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How to Invest In Indian Stocks 101

Welcome to this page about How to Invest in Indian Stocks 101! If you are tired searching for authentic/reliable information about Investing in Indian Stocks- one of the few hot countries with promises for attractive investment returns over the next few years (if not decades), you will find this page valuable with the exact information you are looking for about trading/investing in India.

Disclaimer- Information becomes outdated quickly so before making any investment related decisions based on the information that follows, please consult current laws and investment regulations in India as well as in your country, your tax advisors and your investment advisors. I will not be liable for any misrepresentation or typos or any losses. I am just trying to do a favor by providing primary information about investing in India.

If you are looking at alternative for investing in India, there are quite a few ETFs and MFs in US market:
EPI, ICN, INCO, INDA, INDL, INDY, INP, INR, INXX, PIN, SCIF, SCIN, SMIN


If you are an NRI looking for a broker in India to open a trading and demat account, please send an email to
.

InvestMentor Securities Ltd is a SEBI registered direct member of National Stock Exchange and Bombay Stock Exchange, offering online webbased trading to its customers. InvestMentor is also a direct member of NSDL so you can also open your demat accounts with them. All information that you provide to InvestMentor is safe and secure.

Investing In India Terms and FAQ

Who can invest in Indian Stocks?

As you might know, most investors in any stock market in the world can be divided into two broad groups- Individual investors and Institutional investors .
*Individual investor* means an investor like you and me who is investing own money.
On the other hand, an *institutional investor* is a mutual fund, pension fund or a company like Microsoft who is investing others' money (I mean clients' money or shareholders' money).

Another dimension for looking at investors is- Foreign or Domestic. So an Individual Investor can be placed in one of the two groups: Resident or the Non-Resident. Citizen or non-citizen.
Similarly an institutional investor can be domestic or foreign.

So broadly speaking, there are 4 different types of market participants when it comes to investing in any country or stock market. Countries like the USA have free markets and few investing/ trading restrictions but most emerging countries have different rules and restrictions for different entities. So let us take a look at investing implications for these four groups in India.

  1. Resident Indian Individuals: They can, directly or thro stock market, invest/trade in India without much restrictions. So if you are a citizen of India who lives in India, there are no restrictions on you to invest/trade in Indian stocks. (SEBI and NSE/BSE's regulations like Insider trading in India still apply to you like any other market participant in India.)
  2. Domestic Institutions: Subject to the Articles of Association and MoA of the charter and subject to SEBI's rules and regulations, a domestic company (including mutual funds, financial institutions) can also freely (I mean at will) invest, directly or through stock market, in Indian securities.
  3. People who are not resident of India. Let us divide them in two subgroups
    1. Nonresident Indians (NRIs) and institutions controlled by them: Subject to certain special provisions, more or less, NRIs can also, directly or thro Indian stock exchanges, invest/trade in Indian stocks. (Remember to read this whole article for details about how an NRI can buy and sell stocks bonds real estate in India.)
    2. Foreign *Individual* Investors: Sorry, if you are a citizen of any other country (other than Nepal, Bhutan, Pakistan) and if you, or your parent or grandparents, had no ties with India at any time, currently you can **not** invest directly or through Indian Stock Exchanges in India. However there are some indirect ways for you to invest in India. Two most prominent ways are through ADRs (American Depository Receipts) issued by Indian companies in foreign markets or through mutual funds floated by foreign or domestic Institutional Investors. (Remember to read toward end of this page for details about how you can invest in India stocks and securities.)
      UPDATE- Jan 2012- India allows Foreign Individual Investors to invest in Indian IPOs. This is a brave starting step from India to open up Indian markets to Foreign Nationals/Individual Investors. For more details, click here: QFIs may be allowed to invest in Indian IPOs
  4. Foreign Institutional Investors (FIIs): Subject to certain regulations by India's central bank, Reserve Bank of India, and India's security markets watchdog, SEC like entity- Securities and Exchange Board of India (SEBI), foreign institutions investors can invest/trade almost in any Indian securities.(If you fall in this group, please look at this page which has information for you!)

