all across India invest in shares and debentures, mutual funds and securities among other investment tools. Shares can be traded in BSE (Bombay Stock Exchange) or the NSE (National Stock Exchange). Investors can trade on line or over the phone through the help of an intermediary. Indian investors can buy shares on day to day basis or use the futures and options route. Futures and options route is a contract that seeks assurance from an investor that he/she will trade in a stocks at a future date. NRI's can invest in the Indian stock market under PIS (Portfolio Investment Scheme) which is regulated by RBI and NRI's are not allowed to trade in the stock market on day to day basis. Stock market in India has been an unprecedented boom in the past year with the Sensex recently hitting a new high by bridging the 7500 mark. There are 23 recognised stock exchanges in India but the most active ones are the NSE and the BSE. NSE set up has a model exchange as a fully automated screen based system. BSE one of the oldest in the world accounts for the largest number of listed companies has also started a screen based trading system with the introduction of the Bombay online trading system. Regulations on the capital markets and the protection of investors interest is primarily the responsibility of the Securities and Exchange Board of India (SEBI) headquartered in Mumbai.
Q. Kindly explain the various tools available to invest in Indian stocks and equities, mutual funds, debentures, government securities etc. What is the process of investment for each of these?
A: To invest in mutual funds visit the respective mutual fund website or call them up. You can send them the necessary documents and payment can be made from the NRE or NRO bank accounts. However, taxation might be an issue. But then the mutual fund companies can answer your queries regarding this. For stock trading you can trade online, by the phone or even through a broker.
Q: What is the difference between investments that have a repatriation benefit and those that do not?
A: If an investor wants to bring in USD 10000 into India and has decided to stay back, then he can invest that money and he won't have to go through much paper work particularly when it comes to taxation. Now that is non-repatriable. But if he wants to take the principal out plus the profits then he would need an NRE account in which case he would be allowed to take out the principal and the profits after paying the due taxes.
Q: Are there any guidelines set by the RBI for NRI's to be followed while investing in the Indian markets?
A: You would have to ask your bank for Portfolio Investment Scheme (PIS) approval. The bank may charge you a nominal fee of around Rs 1000 to Rs 2000 and you would be allowed to invest in the markets. Another important rule is that you would not be allowed to day trade. Indian non-resident investors are not allowed to speculate on a day-to-day basis in the markets. For instance if they buy shares on Monday they would have to wait till Wednesday to sell it. However, they would be allowed to trade in the futures segment of the market. These are the basic general guidelines. RBI has relaxed its rules and it is for your bank to verify your paper work and the contract notes. They would definitely charge you a fee for these no doubt. So shop around and look for the best bank where you can get the best deal.
Q: Does an NRI have to pay extra transaction charges for his demat account linked with an NRO account.
A: That would depend on the bank. So you would need to take a look at the fine print while applying for a bank account. Brokers state that there is no such charge but the bank may charge extra for demat accounts with shares in it. Now that would be mentioned in the application when you open an account.
Q: Is it necessary to have a broker in India even if the NRI has a demat account?
A: Yes that is a must. An NRI will not be able to execute any trade without nominating a stock broker. There is no limit as to how many stockbrokers you need to have but you must have a stock broker nominated in India.
Q: Can an NRI execute trades through relatives in India?
A: Yes. He can give power of attorney. There are many who do this and its also a lot easier and faster. Not a bad idea as long as you give them the power of attorney just to make things more faster and efficient for the client and his family here.
Q. How should NRI's go about investing in stocks? Do they look for RBI designated banks and if so where can they start?
A: First and foremost they will have to open a bank account with a RBI designated bank which allows NRE, NRI, NRO accounts and that is available with the website of RBI or any banks they can go and check it out, on the site whether they are designated banks or not. So they will have to open an account there. That is step one because that is where the money will be coming. Step two would be to open a demat account and when I say demat account like you have a bank account for your cash, for your assets like you have equities, debentures or your mutual fund units you need an account where those assets as and when you buy and make the payments will be transferred to. So that is step two and step three would be that you will have to open an account with a brokerage firm- a SEBI registered brokerage firm or a SEBI registered mutual fund advisor to buy or sell any of these products and there are designated stock brokers in this country close to 1600 who are SEBI registered and who are allowed to access the trading site or the trading platform of NSE and BSE.
