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The Indian government allows NRIs to trade in both the equity and debt markets under certain regulations and guidelines. The Indian equity market offers a variety of trading and investment opportunities. NRIs can invest in stocks, futures and options (F&O), IPOs and mutual funds, and many more instruments.
Non-resident Indians can trade in India if they have a bank account, demat account and trading account. Let us understand in detail the type of accounts NRI requires for trading in Indian markets.
Key Definitions
1. Non-Resident Indian
NRI stands for Non-Resident Indian. NRI is a term that refers to an Indian citizen who resides outside India for a period of 182 days or more in a fiscal year.
An NRI is different from PIO (Person of Indian Origin) and OCI (Overseas Citizen of India). However, in terms of trading, they all abide by the same rules and regulations.
2. PIO (Person of Indian Origin)
- a foreign citizen (except a national of Pakistan, Afghanistan, Bangladesh, China, Iran, Bhutan, Sri Lanka, and Nepal) who at any time held an Indian passport.
- the person, his/her parents or any of his/her grandparents is/was/are/were a citizen of India under the Constitution of India or the Citizenship Act, 1955 or.
- a person whose spouse is an Indian citizen or a person of Indian origin (covered under (a) and (b) above).
- an Iranian national subject to prior approval from the Ministry of Home Affairs.
3. OCI (Overseas Citizen of India)
The Overseas Citizens of India (OCI) are issued OCI cards by the Government of India.
Below is the list of individuals eligible for OCI Card:
- Former Indian Citizens: Persons who were citizens of India on or after January 26, 1950, or who had the right to become citizens of India on January 26, 1950. Persons who belonged to a territory that became part of India after August 15, 1947.
- Descendants: Children, grandchildren, or great-grandchildren of such a citizen.
- Minors: Minor children of the aforementioned persons.
- Spouses: Spouses of an Indian citizen or OCI cardholder, provided they have been married for at least two years.
The PIO card scheme was merged with the Overseas Citizen of India (OCI) scheme in 2015. PIO cardholders were advised to convert their PIO cards to OCI cards.
4. Repatriation and non-repatriation
An NRI can invest in India on repatriation or non-repatriation basis. The trading account requirement differs based on this. Thus, before we proceed further, let us understand these two basic terms which may help an NRI assess the type of accounts they would require for trading.
a. Repatriation
Repatriation is the process that allows NRIs to transfer money from their NRI bank account in India to their foreign bank account.
In simple words, NRIs can transfer money from their Indian accounts to their bank account in their country of residence. When funds are repatriated, they are converted from Indian rupees (INR) into the desired foreign currency.
The NRI bank account designed for the repatriation of funds is known as the NRE bank account (Non-Resident External)
For example: Ms. Patel, an NRI living in the United Kingdom, has savings of INR 2,000,000 in her NRE account in India. She wishes to transfer a part of these savings, say INR 1,500,000 to her UK bank account.
The bank converts the INR amount to GBP (British Pounds) at the prevailing exchange rate and transfers the amount to Ms Patel�s UK-based bank account.
b. Non-repatriation
Non-repatriation refers to the process whereby profits, dividends or other income from investments made in India cannot be freely repatriated to the investor's home country. There are restrictions and limits involved in repatriation of such funds.
The NRI bank account designed for investment on a non-repatriation basis is known as the NRO bank account (Non-Resident Ordinary).
NRIs can repatriate up to USD 1 million per financial year from an account after paying the applicable taxes subject to the documents provided supporting sources of funds. Any amount above this limit is considered non-repatriable and must remain in India.
For example: Mr. Gupta, an NRI living in Canada. He has an NRO account in India. He has accumulated INR 5,000,000 (INR 5 million).
Mr. Gupta can repatriate the maximum permissible amount of USD 1 million (or its equivalent in INR). The bank converts the INR amount into USD at the current exchange rate. If the exchange rate is USD 1 = INR 75, he can repatriate a maximum of INR 75,000,000 (equivalent to USD 1 million). The repatriation is subject to the documents submitted supporting the source of funds in the NRO account.
The remaining amount remains in the NRO account in Indian rupees and can only be transferred to Mr Gupta�s account in Canada in the next financial year.
Regulatory Bodies for NRI Trading in India
NRI trading is regulated by SEBI and RBI. They have established specific guidelines and frameworks to ensure that NRI investments are conducted smoothly and within legal and regulatory boundaries.
1. Reserve Bank of India (RBI)
The RBI sets the regulations and guidelines for NRI investments under the Foreign Exchange Management Act (FEMA). It ensures compliance with repatriation rules and monitors foreign exchange transactions.
2. Securities and Exchange Board of India (SEBI)
SEBI regulates the securities markets and ensures that all investments comply with Indian laws. It oversees the functioning of stock exchanges, mutual funds, and other market intermediaries.
3. Foreign Exchange Management Act (FEMA)
FEMA rules (Foreign Exchange Management Act) outline the regulations for NRIs (Non-Resident Indians) concerning foreign exchange transactions and investments in India. FEMA sets guidelines for foreign exchange transactions and ensures that these transactions are conducted legally and transparently. These rules ensure that NRIs comply with Indian laws when repatriating funds, investing in Indian securities and managing bank accounts such as NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts.
NRI Investment Options
NRI has a wide range of choices to invest in India in any of the below:
- Equity Shares
- Government Securities
- Mutual Funds
- Exchange Traded Funds
- Equity Derivatives Trading
- Bonds issued by Public Sector Undertakings (PSUs)
- Bonds issued by Infrastructure Debt Funds
- Corporate fixed deposits (FDs)
- Residential and commercial properties in India
- Listed Non-convertible / redeemable preference shares or debenture
- Debt instruments issued by banks
- Certificates of Deposits (CDs) and Commercial Papers (CPs)
- Tax Saving Instruments (Equity Linked Savings Schemes (ELSS) and Public Provident Fund (PPF))
- Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs)
- National Pension Scheme (NPS)
In this book, we will cover the instruments related to the Indian stock market.
