India is the fourth largest economy in the world measured in terms of purchasing power parity (PPP). A series of bold economic reforms persistently undertaken by the Indian Government has stimulated foreign investment in India. Highly skilled managerial and technical manpower that is comparable to the best available in the world, endows India with a distinct cutting edge in global competition. International investors are beginning to see India as a potential market for excellent return on investment.
Indian Stock Market
Indian stock markets continue to be vibrant despite the prevailing global economic recession. The National Stock Exchange of India is the third largest and Bombay Stock Exchange the fifth largest in the world in terms trade volumes. Indian stock markets are having a dream run because of the effects of FII investments, good performance by Indian corporate sector and realization of better valuations by Indian companies.
For a NRI or Non-Resident Indian to invest in Indian stock markets the first thing is to open bank account and create an account with a reliable stock broker and make sure that all trades would be executed transparently. An NRI will not be able to execute any trade without nominating a stock broker. There is no limit as to how many stockbrokers one can have, but a stock broker nominated in India is a must.
NRIs have to decide whether to trade on a repatriable or a non repatriable basis. Let’s see what repatriable and non-repatriable mean? If an investor is willing to invest some amount say 5000 USD into India and does not want to take back any money to USA, then that is non-repatriable. But if they want to take the principal plus the profits back to USA, then they would need an NRE account that will enable taking out the principal and the profits after paying the due taxes as applicable in India.
Indian Mutual Funds
For investing in Mutual Funds, however, a NRI does not need permission from the Reserve Bank of India and investment can be done on repatriation or non repatriation basis. A NRI investing in a mutual fund cannot make the investment with a foreign currency but only with Indian Rupees. NRIs can invest in all Indian mutual funds except in funds promoted by Asset Management Companies based in US like Fidelity, Franklin Templeton and HSBC
Permanent Account Number (PAN) card and Know Your Customer (KYC) registration are the mandatory requirements. It is preferable to appoint a local representative in India to sign transactions to avoid the time-delay and other hassles of sending documents every time through courier.
Exchange Traded Funds (ETFs)
Exchange Traded Funds (ETFs) are closed ended funds bought and sold on a stock exchange. The price of the ETF on the stock exchange will be different from the NAV (Net Asset Value) of the fund and the differential is obviously the premium to the book value. ETFs generally invest at least 65% of total assets in Indian companies through American (ADR) or Global Depository Receipts (GDR). It is also mandatory for ETFs to invest in preference shares, convertible debentures and share purchase warrants.
Many NRI investors feel direct investment in Indian Mutual Funds is preferable to investment in India dedicated Exchange Traded Funds (ETFs) available in the US. India dedicated ETFs invest primarily in ADRs or GDRs, of Indian companies but the number of Indian companies with these GDR and ADR offerings are highly limited. Besides, past performance of Indian mutual funds is lot more productive than that of India dedicated ETFs.
ADR and GDR
ADR is the acronym for American Depository Receipt and GDR for Global Depository Receipt. If the depository receipt is traded in the United States of America (USA), it is called an American Depository Receipt, or an ADR. If the depository receipt is traded in a country other than USA, it is called a Global Depository Receipt, or a GDR.
Shares of Indian companies are sometimes also listed and traded on foreign stock exchanges like NYSE or NASDAQ. Several Indian companies also get the shares listed on these stock exchanges indirectly – using ADRs and GDRs. These receipts are listed on the stock exchanges and sold to the people in that country. The shares are exactly like regular stocks – their prices fluctuate depending on the fundamentals of the underlying company. For Non Resident Indians and foreign nationals, ADRs and GDRs are some great investment option.
Other Investment Options for NRIs
The common route for a non-resident Indian investing in companies in India is the scheme called Portfolio Investment Scheme (PIS). NSE and the BSE in India are the two exchanges listed for this purpose. NRIs are permitted to invest up to 5 percent of the positive share in Indian companies’ debenture values - either on a repatriation basis or non-repatriation basis. NRIs can also, on a non-repatriation basis, freely buy government securities but cannot invest in small savings schemes like PPF. NRIs can, on a repatriation basis, buy government securities, units of domestic bonds and shares in public sector undertakings.
This post is part of the series: How to Invest in India
Investment strategies for the booming Indian economy.