Investing in Indian Stock Markets

Indian stock market Overview

Indian stock market is quite mature. In fact India has the largest investor base in the world after the US and Japan. Investors can invest in shares, debentures, mutual funds and securities among other investment tools. Shares are traded in BSE (Bombay Stock Exchange) and the NSE (National Stock Exchange). Trading can be done online or over the phone through the help of an intermediary. NRI's can invest in the Indian stock market under PIS (Portfolio Investment Scheme) which is regulated by RBI but NRI's are not allowed day trading that is to buy and sell a stock on the same day. In addition to above two main stock exchanges India have 21 recognised stock exchanges but the most active ones are the NSE and the BSE. NSE set up has a model exchange as a fully automated screen based system. BSE one of the oldest in the world accounts for the largest number of listed companies has also started a screen based trading system with the introduction of the Bombay online trading system. Regulations on the capital markets and the protection of investors interest is primarily the responsibility of the Securities and Exchange Board of India (SEBI) headquartered in Mumbai.

How NRIs can invest in Indian stock markets

With rapidly growing economy Indian Stock Markets are booming as well. Although Indian stock market is highly regulated, preventing most non-Indians from investing in it but NRIs are in a special situation and can take advantage of booming Inidan stock market. Below it is outlined what non-resident Indians (NRIs) need to invest in the Indian stock market.

First step in investing in Indian Stock Markets is to get a Bank Account. This will off course be there to hold your funds that you need to invest. As you are outside India your funds will be in foreign currency. So next question arising is weather you want your funds to be held in foreign currency or in Indian Rupees. In banking terms weather you want your account to be repatriable or non repatriable. So let’s first understand these terms and various types of NRI bank accounts.

If you are interested in investing in property in India read Property Investment in India.

NRI Bank Accounts

In simple terms repatriable means the balance held in the account in India can be taken out of India while on the other hand balance in non-repatriable account can not be taken outside India. Rupee account can be:

NRE (Non resident External Rupee Account).

NRE account is repatriable account that is money can be transferred back to foreign country. NRE Account can be Current / Savings / Term Deposit account. Funds are held in convertible Indian rupees. Minimum balance requirement for Current Account is Rs 10,000, Rs 5,000 for Savings Account and Rs 10,000 for Term deposit accounts. Accounts can be funded through remittances in any convertible currencies from abroad, which will be converted at ruling exchange rates into Indian rupees or transfers from existing NRE/FCNR accounts / deposits or foreign exchange brought into India during visits to India. A joint account can also be opened by two or more individuals, provided all of them are NRIs. In case of an account in the name of a minor, both the minor and the guardian should be NRIs. Entire balance, including interest earned thereon, can be converted into any convertible currency at ruling exchange rates and repatriated abroad. Interest on term deposit can be paid periodically or compounded. Balance in the NRE accounts is exempt from Wealth Tax. Entire interest income from a NRE account is exempt from Income Tax under the provisions of Income Tax Act in India.

NRO (Non Resident Ordinary Rupee Account)

Account to be maintained in local currency that is Rupees. NRIs who have local income or expenses in India can open NRO Account. The Account can be Savings, Current or Fixed Deposit Account. Local incomes like rent, dividend, or interest can be credited to this account. Interest earned on this account is not exempt from Income Tax under the provisions of Income Tax Act. Although interest earned is repatriable subject to RBI guidelines. Joint Account with Residents or Non Residents can be opened. Minimum balance requirement for current Account is Rs 10,000, for savings Account is Rs 5,000 and for Term Deposits is Rs 10,000.

FCNR (An account under the Foreign Currency Non Resident Account Bank Scheme)

This type of account is to be maintained in foreign currencies. Fixed deposit accounts maintained only in US Dollars, Sterling Pounds, Japanese Yen and Euro. The deposits can be accepted for a minimum period of 12 months and upto 36 months. Minimum deposit amount is USD 1,000 or equivalent. Deposit can be made by remittances from abroad or by transfer of funds from NRE accounts or by depositing foreign exchange while on visit to India. Interest payments would be at half yearly. All other benefits available at NRE deposits are also available to FCNR deposit.

Open a bank account and decide whether you need to trade on a repatriable or a non repatriable basis. You can open any type of the accounts above but what is important is that to have an account with a good bank, open an account with a good stock broker and be comfortable that their funds are safe and that all trades would be executed fairly and transparently.

Opening an account can appear cumbersome but if you download the application form from the bank's website it will be a lot faster. If you want to do it through the internet, you would have to get copies of your passport, may be some bank statements in original. But the advantage with bigger banks is that all such information would be available on the website so you would not have much of a problem.

You can get further help on various NRI Bank accounts from here: Choosing an NRI Bank Account

Demat Account

So that was step one, in step two you would need to open a demat account. As bank account was there to hold your funds demat account is to hold your assets like you have equities, debentures or your mutual fund units you need an account where those assets as and when you buy and make the payments will be transferred to.

The demat account reduces brokerage charges, makes pledging/hypothecation of shares easier, enables quick ownership of securities on settlement resulting in increased liquidity, avoids confusion in the ownership title of securities, and provides easy receipt of public issue allotments.

It also helps you avoid bad deliveries caused by signature mismatch, postal delays and loss of certificates in transit. Further, it eliminates risks associated with forgery, counterfeiting and loss due to fire, theft or mutilation. Demat account holders can also avoid stamp duty (as against 0.5 per cent payable on physical shares), avoid filling up of transfer deeds, and obtain quick receipt of such benefits as stock splits and bonuses.

You can also have your bank account which also works as your demat account. Check with the banker that the account is suitable for stock trading. Also remember that you can nominate only one bank account for your stock trading. Some of the leading private banks are competent in this regard and can help you open an account through the internet that can be faster.

Brokerage Account

So that’s done you have a bank account and a demat account. But wait you need another account called brokerage account. . An NRI will not be able to execute any trade without nominating a stock broker. There is no limit as to how many stockbrokers you need to have but you must have a stock broker nominated in India. Brokerage is the place where you actually place you trades. These accounts allow you to purchase stocks, bonds, mutual funds, and other investments by paying professionals to buy or sell the items you tell them to. The fee you pay them is their commission, and can vary from broker to broker. The price difference arises when you choose between either a discount or traditional broker. Traditional brokerages provide a wider range of services, and have the price tag to match. They serve along the lines of professional money managers and can offer advice as to what investments might be right for you. Discount brokers are companies that tailor to the more self-directed investor; they don't offer advice as to what to put your money into, leaving you to make your own financial decisions and charging you much less than their traditional counterparts.

But again there are banks which can provide you all in one service. They can act as your bank as well as demat account and over it they can also act as your broker. It is up to you to go for convenience and get one of these all in one accounts or go for specialized accounts.

Before choosing a financial institution the first and foremost criteria for anybody should be to see how tech savvy the banks are since these are long distance transactions. Online access for most of transactions should be preferable. Such ease would enable easy transfer of funds. Secondly before opening an account with the broker you need to find out their net worth, the strength of the balance sheet of the broker. For instance if the total net worth of a broker is Rs 5 crore and the NRI sells stocks worth Rs 50 crore and transfer the asset, the security of your money is doubtful. While all brokers are strictly regulated by SEBI you must choose a broker with a strong balance sheet, strong net worth so that your money is safe.

Further Reading: http://onenri.com/investing-for-nris.html