NRI Investment in Indian Equity Markets

RBI Guidelines

Equity as an asset class has historically provided one of the best returns over a long time horizon. Investment in Indian equities is an attractive investment option for the Non-Resident Indians. Reserve Bank of India (RBI) has framed various rules and guidelines which governs the investment by NRIs in Indian share markets. NRIs need to be aware of the various regulatory guidelines, do’s and don’ts, before taking the plunge.

Salient rules and regulations governing NRI investment in Indian equity / share markets are given below.

Portfolio Investment Scheme (PIS)
One time permission is required before NRIs can begin investing in Indian share markets through stock exchange. Investment by NRIs through stock exchange is allowed under Portfolio Investment Scheme (PIS). RBI has authorized few branches of each authorized dealer (bank) to grant permission to NRIs and administer the PIS.
Designated bank account
NRI need to approach the authorized dealer (bank) which has granted it the permission, to open a NRE (Non Resident External) /NRO (Non Resident Ordinary) account under PIS for routing Investments. It is to be noted NRIs are allowed to open only one such account and all inflows/ outflows regarding the investments have to be routed through this account.
Demat & Trading Account
NRI have to open Demat Account with Depository Participant and Trading account with SEBI registered broker to execute trades.
Investments Allowed
NRI’s are allowed to invest in the following instruments:
  • Shares
  • Convertible debentures
  • Government securities and Treasury Bills. However note NRIs are not allowed to invest in bearer securities
  • Mutual funds
  • Bonds issued by a public sector undertaking (PSU) in India
  • Shares in Public Sector Enterprises being disinvested by the Government of India
  • Exchange traded funds
Repatriation
NRI investment in stock market can be both on repatriation and non-repatriation basis.  NRIs need to be cognizant of the following points.
  • Payment for purchase made on repatriation basis has to be made by way of inward remittance of foreign exchange or out of funds held in NRE/FCNR (B) account. If the shares are purchased on non-repatriation basis, funds in NRO account can be utilized in addition to the above
  • If the shares sold were held on repatriation basis, the sale proceeds (net of taxes) may be credited to the NRE /FCNR (B)/NRO accounts. Whereas sale proceeds of non repatriable investment can be credited only to NRO accounts
  • NRIs are allowed to open two separate trading and demat accounts, based on repatriation and non-repatriation
Intra-day trading
Not Allowed.
NRI Investor has to take delivery of shares purchased and give delivery of shares sold. Short Selling is not permitted.
Futures & Options
(F&O)
NRIs are allowed to invest in F&O segment out of Rupee funds held in India on non repatriation basis (i.e. funds in NRO account), subject to the limits prescribed by SEBI. An NRI, who wishes to trade on the F&O segment of the exchange, is required to apply for a custodial participant (CP) code. Thereafter he can open a trading account and start trading in derivatives.
Currency derivatives
Not Allowed.
Kindly note vide Union Budget 2013, Foreign Institutional Investor (FII) have been allowed to participate in currency derivative segment to the extent of their Indian rupee exposure in India, however NRI’s are still not allowed to trade in currency derivatives.
Off market transactions
Not Allowed
IPO
Allowed
Transfer of shares acquired under PIS under
private arrangement
Shares purchased by NRIs under PIS cannot be transferred by way of sale under private arrangement or by way of gift to a person resident in India or outside India without prior approval of the RBI. However, NRIs can transfer shares acquired under PIS to their relatives.
Monitoring of transactions
RBI monitors the investment position of NRIs in listed Indian companies, reported by designated banks, on a daily basis. Contract notes in original for both purchase and sale transactions needs to be submitted within 24 hours  to the designated bank to enable designated banks to report the same to RBI.
Additional points to be kept in mind by the
broker
While executing transactions for NRIs, broker needs to ensure that:
  • Securities are not in RBI ban list before executing the order.
  • Clear funds are available for purchases.
  • Securities are available before executing any sell order.
  • Depending upon whether the purchases are made on repatriation / non-repatriation basis pay-out of the securities needs to be transferred to respective demat account.
  • Purchase/Sale transactions in cash segment should be settled by delivery only.
Ceiling on Investments under the PIS
Individual NRIs can acquire maximum 5% capital / paid-up value of debentures of listed Indian companies. Overall limit for NRI investment is 10%, which can be raised to 24% per cent, if approved by the company.
Rights/bonus shares
Rights / Bonus shares can be issued to existing NRI shareholders, subject to adherence to sectoral cap as may be applicable.

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