An NRI who is willing to make investment in the Indian Markets through stock exchange has to follow 3 simple steps:-
#1. An NRI should open a NRO or NRE savings account with a bank which is approved by RBI (Reserve Bank of India).
#2. He should open a Portfolio Investment Scheme (PIS) on repatriation (NRE) and /or non repatriation (NRO) basis with the bank and apply for a general approval from RBI for investment in Indian Stock Market through his designated bank branch.
#3. He should open a Dmat & Trading Account with a broker to execute his buy/sell orders on the stock exchange(s) and to hold their shares or debentures with the Depository Participant (DP).
Before continuing further, Lets get familiar with some key terms you will be encountering with.
A NRE bank account is Non-Resident External Account. Since it is an external Account, any funds lying in NRE account can be converted into any foreign currency and can be remitted outside the country or in other words, it is fully repatriable.
The funds can be freely transferred from NRE account to NRO account.
NRO bank account is Non-Resident Ordinary Account. Funds lying in NRO account cannot be converted into foreign currency and hence cannot be remitted outside the country or in other words, it is non repatriable.
Funds cannot be transferred from NRO account to NRE account. Erroneously transferred money from NRE account to NRO account, cannot be transferred back to NRE account.
Portfolio Investment Scheme (PIS)
Portfolio Investment Scheme (PIS) is a scheme of the Reserve Bank of India (RBI) through which NRIs and PIOs can purchase and sell shares and convertible debentures of Indian companies on a recognized stock exchange by routing all such purchase/sale transactions through their NRI bank account held with a Designated Bank Branch.
Transactions covered under PIS?
# Fresh purchase from the secondary market as an NRI
# Sale of shares, which were bought under PIS
Transactions not covered under PIS?
# Sale of shares, which were not bought under PIS, like Gifts, subscription to IPOs or shares bought as resident Indian, or received in bonus.
# Fresh subscription for IPOs as an NRI.
# Investment in Mutual Funds.
Documents Required to open an NRI Trading & Dmat Account
# Copy of PIS permission letter
# Copy of FEMA Declaration
# Copy of PAN card
# Overseas address proof – Copy of Driving License/Foreign Passport/Utility Bills/Bank Statement (not more than 2 months)/Notarized copy of rent agreement/Leave & License agreement/ Sale Deed.
# Passport size photograph
# In case of an Indian Passport: Copy of valid passport with place of birth as India, Copy of Valid Visa.
# In case of Foreign Passport: Copy of Valid passport, Copy of PIO/OCI card.
# Proof of Bank account (a cancelled cheque leaf of your NRE or NRO savings bank account)Note: Copy of PAN card, Passport, and Foreign address proof to be notarized by Indian Embassy.
Trading / Investing Process
# Allocate funds from your NRE/NRO bank account to your PIS account.
# When you make a stock purchase, the broking firm sends the buy contract note at the end of the day to your bank. The bank in turn debits your PIS account to that extent and credits the broking firm.
# Similarly when you sell some stocks from your dmat, the broking firm sends a sell contract note at the end of the day to the bank and also credits your PIS bank account with the proceeds from the sale.
#Note that two separate contract notes are sent for all your buy transactions and sell transactions at the end of every day. The net amount credited/debited to your PIS will be including all charges that appear on the contract note.
Derivatives Trading for an NRI
Derivative Trading for NRIs is possible only through NRO Account i.e. on Non Repatriable basis. The NRI is required to approach the exchange through a clearing member, through whom he/she would like to clear his trades for allotment of custodial participant (CP) code. Clearing corporation would assign a CP code to each NRI, based on the application received from the clearing member of the NRI. Trading members should ensure that at the time of order entry CP Code of the NRI is placed in the CP Code field of the trading system. The NRI client shall have only one clearing member at any given point of time.
Taxation for NRIs on Investment in India
# Financial year ending in India: March 31st
# Last date for filing IT returns: July 31st
# Long term capital gains: If the period of holding is more than 1 year i.e. the difference between the date of purchase and sell is more than 1 year, then the TDS rate applicable is 0 %.
# Short term capital gains: If the period of holding is less than 1 year i.e. the difference between the date of purchase and sell is less than 1 year, then the TDS rate applicable is 15%. (Excluding Service Tax and Education cess)
# Trading income from F&O: Considered as business income, and taxed according to the Income tax (IT) slabs in India.
Restrictions for an NRI
No Short Selling or Intraday in Stocks
NRIs cannot trade intraday in stocks i.e. they cannot buy and sell the same shares within a day. So all the shares bought can only be sold after delivery of shares is credited to their Dmat account (i.e. on T+2 basis). Similarly, NRIs cannot short sell any stocks i.e. they cannot sell any stock without owning it.
Limit for purchase under PIS
An NRI can purchase up to a maximum of 5% of the aggregate paid up capital of the company (equity as well as preference capital) or the aggregate paid up value of each series of convertible debentures as the case may be. For the purpose of this ceiling, investment under the Portfolio Investment Scheme on repatriation as well as non-repatriation basis will be clubbed together.
There is an overall ceiling of 10% of paid-up equity share capital of the company/paid-up value of each series of convertible debentures for purchase by all NRIs/OCBs put together.
No Currency/ Commodity trading is allowed
NRIs are not allowed to trade in currency or commodities market in India. Only “a person resident in India” as defined in section 2(v) of FEMA Act 1999 are allowed to participate in currency derivative segment of the Exchange.
In an attempt to make you task simple and easier, we are further writing long list of Q&As to answer your many why`s and how`s of making investments in India.
Please Visit:- Q&A : How NRIs can Invest in Indian Stock Market?
KNOWLEDGE IS POWER!