India’s growth story is compelling especially when seen in comparison to other emerging economies and developed markets. So, if you’re a returning NRI and wish to be part of the growth story, one of the ways to invest in Indian economy is to invest in equity shares. Though I am hugely in favour of investing through the mutual fund route as compared to direct equity, which is high on risk & requires a lot of preparation on part of the investor, still if you want to go through it, investing in equity markets for an NRI is a bit different for an NRI as compared to a person resident in India. Reason is that the Reserve Bank of India (RBI) has laid out a set of rules for NRIs, which involve monitoring of the flow of funds as well as certain procedural formalities.
Today, let’s decode the complexities in rules for NRI investing in shares.
FEMA rules on NRI investment in Indian equity markets
Foreign Exchange Management (Transfer or Issue of Security to Person Resident out of India) Regulations, 2000, provide the rules for this. The regulations allow the following:
- Purchase shares/ convertible debentures of an Indian company on a stock exchange under Portfolio Investment Scheme (PIS)
- Purchase shares/ convertible debentures/ warrants of an Indian company on a non-repatriation basis other than under PIS (usually this means off market purchases like IPO, bonus and rights issues, etc.)
So, for transacting in shares, NRI has to open a separate PIS bank account with a bank in India for routing transactions relating to purchase & sale of shares/securities. Note that this account is different from the normal NRE/NRO savings account.
The regulations further specify certain terms and conditions for investments through PIS route as follows:
- Paid-up value of shares of an Indian company or each series of convertible debentures, purchased by each NRI both on repatriation and on non-repatriation basis, must not exceed 5 per cent of the paid-up value of shares/ debentures issued by the company respectively;
- Aggregate paid-up value of shares/ convertible debentures of any company purchased by all NRIs must not exceed 10 per cent of the paid-up capital of the company/ each series of debenture issue
- NRI investor cannot do any short selling & has to take delivery of the shares purchased/ sold;
- Separate NRE(PIS)and NRO(PIS) shall be towards investment made on repatriation basis and non-repatriation basis respectively. Bank has to ensure that sale proceeds of shares/ convertible debentures which have been acquired by modes other than PIS do not get mixed up.
Permitted Credits/Debits in PIS account
NRE (PIS) account: Debits
(i) Outward remittances of dividend or income earned;
(ii) Amounts paid on account of purchase of shares and convertible debentures on repatriation basis on stock exchanges through registered broker under the Scheme; and
(iii) Any charges on account of sale/purchase of shares or convertible debentures under the Scheme.
NRE (PIS) account: Credits
(i) Inward remittances in foreign exchange through normal banking channels
(ii) Transfer from the NRI’s other NRE accounts or FCNR(B) accounts maintained with Authorised Dealer in India
(iii) Net sale proceeds (after payment of applicable taxes) of shares /convertible debentures acquired on repatriation basis under the Scheme and sold on stock exchange through registered broker
(iv) Dividend or income earned on investment made on repatriation basis under the Scheme
NRO (PIS) account: Debits
(i) Outward remittances of dividend or income earned
(ii) Amounts paid on account of purchase of shares and convertible debentures on non-repatriation basis on stock exchanges through registered broker under PIS
(iii) Any charges on account of sale/purchase of shares or convertible debentures under PIS.
NRO (PIS) account: Credits
(i) Inward remittances in foreign exchange through normal banking channels
(ii) Transfer from the NRI’s other NRE accounts or FCNR(B) accounts or NRO accounts maintained with Authorised Dealer in India
(iii) Net sale proceeds (after payment of applicable taxes) of shares and convertible debentures acquired on repatriation basis (at the option of the NRI) and non-repatriation basis under the Scheme and sold on stock exchange through registered broker
(iv) Dividend or income earned on investment made on repatriation basis under the Scheme
Documents required for opening an account
Following documents are generally sought after for opening the account:
- Valid Passport and visa Copy of main applicant self attested
- PAN Card Copy if not updated in SB account
- Copy of PIO/OCI card (only if the customer is Person of Indian Origin (PIO)
In case a person is a PIO, then he has to give a declaration of the same. In the application, applicant has to specify name and address of the designated branch from where he will purchase shares/debentures.
Other points:
- You can have a PIS account with only one authorised dealer bank at a time. The PIS account will be in addition to the existing NRE/NRO savings bank account.
- Account is permitted to be opened in joint name & the joint holder can be an NRI/ PIO/Foreign National
- Shares purchased through PIS can be sold only under PIS route, in any other case, prior approval of RBI is required.
- If you had opened a PIS account previously, you need to submit a NOC and statement of holding from such previous bank, as per the format required by the new bank.
Sources: RBI regulations, PIS account opening forms at bank websites
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