Last year, the Indian stock market saw a parabolic fall after the imposition of nationwide lockdown. But, only after a few months, when businesses started to open gradually, the stock market revived itself and saw a new all-time high. During this period, a considerable portion of new investors entered the market, especially the youth. It is predicted that ten years from now, as India’s financial literacy rate increases, the stock market will see tremendous growth potential over time.
But what about Indian citizens residing outside India? Can they invest in Indian businesses holding the NRI tag? The answer is yes, and they can. But, there are some rules and regulations, or in short, you can say some extra documentation process is required for an NRI to invest in Indian businesses. NRI’s have to go under a regulated framework laid by the government to invest in Indian markets to eliminate the risk of any illegal activities. So, in this article, let’s find out how NRIs can invest in India and what requirements need to be met by them.
What is a Demat account? What are the different types of Demat accounts available for NRI?
To start investing in the Indian stock market, one must have a Demat account with a bank applicable to Indian & Non-Residential Indian citizens. A Demat account is also known as the dematerialised account, where your shares or holding are stored securely. It also stores various other security assets other than shares of a company like government bonds, mutual funds units, etc.
For a normal Indian citizen, there is only one type of Demat Account but for an NRI, there exist two different types of Demat account which can be chosen according to their requirement.
1. NRO Demat Account:
To open an NRO Demat account, a non-resident Indian citizen must have an Indian Bank account to manage his funds generated in India, like real estate rent or a business running in India. An NRO Demat account is also known as a non-repatriable account which means one can’t transfer all the funds from this account abroad. There is a specific limit for fund transfer which is laid by RBI.
2. NRE Demat Account:
To open an NRE Demat account, an NRI must have an NRE bank account to transfer money earned in any country abroad to their home country. An NRE Demat account is deemed as a repatriable account which means that the funds can be transferred to any country abroad without limits.
What is the documentation required for an NRI to invest in Indian businesses/stock markets?
Like every other Indian citizen, NRI’s have to go through all the normal documentation procedures, including valid ID, Pan Card, bank account details, etc. But in addition, NRI’s also need to get a few more documents ready to open a DEMAT account with an Indian Broker. Below, we have listed some documents with a small brief that an NRI requires to open a DEMAT account in India and start investing in a business.
Apart from basic documents like ID and other KYC-related documents, an NRI is required to provide additional proof of certain documents to open a Demat account in India and start investing-
1. Duly signed Form from the Indian Embassy of the residing country-
An NRI must fill the account-opening form and get it verified from the Indian Embassy to apply for a Demat account with an Indian broker and start investing.
2. Address proof of the residing country-
An NRI must also attach an address-proof document to validate his/her permanent residency over there.
3. PIS letter-
PIS, also known as Portfolio Investment Scheme letter which the Reserve Bank Of India issues to an NRI, must be provided while Demat accounting opening.
4. Copy of Passport or Visa-
He/She shall also provide a copy of his VISA along with his Passport to the brokerage firm.
What are the ways through which NRI can trade in Indian Equity Shares?
A Non-Residential Indian, after completion of the documentation process and open an NRO or NRE Demat account, can finally start investing in three legal ways-
1. By authorising a mandate holder in India:
An NRI can give the authorisation to a mandated holder, anyone from the family, relatives, friends, or other trusted persons. He/She has to fill up the Account Mandate Holder Form of his respective bank and get it duly signed by both the leading candidate and the Mandated holder, who will be able to manage the account on his behalf. Once approved by the bank, the mandated holder gains the right to manage his funds or shares in that Demat Account.
2. By giving another person the Power Of Attorney:
An NRI can also appoint a person on his/her behalf by giving the person Power Of Attorney. It can be done by filing the POA agreement and getting it signed by a notary on stamp paper. This will allow the person to manage funds in the Demat account of the NRI holder and can also redeem the funds on his behalf.
3. Internet Trading:
Nowadays, many selected brokers allow NRI’s to execute their funds into any investment through the internet like every other normal citizen. This has opened the door to widespread adoption of investment for the Indian citizens residing outside India.
What are the limitations of NRI’s while investing in Indian Business/Stock Markets?
We have to agree that NRI’s don’t benefit while investing in Indian businesses that a normal Indian citizen enjoys. The Securities Exchange Board Of India has put certain limitations to NRI investment for controlling any bad practices. Those limitations are mentioned below in detail-
1. NRI’s are not allowed to trade or invest in selected equities:
It is recommended for the NRI’s to ensure with his/her broker on which equities they are permitted to invest. Certain stocks are only tradable by Indian citizens, and any violation of this rule may lead you to catch up with penalties or fines.
2. No intra-day or short selling:
NRIs cannot do intraday trading or short selling any particular stock.
3. No Future and Options trading through NRE Demat account:
NRE accounts are barred from Future & Options trading, but one can do F&O trading via an NRO account, which is non-repatriable in nature.
4. No currency or commodities trading-
An NRI cannot exchange securities in foreign currency or commodities like Gold, Silver, Nicker, etc.
Indian businesses are expected to boom in the coming 5 or 10 years with huge growth in financial literacy throughout the country. Moreover, due to the availability of cheap internet & widespread internet adoption, new investors are entering the stock market every other day, which will make it grow in the long term.
So, the Indian citizens residing outside their home country can also take part in this and invest their valuable money to make it grow in the long term. Although the NRI’s are barred from availing all the trading or investment ways, still they can make a long-term investment through NRE or NRO Demat accounts.
We hope that this article is successful in helping you in knowing how NRI can buy stocks in India.
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Q. Are there any extra charges for an NRI to invest in businesses via a Demat account?
Ans. No, there are no extra charges levied on the NRI’s for investment or trading. But, they have to pay trading fees, account maintenance charges, and other applicable charges, which the broker takes typically from every Demat account holder.
Q. Are NRIs allowed to open a joint account with their spouse?
Ans. Yes, NRI’s are allowed to open a Demat account with their husband or wife, but one of them has to be the primary holder and the other secondary holder. To open a joint account, they both have to be mandatorily an NRI, and they have to submit their KYC documents and FEMA declaration.
Q. Can an NRI invest in Indian Mutual Funds?
Ans. Yes, NRI’s are also allowed to invest in mutual funds or stock ETFs.