IMPORTANT::::You might want to look at this big picture Master Document about who can invest in what in India.

Now let us look at the third group- NRIs and Foreign Nationals- and how they can purchase Indian stocks or trade through India based stock brokers.

Who is a Nonresident Indian?

NON-RESIDENT INDIAN (NRI ):
An Indian citizen or a foreign citizen of Indian origin who stays abroad for employment/carrying on business or vocation or under circumstances indicating an intention for an uncertain duration of stay abroad is a NONRESIDENT INDIAN ( NRI ). ( Those who stay abroad on business visit, medical treatment, study or such other purposes which do not indicate an intention to stay there for an indefinite period will not be considered as NRIs. Students who go abroad for studies with an intention to stay there for an uncertain period and who stayed abroad for more than 180 days in the preceding financial year will be treated as Non Resident Indians).

FOREIGN CITIZEN OF INDIAN ORIGIN (POI- Persons of Indian Origin):
For the purposes of availing of the facilities of opening and maintenance of bank accounts , a foreign citizen (but not a citizen of Pakistan or Bangladesh) is deemed to be of Indian Origin, if he, at any time was an Indian citizen or either of his parents or any of his grandparents was a citizen of India. A spouse (not being a citizen of Pakistan or Bangladesh) of an NRI is also treated as an NRI for the above purposes. For investments in shares/securities in India, a foreign citizen (but not a citizen of Pakistan, Bangladesh or Sri Lanka) is deemed to be of Indian Origin, subject to satisfaction of the other conditions above. For investments in immovable properties, a foreign citizen (but not a citizen of Pakistan, Bangladesh, Afghanistan, Bhutan, Nepal or Sri Lanka) is deemed to be of Indian Origin, if he, at any time, was an Indian citizen or his father or paternal grandfather was an Indian citizen.

(Unless specifically mentioned, "NRIs" in this document usually means "NRIs" and "POIs")

What are the investment opportunities available to NRIs in India?

Before we dig into the details of investment alternatives to NRIs, it would be helpful to define two terms: REPATRIATION BASIS and NON-REPATRIATION BASIS. Investment on REPATRIATION BASIS can be taken back to the country of residence of NRI. That means, if you are a NRI living in the USA, you can convert the sale proceeds of your REPATRIABLE INVSETMENTS in US dollars and can transfer to your bank account in USA without any restrictions. If your investment is on NON_REPATRIATION BASIS, you can not convert your rupees in any foreign currency. Most of the investments made out of your NRE accounts are usually on the REPATRIATION basis.

* Government Securities/Units/ National Savings Certificates:

NRIs are freely permitted to invest their funds in Government securities or Units of UTI through authorized dealers. Units can also be purchased directly from UTI. Investments in National Savings Certificates can be made by NRIs subject to the terms and conditions applicable to the sale/issue of such certificates. However, NRIs are not permitted to invest in bearer securities like Indira Vikas Patra/Kisan Vikas Patra.
These investments can be freely transferred or sold, provided the transfers/sales are arranged through an authorized dealer. Units can, however, be repurchased directly by UTI.

If such securities were purchased out of funds remitted from abroad or out of NRE/FCNR accounts, sale/maturity proceeds can be repatriated. Sale/maturity proceeds of securities purchased out of funds in NRO accounts can only be credited to NRO accounts and cannot be remitted abroad.

* Company Shares/Debentures
NRIs are permitted to make direct investments in proprietary/partnership concerns in India as also in shares/debentures of Indian companies. They are also permitted to make portfolio investments i.e. purchase of shares/debentures of Indian companies through stock exchange/s in India. These facilities are granted both on repatriation and non-repatriation basis.