Q: What about IPO's and private placement? Do they have to go through the SEBI registered portfolio investment scheme and if so you could tell us a little bit about how that works?
A: In case of an IPO you just need to fill up the IPO form and give a cheque along with it for whatever amount they want to subscribe to. For private capitals there is an entirely different set of rules that guide them and private equity can come into quite a few areas except plantation, agriculture, real state development although 100% FDI has come but there are restrictions in terms of the township that they have to make. Those fall basically into FDI. In case of IPO's all they have to do is fill the form, tell the amount of money they want to put in the shares that they are subscribing and just send it across.
Q. The most important concern of NRI, PRO,OCB is how to choose an intermediary, the financial institution, the stock broker or the bank through which they need to transact business. Please explain
A: The first and foremost criteria for anybody choosing a bank or a broker is to see how tech savvy the banks are since these are long distance transactions. Such ease would enable easy transfer of funds. Besides the broker too needs to be tech savvy.
Secondly before opening an account with the broker you need to find out their net worth, the strength of the balance sheet of the broker. For instance if the total net worth of a broker is Rs 1 crore and the NRI sells stocks worth Rs 50 crore and transfer the asset, the security of your money is doubtful. While all brokers are strictly regulated by SEBI you must choose a broker with a strong balance sheet, strong net worth so that your money is safe.
Q. Any other factor that needs to be considered while assessing the credibility of the broker?
It's the reputation of the broker, his balance sheet numbers that are important. Besides you can cross check with SEBI, NSE or BSE. You may ascertain whether the broker in question has defaulted earlier or he has had issues with compliance.
Q. Can you throw some light on the various charges that need to be paid while opening all these accounts? Are there any hidden costs, any transaction fees that one needs to watch out for?
If you open a DP account with an Indian address you are charged Rs 250 rupees while if it is with a foreign address the charge is Rs 1000. No other charges as far as the DP is concerned. But with the brokerage firm obviously when it comes to transactions from the US you would be charged per transaction. Typically in India today it is that the value of the transaction. So you will have to check out with the broker. This is pre-negotiated when you open an account and there is a lot of flexibility depending on the size of the client transactions besides there's STT too. Additionally there are statutory charges like stamp duty, a turnover tax
Q. How does one ensure that he gets the highest return on his investments and how can one prevent losses?
There are three important aspects and they are fear, greed and hope. The moment you enter into a transaction there is a fear. After that there is greed when you say let me wait for some more and subsequently hope and I think that is the worst. If you've made a wrong decision, cut your losses and get out. Don't get emotionally attached to a position, to a stock or to an investment.
Don't look for phenomenal returns. The way the Indian markets are going they will give you the best results. But be realistic. Don't expect unrealistic returns. Besides do some basic homework before you take the plunge.
Q. What are the taxes that are levied? Also is there a system of double taxation for NRI's?
That depends on the country in question. But here currently if it is a repatriable account, there's an STT's levied. Its the minimum levied by the Indian government
Q. Is there a significant advantage in investing under repatriable?
All that depends on the individual's choice per se, whether he wants the money repatriated or he doesn't.
Q. Can NRI's, PIO, OCB's invest in government securities? What are the restrictions?
A. There are no restrictions. The only issue is repatriation, non-repatriation
Q. There are individuals who are not even of Indian origin but would like to invest in the Indian market. Now is that possible?
The best way they can enter the market is through FII Mutual funds which is registered in the U.S and which is investing in India. Today, globally most of the advanced markets have India specific funds. For instance Japan had come out with India specific funds. So you never knew whether that money is going to Brazil or Thailand or to Malaysia or India. At present there is quite an amount of interest in Indian equities. So most of the Mutual funds investing in Indian equity have India Specific Funds. That way you can put in your money and rest assured that your money is safe.
Q. What about Over The Counter stock exchanges. How does it work?
A.I think OTCEI is nearly defunct. It was a great idea which came in 94 and OTCEI was the first exchange where dematerialisation happened. There is nothing much happening there. Today you have two options the NSE and the BSE for listed equity, debenture and debt. There is a retail market segment also on the NSE.
Q. Are there any guidelines that foreign investors, NRI's need to keep in mind in terms of RBI guidelines?
That is routine permission required when you sell stocks. You need to give such information to RBI and thereafter there are no hassles. Its quite relaxed compared to the situation around nine years ago. But now the regime is very investor friendly.