You may have moved out of India but you may still want to invest in Indian companies. This could be because of opportunities that Indian equity markets offer or due to your familiarity with Indian equity markets. But you have a number of questions. How can NRIs invest in stock markets in India? Are there any restrictions on NRI investment in equity markets? Can NRIs trade in derivatives?
You have been told it is not so simple. You need multiple types of banks accounts, trading accounts and demat accounts for different kinds of transactions. That is indeed true. But why do you need multiple accounts? This confusion has been holding you back. However, if you understand the rationale behind the need for many accounts, things will start falling in place. For instance, the sale proceeds of investments made through repatriable funds (NRE accounts) are repatriable; otherwise there are restrictions on repatriability. How do you ensure whether purchase was made out of repatriable funds? If the funds used to purchase shares came from NRE account, the funds were repatriable. Having multiple accounts makes it easier for the intermediaries to keep these checks and comply with RBI and FEMA regulations.
Opening the accounts is a one-time exercise. Financial intermediaries take care of the account opening process. In this post, we set out to clarify some of the doubts many NRIs have about equity investments in India.
Portfolio Investment (NRI) Scheme (PINS)
PINS is a scheme by the Reserve Bank of India and permission under PINS scheme is mandatory for any NRI or PIO who wishes to purchase and sell shares or mandatorily convertible debentures of Indian companies on a recognised stock exchange in India. Application for PINS permission can be made through a designated bank branch by filling in a PINS application form.
PINS account can be opened in designated branches of banks (authorised dealers) as authorised by RBI under the PINS scheme.
Only an NRI/PIO can open a PINS account. And an NRI/PIO can have PINS account with only one bank at a time. Hence, if you already have a PINS account with ICICI Bank and want to shift to Kotak Mahindra Bank, you need to close your PINS account with ICICI Bank and open a new one with Kotak Mahindra Bank.
Your designated bank provides a daily reporting of your transactions to Reserve Bank of India.
To trade in equity markets, you need to have a bank account, a trading account and a demat account. To participate under PINS scheme, you need to open all three accounts under PINS scheme. Hence, in this post, depending upon the context, PINS account may mean a bank account, a trading account or a demat account.
Why does an NRI need a PINS account to invest in stock markets?
A PINS account makes it easier to comply with certain regulations under FEMA (Foreign Exchange Management Act), 2000. There are limits on foreign ownership in a company. The limit varies across sectors. An NRI or PIO can purchase shares up to 5% of the paid up capital of the company. Additionally, all NRIs/PIOs together can purchase up to 10% of the paid up capital of the company.
Hence, to keep track of NRI investments, it is necessary to have a separate bank, trading and demat account under PINS scheme, where only such transactions by an NRI are done. The bank (with which you applied for PINS approval) provides regular reporting of your transactions in the stock exchanges to the Reserve Bank of India. This helps RBI keep track of foreign ownership in the companies.
Please note, in a recent Cabinet meeting, it was decided that NRI investments in Indian companies on non-repatriable basis shall be considered domestic investment (at par with investments by resident Indians). However, investment on repatriable basis shall still be considered foreign investment and will be governed by extant ownership caps.
Is PINS Account enough? Or do you need something else too?
No, PINS account is not enough. There are a set of transactions that are not permitted under PINS.
- Sale of shares purchased in Initial Public Offering (IPO)
- Subscription to IPOs (Purchase of shares in IPO)
- Sale or purchase of mutual fund units
- Sale of shares received through gifts (even if the gifted shares were purchased under PINS)
- Sale of shares bought as a resident
- Sale of shares received in bonus
- Derivative transactions
Hence, if you had purchased shares of a company in an IPO, you cannot sell off the shares under the PINS scheme (through PINS account). To take care of such investments by NRIs, a regular trading account, bank account and demat account is also required. We will call such accounts Non-PINS accounts.
What NRIs are not allowed to do in equity markets?
- Intra-day trading
- NRIs can only trade on delivery basis.
- Buy Today Sell Tomorrow (BTST) is not allowed
- NRIs need to have 100% funds at the time of purchase.
- Short selling is not allowed. You need to own the stocks before selling.
- No adjustment of purchase against sales consideration can be done. NRIs are required to make bill-to-bill payments.
Can NRIs trade in derivatives?
Yes, NRIs can trade in derivatives but only through Non-PINS NRO account. Trading in derivatives is not allowed under PINS scheme or on repatriable basis.
You need a bank account, a trading account and a demat account
To trade in the stock markets, you need three accounts:
- Bank account: To provide funds for purchase and receive proceeds of sales from equity investments.
- Trading Account: A trading account is opened with a brokerage firm such as ICICIDirect, Sharekhan, Zerodha etc. A brokerage firm is a member of stock exchange (BSE, NSE) and you can place your orders on the exchanges through these entities.
- Demat Account: Such an account is opened with a depository (NSDL, CDSL) through a depository participant (say ICICI Bank). Any shares/securities purchase are stored in dematerialized (digital) form in your demat account.
When you purchase shares, funds are fetched into your trading account from your bank account and purchased stocks go to your demat account. When you sell shares, the shares are fetched from your demat account and the sales proceeds are credited to your bank account. This is a simplistic representation. The actual cycle is a bit complex but the end result is same.
What is a PINS Bank Account?
A PINS bank account is just like a regular NRE or NRO savings bank account. The limitation is that you cannot route personal banking transactions or any transactions pertaining to securities acquired other than PINS such as IPO through the PINS account.