(How much can NRIs invest in individual companies in India? In the case of NRIs under PIS it is to be ensured that the paid-up value of shares/ convertible debentures purchased by an NRI under PIS route should not exceed 5% of the paid up capital/ paid up value of each series of debentures. The aggregate paid-up value of shares/ convertible debentures purchased by all NRIs should not exceed 10% of the paid-up capital of the company/paid-up value of series of debentures of the company. The aggregate ceiling of 10% can be raised to 24%, if the General Body of the Indian company concerned passes a special resolution to that effect. The NRI investor should take delivery of the shares purchased and give delivery of shares sold. Payment for purchase of shares and/or debentures is made by inward remittance in foreign exchange through normal banking channels or out of funds held in NRE/FCNR account maintained in India if the shares are purchased on repatriation basis and by inward remittance or out of funds held in NRE/FCNR/NRO account of the NRI concerned, maintained in India where shares/debentures are purchased on non-repatriation basis.

There is no limit on NRI purchasing shares/ convertible debentures issued by an Indian company on non-repatriation basis whether by public issue or private placement. Amount of consideration for such purchase shall be paid by inward remittance through normal banking channels from abroad or out of funds held in NRE/FCNR/NRO account maintained with the AD. NRI can also, without any limit, purchase on non-repatriation basis dated Government securities, treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds. )

* Investment in Immovable Property
Reserve Bank has granted general permission to foreign citizens of Indian origin, whether resident in India or abroad, to purchase immovable property in India for their bona fide residential purpose. They are, therefore, not required to obtain any **prior** permission of Reserve Bank. (One important note: If you are NRI (Nonresident but still citizen of India, you are at an advantage. If you are POI (Nonresident and also not citizen of India), you have to buy property with Foreign Exchange or out of funds from your NRE/FCNR(B)/NRO account.)
However after the purchase is made, they are required to file a declaration in form IPI 7 with the Central Office of Reserve Bank at Mumbai within a period of 90 days from the date of purchase of immovable property or final payment of purchase consideration along with a certified copy of the document evidencing the transaction and bank certificate regarding the consideration paid.
Can such property be sold without the permission of Reserve Bank? Yes. Reserve Bank has granted general permission for sale of such property.

As the focus of this page is INVESTING IN INDIA, let me add some relevant information: Can sale proceeds of such property if and when sold be remitted out of India? In respect of residential properties purchased on or after 26th May 1993, Reserve Bank considers applications for repatriation of sale proceeds up to the consideration amount remitted in foreign exchange for the acquisition of the property for two such properties. The balance amount of sale proceeds if any or sale proceeds in respect of properties purchased prior to 26th May 1993, will have to be credited to the ordinary nonresident rupee account of the owner of the property. Applications for necessary permission for remittance of sale proceeds should be made in form IPI 8 to the Central Office of Reserve Bank at Mumbai within 90 days of the sale of the property.

 

How can an NRI invest/trade in Indian stock markets?

Step 1: Get PAN Number, Open three types of accounts and get Reserve Bank of India's one time permission.

  1. Obtain PAN number from IncomeTax Department of India if you don't have one. Since Jan 1, 2007, it is compulsory to have PAN if you want to place any trade with a broker in India.
    What is a PAN card? Is it compulsory to have a PAN card if I am an NRI?
    Permanent Account Number (PAN) card is issued to anybody who pays or will have to pay taxes in due time in India. As per the new rules and guidelines, even NRI’s are required to have a PAN card
    Need more information about PAN card and how to get it? Don't worry. All you need for getting a PAN card is right here on this website. Please click here for PAN Card form and instructions.
    Important: PAN Card application requires very odd sized photos 35mm x 25 mm and only way is to get PAN Card photos at reasonable rates in the USA is with http://www.onlinepassportphotos.com

  2. Open two bank accounts with RBI (Reserve Bank of India) approved *Designated* Bank Branch- NRE Account and NRO Account
    (What is a designated branch? It is a bank branch which is selected/approved by Reserve Bank of India to open NRE accounts that are intended to be used for buying and selling stocks on stock exchanges. Such branches also have the expertise and infrastructure to handle NRI's trading under RBI's Portfolio Investment Scheme. They help you get necessary approvals and help RBI watch NRIs holdings in various companies. Want to know more? Email me.)

