NRI Trading in India - Account, Rules, Eligibility

Published on Wednesday, April 15, 2020 by Chittorgarh.com Team | Modified on Thursday, June 4, 2020

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NRI Trading in India - Account, Rules, Eligibility

An NRI looking to invest in India but confused whether it is worth going ahead and where the investments can be made and to what extent, you have landed at the correct place. In this article, we will cover the basics of NRI trading along with investment options with rules and restrictions. Let us first understand that who qualifies as NRI.


Who is NRI?

Non-Resident Indian (NRI) is a person resident outside India who is either a citizen of India or is a Person of Indian Origin (PIO).

NRI has been defined by the Foreign Exchange Management Act (FEMA) as well as the Income Tax Act. Though both definitions have similarities to some extent, it is important to understand the difference between the two as the underlying intent for both of them is different.

The residency status as per the FEMA Act helps decide how and where to invest and residency status as per Income Tax decides how the income from various investments will be taxed.


Why should NRI invest in India?

India is one of the fastest-growing economies in the world with an average annual GDP of 6-7% for the last 5 years and has the potential to emerge as a superpower in the coming decades.

India is a developing country and has a vast scope for development across various sectors giving ample opportunities for wealth creation.

India has the largest youth population in the world containing millennials and Generation Z who can turn the entire outlook of the country in the near future.

With a Compounded Annual Growth rate (CAGR) of 10%, the Indian stock market is expected to become prominent in upcoming years with many stocks in its kitty to give a CAGR of more than 10%.

Indian Mutual Funds have been giving spectacular performance over the past few years fetching very good returns on the investments. Moreover, investing in mutual funds is quite easy and convenient and does not require specialized knowledge, research, and skills as in the case of equity. The professional team of fund managers manage the portfolio for us and diversify funds by doing proper asset allocation.

Considering all the above factors Indian markets offer a lucrative platform for NRI to invest in India.


NRI Trading Rules in India

  • NRI needs banks and stock brokersto trade in Indian markets.
  • NRI needs non-resident bank accounts, trading account, and demat accountto start trading in India market. [Non-Resident External (NRE)/Non-Resident Ordinary (NRO)]
  • Initially NRIs and PIOs were allowed to invest in secondary capital markets only throughthe Portfolio Investment Scheme (PIS) under RBI whether NRIs wanted to trade on a repatriation basis or non-repatriation basis. However, these rules have now been relaxed for NRO mode of trade, and trades without PIS is now possible like resident Indians. Under the new process, NRO transactions need not be reported to RBI by routing through the PIS account making the NRI transaction process speedy and less complicated.
  • NRIs are allowed to invest up to 5% of the paid-up capital of listed Indian company in recognized Stock exchange on repatriation or non-repatriation basis
  • NRIs are allowed to invest up to 5% of the paid-up value of each series of debentures of listed Indian companies on repatriation or non-repatriation basis.
  • Investments by all NRIs clubbed together cannot exceed 10% of paid-up capital of the Indian listed company or paid-up value of each series of debentures of the company.
  • The above aggregate ceiling can be raised to 24%if the Indian company passes a special resolution to that effect.
  • NRIs are required to maintain a higher bank balanceas compared to resident individuals.
  • To trade in the derivativesmarket, NRIs need a custodial participant code. NRI investments should be on a non-repatriation basis and Rupee funds held in India should be used.
  • NRIs can offer instruments as collateralto trade in exchange-traded derivative contracts as per the rules specified by RBI and SEBI

NRI Trading Restrictions

Though all measures and initiatives are being taken by the Government to make NRI trading simpler, there are certain restrictions which every NRI should be aware of:

  • NRIs cannot do short selling.
  • NRIs are prohibited from investing in certain sectors mentioned below :
  • Lottery Business including Government/ private lottery, online lotteries.
  • Gambling and betting including casinos.
  • Nidhi company.
  • Trading in Transferable Development Rights (TDRs).
  • Real Estate Business or Construction of Farm Houses.
  • Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
  • Activities/ sectors not open to private sector investment viz., (i) Atomic energy, and (ii) Railway operations.
  • Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract.
  • NRIs need to trade on a delivery basis and are not allowed to do intra-day trading.
  • NRIs are not allowed to trade in Commodity Derivatives.
  • NRIs are required to take RBI approval for trading in scrips under caution list. [Caution list is the list of stock issued by RBI where the NRI investments are nearing the threshold holding limit.]
  • NRIs are not allowed to trade in stocks under the ban list. [Ban list is the list of stocks issued by RBI where the NRI investments have reached the threshold limit.]

NRI Investment Options

Apart from the secondary capital markets, NRI investments are permitted to invest in below securities without any limit:

NRI Investment on Repatriation Basis

The following are the investments permitted to NRIs on repatriation basis.

  • Government dated securities
  • Treasury bills (T-bills)
  • Units of domestic mutual funds;
  • Bonds issued by a Public Sector Undertaking (PSU) in India
  • Shares in Public Sector Enterprises being disinvested (partial dilution) by the Central Government
  • Bonds/ units issued by Infrastructure Debt Funds
  • Listed non-convertible/ redeemable preference shares or debentures
  • Perpetual debt instruments (with an overall ceiling of 24%) and Debt capital instruments issued by banks in India to augment their capital
  • Initial Public offerings
  • National Pension System (This option is available for NRIs between 18 to 60 years)

NRI Investment on Non Repatriation Basis

The following are the investments permitted to NRIs on non-repatriation basis.