Find out more about NRE and NRO savings accounts here.
There are two types of PINS bank accounts.
- NRE PINS Account: This account can only be funded from your NRE/FCNR accounts or from inward remittances through normal banking channels. You need this account if you want to repatriate sale proceeds (net of taxes) of your equity investments.
- NRO PINS Account: You need this account if you need to trade/invest out of your funds in India. The sales proceeds will be non-repatriable (will be subject to repatriation restrictions on NRO accounts).
Depending upon your requirements, you can open a NRE PINS or a NRO PINS or both types of accounts. However, please note you can open these accounts with just one bank.
An excerpt from Kotak Mahindra Account opening form for NRI bank accounts.
Other features of PINS Bank Account:
- Only NRIs can open PINS account. Resident Indians cannot open such an account.
- The account can be used only to make trades in Indian equity markets.
- It is only applicable for equity investments and not for mutual fund investments.
How many bank, trading and demat accounts do NRIs need?
For resident Indians, you can do with a single savings bank account, trading account and a demat account. However, if you are an NRI, things are not so simple. There are various combinations possible based on source of funds (repatriable or non-repatriable) and nature of transaction (PINS or Non-PINS). So, it depends on your requirements.
- Your Bank Account can be PINS NRE or PINS NRO or Non-PINS NRE or Non-PINS NRO. Non-PINS accounts are regular NRE or NRO accounts.
- Your Trading Account can be NRE or NRO. You need separate trading accounts for PINS and Non-PINS transactions.
- Your Demat account can be NRE (repatriable) or NRO (non-repatriable). However, you need separate demat account for PINS and Non-PINS transactions. No permission is required from RBI to open a demat account.
Not all combinations are allowed. Only following combinations are allowed.
You can open all four combinations.
Please note the terminology may vary across banks, brokerages and depository participants. I have used this terminology to make it easier to understand.
You can notice NRIs cannot make fresh purchases under Non-PINS accounts. The only exception is issuance under IPO. However, IPO allocation is done by company i.e. shares are not purchased on exchange. For any fresh purchase in the secondary market, you need a PINS account.
Only those shares acquired under PINS scheme can be sold under PINS scheme. Therefore, shares acquired as a resident, allotted under IPO or received in gifts or as bonus cannot be sold under PINS scheme. Such shares have to be sold under Non-PINS account.
You can use your existing NRE or NRO savings accounts for linking to your Non-PINS trading accounts. However, for PINS trading account, you will have to open fresh savings banks account (PINS NRE savings account or PINS NRO savings account or both).
Non-PINS NRE and Non-PINS NRO savings account can be used to purchase mutual fund units and apply to IPOs. You do not need a demat account to hold mutual fund units. Shares received in an IPO shall be credited to Non-PINS demat account (NRE or NRO depending upon the source of funds).
What about the shares that I bought as a Resident?
You will have to intimate about the change in resident status to the concerned financial institution. You will have to open a new demat and trading account. The new trading and demat will reflect your NRI status and will be linked to your NRO savings account (Non-PINS NRO). All the securities held in your resident demat account will be transferred to the new demat account (Non-PINS NRO demat account). Such securities will be held on a non-repatriable basis.
What happens in case of a Bonus issue?
The bonus shares have to be transferred from PINS demat account to Non-PINS demat account. Such shares can only be sold from Non-PINS demat account. The sale proceeds will be credited to Non-PINS savings account (NRE or NRO).
Tax deduction at Source for NRI Investment in equities
Though the tax treatment for NRIs is same as resident Indians, there is difference in TDS rules for NRIs. Tax on long term capital gains on equity investments is Nil while short term capital gains are taxed at flat 15%. Entire tax liability will be deducted as TDS by your broker.
Please note you may be required to submit proof of date of acquisition and purchase cost with the broker in specific cases such as sale of bonus shares, shares allotted in IPOs etc. If you fail to submit the requisite proofs, TDS will be deducted on entire sales proceeds (and not just capital gains). You will have to claim the excess tax deducted while filing income tax returns.
I am an NRI. I want to invest. How to get started?
You need bank, trading and demat accounts. You need to submit following documents with the bank or brokerage firm:
- Copy of Passport
- Copy of Visa or local residency proof
- Address proof
- Copy of PAN Card
- Duly completed PINS application
- Duly completed application forms for opening bank, trading and demat accounts.
This is a tentative list. Exact set of documents can be checked with the respective banks or brokerage firms. Additional documents may be required based on your country of residence. Several banks provide an integrated offering where you can apply for bank, trading and demat accounts and PINS permission in a single application. Going with an integrated offering can save you a lot of compliance hassles.
Indian equity markets present an opportunity to NRI investors. There are a few restrictions placed on NRIs. However, these restrictions should not deter NRIs from participating in Indian stock markets. Based on the source of funds and nature of transactions, NRIs need multiple bank, trading and demat accounts. As NRI are much sought after by financial institutions, this should not be a very tedious affair. To avoid unnecessary administrative costs, do understand the types of accounts you need and open only those accounts.
Source: RBI FAQs on Foreign Investments in India, FEMA regulations, 2000, Websites of various banks and trading portals
Image credit: The original image and information about usage rights can be downloaded from Pixabay.
Deepesh is a SEBI registered Investment Adviser and Founder, PersonalFinancePlan.in