    Some tips about which bank to select:
    Compare various banks and choose a bank to open NRE and NRO accounts with it. Few prominent Indian banks are SBI, ICICI Bank, Citibank. Be prepared to fill up some papers, produce evidences to prove that you are an NRI and notorize some forms.
    Here is a list of some important factors in choosing a bank:
    Does the bank have a branch in your local town/city in India?
    Does it have a branch in your current city of residence abroad (I mean USA, England, Russia wherever you are living?
    Does the bank offer online banking facility?
    Does it have dedicated staff for providing trading/investing needs of NRI investors like yourself?
    Is the bank-branch a designated branch by RBI under Portfolio Scheme (for investment by NRIs thro stock exchangers)?
    Does the bank prefer or work with any SEBI registered stock brokers?
    Does the bank itself offer any stock broking/brokerage services?
    Is the bank Depository Participant? Does it open *Individual's demat accounts?
    Very important: What are their charges and fees? (Some of the banks charge too high fees for even basic services. So do your homework.)

    Banks which offer Accounts for NRIs
    Citi Bank, HDFC Bank
    Global Trust Bank, UTI Bank
    Vysya Bank, Times Bank, Canara Bank
    IndusInd Bank, Oriental Bank of India


  3. Open a Demat Account with a Depository Participant
    (What is this? If you are in the USA or some developed country, you probably don't know about such accounts even though you might have one or more such accounts! If you have a brokerage account with any broker like Ameritrade or E*Trade, you also have a depository account somewhere. This depository account maintains your stock balances so you get stock splits, dividends, Meeting notices and Annual reports etc.
    The depository concept is similar to the Banking system with the exception that banks handle funds whereas a depository handles securities of the investors. A depository can therefore be conceived of as a "Bank" for securities. An investor wishing to utilize the services offered by a depository has to open an account with the depository through the Depository Participant. This is very similar to opening an account with any of the branches of a bank in order to utilize the services of that bank.)

    How to choose a good DP for you?

    Open a Demat account. You can check with your banker or broker above. Chances are they are also Depository Participant.
    Here is a list of Important factors in choosing a DP:
    Is it Depository Participant with NSDL or CDCL? NSDL is the biggest depository institution in India.
    Does it offer online account viewing?
    Does it let you transfer stocks into and out of it to your brokers' account for clearing purposes?
    What is its fee structure?
    What extra services does it offer?
    If you are going to demat your old share certificates in India, make sure the DP is easily reachable in person.
    Do they seem knowledgeable about demat accounts by NRIs?


  4. Open an account with a stock broker. Well, you need a stock broker to execute your buy and sell orders. (There are two major stock exchanges in India- Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Each of them have several hundred members. So open an account with a stockbroker who is a member of either of the stock exchange. As NSE has nationwide coverage and is professionally run, an account with a NSE member is more desirable over an account with a BSE member. One such stock broker who is in the process of setting up services for NRI is InvestMentor Securities Ltd (a SEBI registered stock with membership of National Stock Exchange. The company is in the process of acquiring BSE membership. Plus, InvestMentor is a depository participant with several thousand demat account (see item 2 above). So you can open your Demat as well as stock trading account with InvestMentor Online.)

    How to select a stock broker for trading stocks in India?
    Compare various stock brokers and choose a broker to open your stock trading account. Make sure your broker likes your banker (where you have decided to open your bank accounts.) Settlement of trades in India is now T+2 (which happens to be speedier than what you will find in advanced country like USA! Mera Bharat Mahan. Jai Hind.)
    Here is a list of Important factors in choosing a stock-broker in India:
    Is it registered with SEBI as a stock broker?
    Which stock exchanges the broker is a member of? If it is a member of both NSE and BSE, it is much better.
    If you are looking to trade Indian stocks and derivatives, check if the broker is a member of Equity as well as Derivatives segments of the National Stock Exchange/Bombay Stock Exchange.
    What are the brokerage commissions?
    Does it offer online stock trading facility?
    How seamlessly does the brokers' infrastructure work with your bank and DP?
    Does it have dedicated/expert staff to handle details of investing by NRIs like yourself?