An NRI should also take note of the below list wherein NRI investments are not permitted:
- Trading in Commodities Exchanges
- Agricultural Land and Plantation Property
- Real Estate Business
- Limited Liability Partnership (LLP) in Certain Sectors:
- Chit Funds and Nidhi Companies
- Lottery Business
- Gambling and Betting Business
- E-commerce (Inventory-Based Model)
NRI Trading Account Requirements
Like any investor requires a demat account, trading account and a bank account to invest in Indian stock markets, an NRI also requires these three accounts. However, the nature of these accounts for NRI are slightly different.
An NRI requires:
- NRI Bank Account
- NRI DEMAT Account
- NRI Trading Account
Let us understand the basics of these accounts which can help an NRI to know the type of accounts required to invest in different instruments of the Indian stock market.
1. NRI Bank Account
An NRI bank account is a specially designed bank account for NRIs to manage their money earned within and outside India. An NRI bank account is of two types - NRE and NRO.
a. NRE Account
An NRE account is a bank account designed for Non-Resident Indians (NRIs) to facilitate the transfer of their foreign earnings to India. This account is denominated in Indian Rupees (INR) but allows deposits in various foreign currencies. The money gets converted in Indian rupees when deposited in this account.
The funds in an NRE account are fully and freely repatriable without any restrictions. And hence this account is known as Non-Resident External (NRE) and is used for repatriable purposes.
b. NRO Account
An NRO account is designed for NRIs to manage their income earned in India. Account holders can deposit money earned in India and also receive funds from outside. The Indian income could be from various sources such as rent, dividends, pensions, and other forms of earnings.
However, there are restrictions on repatriation from NRO accounts. The funds in NRO account are not easily repatriable and are subject to various conditions, documentations and has a limit.
PIS approval (Portfolio Investment Scheme)
- NRI PIS Bank Account
PIS stands for Portfolio Investment Scheme. PIS is a scheme for NRIs by the RBI that enables NRIs to invest in listed Indian companies on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). It allows them to buy and sell shares in Indian stocks. Investments can be made from both NRE and NRO bank accounts.
Under PIS, all trades get reported to the RBI. After opening an NRI bank account, the NRI should approach the bank for the PIS form. Once RBI approves the PIS request, the specified accounts get the tag of PIS account. If the PIS approval was for NRE bank account, it becomes the NRE PIS account and if the approval was taken for NRO account, the NRO account becomes NRO PIS account.
Earlier PIS was mandatory to invest and transact in the secondary market. However,in 2020-21, RBI relaxed the requirement of PIS approval and allowed NRIs to trade without PIS using their NRO account. But still not many brokers offer the facility to trade using NRO Non-PIS accounts.
It is important to note that NRIs can have only one PIS account with any designated bank branch.
- NRI Non-PIS Bank Account
An NRI account without Portfolio Investment Scheme approval is a Non-PIS account. The transactions under Non-PIS account are not reported to RBI.RBI allows NRI to invest in
many instruments like IPO, MFs, Debt, Rights, F&O without PIS approval except for equity share trading.
An NRE account without PIS approval is known as an NRE Non-PIS account and an NRO account without PIS approval is known as NRO Non-PIS account.
2. NRI Demat Account
An NRI Demat account is a demat account for non-residents of India (NRI) that allows NRIs to invest in the Indian equity markets.
An NRI Demat account is similar to the demat account of a resident Indian to hold securities (such as shares, bonds, mutual funds, etc.) in electronic form The main difference is the linkage of NRI Demat account to NRE or NRO account based on repatriation of funds.
The NRI Demat account linked to NRE bank account is called NRE Demat account or NRI Repatriable Demat account and the NRI Demat account linked to NRO bank account is called NRO Demat account or NRI Non-Repatriable Demat account.
AN NRI Demat account can be opened through a bank, broker or depository participant.
3. NRI Trading Account
An NRI trading account is an account with a stock broker that allows NRIs to invest in the Indian stock markets. For trading, NRIs have to link their trading account with the NRE or NRO bank account based on the basis of their repatriation needs.
An NRI trading account gives online access to NRIs to trade from anywhere across the world.
An NRI trading account linked to NRE account is known as NRE trading account and when linked to NRO bank account is known as NRO trading account.
NRI Account Types and Investment Options
Now that we know about the basic trading requirements, bank account types, PIS accounts, repatriation and non-repatriation, let us understand the NRI account type required for investing in each asset class/type.
In a nutshell, we can observe that:
- PIS approval is required for trading only in Equity stock markets (secondary market) and not for F&O, MFs and other primary market investments.
- F&O trading is permitted only on a non-repatriation basis.
- NRE account is required to invest on a repatriable basis.
- NRO account is required to invest on a non-repatriable basis.
Key Takeaways
NRI Investors Trading in India involves the following:
- NRIs, including PIOs and OCI cardholders, can participate in NRI trading.
- NRI trading requires NRI to open NRI bank account, NRI trading account and NRI Demat account.
- NRIs should open bank accounts based on repatriation (NRE) or non-repatriation (NRO) for easy transferability of money.
- NRIs who wish to invest in shares in India through a stock exchange are required to obtain PIS approval. PIS approval is mandatory to trade using NRE account while optional when wishing to trade using NRO account.
- NRO non-PIS account allows NRIs to invest in share market mutual funds, bonds, government securities, F&O, Fixed Deposits, ESOPs and more.