NRI investments in the Indian capital markets continue to be a minuscule number compared to the inflows seen in bank fixed deposits or other avenues of investment. The primary reasons attributed to the subdued interest in stock market investments is the lack of clarity and know-how as well as people being largely unaware of the immense potential the stock market has to offer in terms of returns on investment.
And quiz any NRI investor about his reluctance to invest in the Indian share market and most would echo similar sentiments that point towards the exhaustive paperwork and documentation as well as the cumbersome process that involves multiple parties to execute transactions. The tax implications and other regulations applicable to NRIs also act as additional deterrents that make them stay away from the markets.
However, a variety of changes have been introduced lately by the Indian Government to boost interest and make things easy for NRI trading and investments, and the entire process is a lot less cumbersome compared to how things were a few years back.
Hereâ€™s a guide we have put together that should act as a reference point for everything an NRI needs to know about the basics of investing in the Indian stock market.
The First Step â€“ Finding a Bank
The first and the most obvious requirement to invest in the equity markets is to open a bank account. And yes, even before an individual decides to open a bank account, one needs to first determine if he or she is going to trade on a repatriable or a non-repatriable basis. The investor can check with his or her existing bank if they do have a provision for stock trading (most leading banks do) or look at opening an account with a bank that provides stock trading facilities.
Completing the Paperwork
While the amount of paperwork and documentation needed is much lesser than what it was earlier, you still need to provide some amount of documentation to formally open an account. The process, however, is considerably less stressful than you would imagine.
Furthermore, if you choose to complete the process online, you can expect the process to be a whole lot simpler and convenient. One pro tip here though would be to approach the better known banks to ensure a hassle free application process â€“ especially if you are taking the internet route to open the account. The banks concerned should be able to walk you through the account opening process and provide you all the information and support need to get things rolling.
What Specific Instruments Can NRIâ€™s Invest In?
Other than the popular investment avenues such as real estate and bank deposits, typically NRI investment broadly constitute of 5 different asset classes namely stocks, mutual funds, insurance, government securities and company deposits.
For investments in mutual funds, NRIs can directly contact the mutual fund website and invest in the funds of their choice. Payments can be made via the NRE or NRO bank accounts. A great way to invest in mutual funds though is to use the banks trading (the one that you have opened the account with) and investment portal which offers a seamless and hassle free single-window facility for all your investment needs. Check with the respective bank for the services on offer.
Repatriable Versus Non-Repatriable Investment â€“ Whatâ€™s the Difference?
Letâ€™s explain this with an example. Ravi Kapoor decides to stay back in India and plans to invest $100,000 in the stock market. Since he has decided to stay back, the paperwork required for taxation purposes would be minimum. The fact that he has decided to stay back makes this a non-repatriable investment.
However, if he decides to go back and take back the benefits plus the invested amount back to the foreign country, the same is considered as a repatriable investment wherein he is liable to pay taxes on the generated returns. He also would need an NRE account to manage the transactions.
What are the Guidelines Set by RBI for NRI Investments in the Stock Market?
NRIâ€™s looking to make investments in the Indian stock market need to be aware of the following guidelines set by the RBI:-
Ã˜ Requirement of the Portfolio Investment Scheme approval from the bank which is basically the ticket to begin investing in the stock market.
Ã˜ Day trading is not allowed and NRIâ€™s can only execute or participate in delivery based trading.
Ã˜ NRIâ€™s can, however, trade in the futures segment.
Be advised though that banks will have specific charges for the above-mentioned services and transactions and you need to review them carefully before you open an account.
Is It Mandatory to have a Stock Broker in India?
Even if you have an existing demat account, you need to mandatorily have a stock broker or a stock broking account in India.
What About Other Individuals Trading on an NRIâ€™s Behalf?
This can be done via the power of attorney route. If for some reason you are unable to personally execute the trade or manage your investments, you can authorize your relatives to execute the trades on your behalf.
How Exactly Does One Go About Investing in the Stocks Market?
Step 1: Open an NRO/NRI account with any of the RBI designated bank. This is the account you will be using to make payments.
Step 2: Open a demat account; preferably with the same bank. Choosing the same bank gives you the benefit of utilizing a common trading platform to execute your transactions. The demat account is essentially used to hold the stocks, mutual funds, debentures and other instruments you have purchased.
Step 3: Open a brokerage account with a SEBI authorized stock broker. The stock broker would be the entity that would be placing and executing trades on your behalf.
Once again, it is always advisable to go with banks that offer trading services via a unified account that offers the benefits of all three accounts namely a trading, demat and brokerage account.
What About Investments in IPO?
Once you have your trading account up and running, most brokerages allow you to easily subscribe for IPOs. All you need to do is fill up the form and submit the application online and make the respective payment.
How Should One Choose a Bank or a Broker?
This is the single biggest factor that will help NRI investors make investments and execute transactions in a smooth and efficient manner. Not only does a good bank or brokerage service offer cutting edge tools and technology to help you make timely investment decisions, they also help you execute your transactions in a safe and reliable manner.
Once again, while there are plenty of brokerage services and banks you can choose from, it is always advisable to go with the best in the business in terms of their technological expertise, product features, as well as the range of services on offer.
One major aspect you need to cross-check though without fail is to ensure that you are dealing with RBI authorized banks as well as SEBI approved brokers. This ensures that there is no room left for uncalled for issues in the future.
What about Tax Liability?
This can be an entirely new topic for discussion but for beginners, as explained earlier in the article, the tax liability depends on the kind of investments made by the investors, i.e., the repatriable or non-repatriable type of investment. Both have their own set of rules and requirements and one needs to seek expert advice on the kind of impact the respective taxes would have on their investments.
Again, you also need to be mindful of the â€œdouble taxationâ€ laws. While the rules might vary from one country to another, one needs to seek expert opinion on whether he or she would be liable to pay tax and what would be the expected outgo.
Kotak Securities is one of Indiaâ€™s largest share broking company offering demat account, online trading, mutual fund and IPO investing serviceâ€™s along with a research division specializing in Sectoral Research and Company Specific Equity Research. We also offer you the insights & information related to various company share prices, their market status thus keeping you updated with share market happenings.
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