How can foreign investors invest in India?
India’s stock markets have surpassed Hong Kong’s to become the world’s fourth largest, as investors flock to a rapidly growing alternative to China’s faltering stock indexes.
As the country prepares for elections this year, India continues to attract foreign investors, who have several options for investing in the country.
FOREIGN PORTFOLIO INVESTMENTS.
Foreign investors must follow the foreign portfolio investment (FPI) route to invest in stocks listed in India. Investors, whether individuals or corporations, must register with the country’s market authority and follow its disclosure rules. The majority of the 10,800 FPIs are funds.
There are no restrictions on investing in Indian companies through this approach; however, an FPI cannot own more than 10% of a listed company. If an FPI invests more than 10% in any company, it is classified as foreign direct investment, which is restricted in certain areas.
All FPI investments must be made in Indian rupees and executed through brokers. All FPI transactions are subject to the same taxes as domestic investors, including capital gains at 15% for short-term holdings of less than a year, 10% for long-term holdings, and a surcharge and securities transaction tax.
DISCLOSURES
The Securities and Exchange Board of India (SEBI) takes a hands-off approach to offshore fund registrations, but it requires custodian banks, through whom foreign money flows into India, to reveal information on the investors in these funds.
Custodians are either domestic banks or Indian branches of international institutions. According to the SEBI website, there are 17 custodian banks registered in India, including Citi Bank, Deutsche Bank, ICICI Bank, Kotak Mahindra Bank, DBS Bank, HSBC, State Bank of India (SBI.NS), opens new tab, and Standard Chartered Bank.
Under India’s anti-money laundering guidelines, regulators also seek information on the fund’s so-called beneficial owners, who are defined as any investor who owns 10% or more of the fund’s assets.
Furthermore, SEBI has increased disclosure requirements for funds.
Non-residential investments
Non-resident Indians can invest in the Indian stock market under the portfolio investment plan, with transactions conducted through a non-resident ordinary (NRO) savings account. NRIs and PIOs can invest in equities up to 10% of the company’s paid-up capital. Individual investments are capped at 5%.
NRIs are not permitted to engage in intra-day trading, must accept delivery of shares, and are prohibited from trading derivatives.
Offshore derivatives
If a foreign investor does not want to go through the registration process with SEBI, they can invest in Indian stocks through offshore derivatives products or participatory notes. SEBI defines these instruments as those issued by an FPI overseas in exchange for securities held in India. Taking a short position in India requires upfront disclosures, but investors can do so via P-notes to obscure their positions.