  5. Once these three accounts are in place, see if you have a local relative/representative ***IN INDIA** who can spare some time for you if and when needed. Can you trust him or her? Can you give her a power of attorney? Would she be motivated to do follow up on behalf of you if needed? If you do not have such person, you may be getting into some dirty waters. So be very careful before you proceed without having a local rep for you. (Important tip about investing in India: Remember to compensate him or her for his/her services as an agent/power of attorney-holder for you. Don't expect anyone to work for free for you. Period. This aligns his/her interests with yours.)
    I strongly recommend that in order to make your investing in India smoother, please find a relative or a person who you can trust and who you think has right motivation to take care of your stuff. Give a Power of Attorney to such a person.
  6. Get Reserve Bank of India's approval for investing in Indian stocks under Portfolio scheme. The application is to be submitted to Reserve Bank through a designated branch of a bank in India in one of the prescribed forms, i.e. NRC/NRI/RPC/RPI. Reserve Bank issues general permission for a period of 5 years which can be renewed further by authorized dealer concerned for a period of 5 years at a time. The approval you get is general approval and you don't need to get any other approval from RBI over the next 5 or so years.
    The purpose of such approvals is not to reject your application but to keep records/traces of your investments in the country so most of NRIs would get this approval within around 2 weeks.

Step 2: Now you are ready to invest/trade in Indian stocks. So here are the routine things you will need to do.

  1. STOCK SELECTION: As always, you will need to do research before you take a plunge. So do your research and select the stocks you want to invest in.
  2. CLEARANCE FROM YOUR BANK: Contact your bank with the list of stock you are intending to invest in and your bank will clear you for trading/investing in those stocks. (As per Indian rules, NRIs can not collectively acquire more than 24%, 40% or X % of the paid up capital of an Indian company. So RBI maintains the current levels of NRI holding in various companies thro the designated branches. After you give your list to your banker, she would check her lists and make sure there is room in individual companies for NRIs to invest. If the limit is exceeded, you might not be able to invest in those stocks. So make sure you get prior clearance about your investments from your banker.)
  3. PLACE TRADES THROUGH STOCK BROKER: Place your order(s) with your stock broker. With many stock brokers, you an place now online orders. Thanks to Internet, this step is much easier now.
  4. FORWARD COPY OF TRADE CONFIRMATION TO YOUR BANK. After you order is confirmed, forward a copy of the TRADE CONFIRMATION to your bank
  5. PAY TO YOUR BROKER FOR PURCHASES AND TELL HIM ABOUT YOUR DEMAT ACCOUNT: Write a check out of your NRE/NRO account to the stock broker. On the settlement date, your stock broker will send the stocks to your demat account so you might want to verify with your depository participant if the stocks are credited in your account. If your demat account is also with the broker you are trading with, your life will be a bit simpler- one less institution to deal with. Also, thanks to the Internet, currently many banks and demat institutions offer online access to your accounts which comes handy in managing your investments in India.
  6. CLOSING/ SELLING YOUR INVESTMENT: Fortunately, repeat step 3 and 4 above. Place a SELL order with your broker. When your order is confirmed, transfer shares to your broker's clearing account from your demat account. After settlement, your broker will give you a check. Take that check and a copy of broker's bill showing the SELL transaction to your bank account for deposit. The bank will withhold some taxes on the gains you had and deposit the rest amount in your account. (Certain bank branches may require you to get a certificate about how much to withhold from your accountant or lawyer.)
  7. FILE YOUR TAX RETURNS EVERY YEAR: Most of the time, you might be able to get refund from the withholdings done by your banker. Sometimes you might owe additional taxes to Indian government. Check with your tax consultant in India. (There is only FEDERAL type of tax in India. There are no STATE or local taxes levied on individuals.)

