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Information becomes outdated quickly so before making any investment-related decisions based on the information that follows, please consult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 an 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)
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 are investing
their 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 the 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.
- Resident Indian Individuals: They can, directly or through stock
market, invest/trade in India without many 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.)
- 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 the stock
market, in Indian securities.
- People who are not residents of India. Let us divide them into two
subgroups
- Nonresident Indians
(NRIs) and institutions controlled by them: Subject to
certain special provisions, more or less, NRIs can also, directly
or through 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.)
- 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. The 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 towards the 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
- 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 a 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 an NRI living in the USA,
you can convert the sale proceeds of your REPATRIABLE INVESTMENTS in
US dollars and can transfer to your bank account in the 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.
Step 1: Get PAN Number, Open three types of accounts
and get Reserve Bank of India's one-time permission.
- Obtain a PAN number from the Income Tax 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 the 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
- 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 that 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 evidence to prove that
you are an NRI and notarize 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 the USA, England, Russia wherever you are living?
Does the bank offer an online banking facility?
Does it have a 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 through stock exchanges)?
Does the bank prefer or work with any SEBI registered stockbrokers?
Does the bank itself offer any stockbroking/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
- 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?
- Open an account with a stockbroker. Well, you need a stockbroker
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 has 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 an NSE member is more desirable
over an account with a BSE member. One such stockbroker who is in
the process of setting up services for NRI is InvestMentor
Securities Ltd (a SEBI registered stock with a membership of the 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 stockbroker for trading stocks in India?
Compare various stockbrokers 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.) The settlement of trades in
India is now T+2 (which happens to be speedier than what you will
find in an 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 stockbroker?
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 an 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?
- 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 a 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 the right motivation to take care of your stuff. Give
a Power of Attorney to such a person.
- Get Reserve Bank of India's approval
for investing in Indian stocks under the 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.
- 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.
- 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 paidup capital of an Indian company. So RBI maintains
the current levels of NRI holding in various companies through 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.)
- PLACE TRADES THROUGH STOCKBROKER: Place your order(s) with
your stock broker. With many stockbrokers, you can now place
orders online. Thanks to the Internet, this step is much easier now.
- FORWARD COPY OF TRADE CONFIRMATION TO YOUR BANK. After you
order is confirmed, forward a copy of the TRADE CONFIRMATION to your
bank
- PAY TO YOUR BROKER FOR PURCHASES AND TELL HIM ABOUT YOUR DEMAT
ACCOUNT: Write a check out of your NRE/NRO account to the stockbroker. On the settlement date, your stockbroker 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.
- 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 the 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.)
- FILE YOUR TAX RETURNS EVERY YEAR: Most of the time, you might
be able to get a refund from the withholdings done by your banker. Sometimes
you might owe additional taxes to the 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?
The following are a few alternatives for Foreign Individual Investors to
invest in India.
- 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.
- 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 the 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 the international market, their ADR/GDR may be quoted at a 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 the 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
- Through Indian funds: IFN, IGF.
Some useful websites about Investing in India:
Investing
In India Terms and FAQ
Yahoo! Finance India: http://in.finance.yahoo.com/
General Market related info: http://www.capitalmarket.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, Reliance
Ind, State Bank, Wipro
Info, HCL Info, Himachal Futuristic, Zee Tele, Dr Reddy's
lab, Ranbaxy, Dabur, Indian Shaving Products (Gillette), Monsanto