  • Government dated securities
  • Treasury bills (T-bills)
  • Units of domestic mutual funds
  • Units of Money Market Mutual Funds
  • Listed non-convertible/ redeemable preference shares or debentures
  • Initial Public offerings
  • National Pension System
  • Chit funds

 

ProStocks Non-PIS NRO Trading

 

Frequently Asked Questions

  1. 1. Can NRIs buy and sell the stock the same day?

    No, NRIs are not permitted by SEBI to do intra-day trading in the Indian Stock Market. NRI cannot buy and sell the stocks the same day at BSE and NSE as Equity Intra-day segment is not enabled in the NRI trading account.

    NRIs can invest in the stock market using Equity Delivery-based Trading, Equity F&O, and Currency F&O.

    NRIs are also not permitted to trade in Commodities at MCX.

     

  2. 2. What is NRI Intra-day trading and Delivery-based trading?

    NRI Intra-day trading Vs Delivery-based Trading

    Particulars Intra-day trading Delivery-based trading
    Meaning Intra-day trading is speculative buying or selling of stocks either once or multiple times during the same day.

    Delivery based trading means if an investor buy stocks, he/she has to take delivery of stock by making payment for the same.

    The stock are held in the demat account as long as the investor wishes and be the owner of it.

    NRI Trading NRIs are not allowed to do intra-day trading. NRIs are allowed to do only delivery-based trading.

     

  3. 3. Does the RBI ban list for NRI updated daily?

    The RBI caution list and RBI ban list are available on the RBI website and are updated as and when the foreign investments reach the trigger limit or the ceiling.

    The RBI caution list is updated and notified to all authorized dealers when the total holdings of Foreigner Institutional Investors (FII)/NRI reaches 2% below the applicable limit. Any further purchases are subject to RBI approval.

    The ban list is updated d when the total holdings of FII/NRIs reach the statutory limit and no further purchases are allowed.

     

  4. 4. Can NRI buy shares that are under caution list?

    Once security comes under a caution list, further purchases are subject to RBI approval which is given on a first come first serve basis. Hence an NRI may or may not get RBI approval to buy the scrips under caution list based on availability.

     

  5. 5. Can NRI buy shares under the ban list?

    No, once the securities are placed in the ban list no further purchases are allowed unless the security comes out from the ban list.

     

  6. 6. What is short selling?

    Short selling is selling of a security that is not owned by an investor but is borrowed from the broker.

    An investor may think that the price of a stock may fall within a week hence he would borrow the stock from the broker with a promise to return within the agreed timeframe. If the price of the stock drops within a week the investor would make a profit by buying it from the market at a lower price and return the stock to the broker. However, if the price of the stock goes against expectations and it increases, the investor would have to buy the stock at a higher price and suffer loss to fulfill his stock obligation.

    Short selling works well in the bearish market.

    NRIs are prohibited from short selling as per regulations.

     

  7. 7. What is a Nidhi company?

    Nidhi Company is like a non-banking financial company that is listed as a public limited company with the sole purpose of accepting deposits and lending funds to its members.

     

  8. 8. What are government dated securities?

    Government dated securities are long term instruments issued by the government for mobilising funds. These securities carry either a fixed or floating rate of interest (known as coupon rate) which is paid on the face value at regular intervals. The tenure for these instruments generally ranges between 5 years to 40 years.

     

  9. 9. What are Treasury bills?

    Treasury bills popularly known as T-bills short term instruments issued by the Government of India with tenure of 1 year or lesser. There is no interest payment on these bills. T-bills are issued at discount and redeemed at face value on maturity.

     

  10. 10. What are mutual funds?

    A mutual fund is a trust that is managed by a professional and expert fund manager that pools money from various investors with a common objective and invest in different asset classes.

     

  11. 11. What are public sector undertakings (PSUs)?

    PSUs are state-owned enterprises that are owned by either Central, State, or both. The government stake in such companies is more than 50%.

     

  12. 12. What are Infrastructure Debt Funds?

    Infrastructure Debt Funds are debt funds meant to promote funding in infrastructure sector.

     

  13. 13. What are perpetual debt instruments?

    Perpetual debt instruments are debt funds with no maturity date. The issuer keeps paying interest forever till either the company dissolves, closes down, or till the investor holds the bond.

    The aggregate ceiling of holding in Perpetual Debt Instruments should not exceed 24 percent of each issue and investment by a single NRI should not exceed 5 percent of each issue.

     

  14. 14. What is National Pension System (NPS)?

    NPS is a retirement saving scheme introduced by the government of India to provide security in old age. NPS is governed and administered by the Pension Fund Regulatory and Development Authority (PFRDA). The accumulated saving in NPS is repatriable.

     

  15. 15. What are chit funds?

    Chit fund is a saving and borrowing tool run by registered chit fund companies under Chit Fund Act 1982. In chit funds, a group of people agree to contribute a specific sum of money for a specific period of time on monthly basis which is then given to one person as loan on lottery or auction basis after deduction of the chit fund commission.

     

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