Also, if you are looking for more info, you might want to look at this FEMA Circular 20 Section 3 about investments in India by NRIs


How can a Foreign Individual Investor invest in India?

Following are few alternatives for Foreign Individual Investors to invest in India.

  1. If you are a citizen of Nepal or Bhutan, Indian markets are open for you to invest directly or thro stock markets. Citizens of Nepal and Bhutan are permitted to invest in Indian Securities on repatriation basis subject to the condition that the amount of consideration for such purchase on repatriation basis shall be paid only by way of inward remittance in free foreign exchange through normal banking channels or by debit to their NRE/ FCNR(B) accounts.
  2. ADR/GDR. American/Global Depository Receipt. Many prominent Indian companies have issued ADR/ADS in foreign stock markets. They are traded in the US and European stock exchanges.
    What is an ADR? An Indian company wanting to raise money in foreign capital markets may issue some stocks to a depository or a trust company which in turn would issue foreign currency dominated stocks based on the holding of Indian companies stock.
    One prominent example is INFY (INFOSYS) traded on NASDAQ. Infosys is India's #1 software company. As of today, May 16, 2005, INFY is trading at around 63 dollars on NASDAQ. Each stock of INFY you buy in the USA is equivalent to buying one stock of Infosys in India. So this is one alternative for foreign citizens to invest in India.

    Notes: Because there may be greater demand for certain Indian stocks in international market, their ADR/GDR may be quoted at steep premium in the USA. As an example, the price of INFY in Indian rupees as of today is around 2740 Rs. (63$ * 43.5 = 2740 Indian Rupees) However if you were a lucky Indian, Non-resident Indian or Foreign Institutional investor, you can buy the same stock in Indian market for around 2050 RS on Indian stock exchanges. So my point is: INFY ADR opened up the Indian market for Foreign Individual investors like you but you are expected to pay around 35% premium for owning Infosys stocks in the USA.
    Look at the following link to see quotes of some Indian ADRs and how much premium or discount they are traded at in foreign currency compared to their value in local stock exchange in Indi
  3. Through Indian funds: IFN, IGF.

Indian Stock Markets today

Some useful websites about Investing in India:
Investing In India Terms and FAQ
Yahoo! Finance India: http://in.finance.yahoo.com/
Charts on Indian Stocks: http://charting.bseindia.com/charting/index.asp
General Market related info: http://www.capitalmarket.com/
Stock Research in India: http://www.dlngroup.com/
How to select a good stock trading book: http://www.beststocktradingbook.com/

Online Business Newspapers:
The Economic Times
Business Standard
Financial Express
Business Line

How to find which stocks to buy or to sell? http://www.profitfromprices.com/

Are you Gujarati? Visit http://www.kavilok.com/

Research Resources on Indian Markets:
Best Stock Market Trading book- How to find stocks for trading
Securities and Exchange Board of India (SEBI)
Stock Research and Analysis on India
(Capitalmarket.com)
List of Best Stock Market Trading books- How to trade stocks
Business News on India (Dhan.com)
Reserve Bank of India (RBI)
Ministry Of Finance, Government of India

Online Business Newspapers:
The Economic Times
Business Standard
Financial Express
Business Line

All you need to know about how to Invest in Indian stocks

Institutions:
National Stock Exchange of India Ltd (NSE)
National Securities Depository Ltd (NSDL)
National Securities Clearing Corporation Ltd (NSCCL)
The Bombay Stock Exchange

Others:
Export-Import Bank of India
Central Board of Direct Taxes (CBDT)
Industrial Development Bank of India (IDBI)
The Industrial Credit and Investment
Corporation of India Ltd. (ICICI)

Central Board of Excise & Customs




Darlings of Indian Markets:
Infosys India, Satyam Computers, Reliance Ind, State Bank, Wipro Info, HCL Info, Himachal Futuristing, Zee Tele, Dr Reddy's lab, Ranbaxy, Dabur, Indian Shaving Products (Gillete), Monsanto

 

 

 

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