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NRI AND INVESTMENTS:-

Equity as an asset class has historically provided one of the best returns over a long time horizon. Investment in Indian equities is an attractive investment option for the Non-Resident Indians. Reserve Bank of India (RBI) has framed various rules and guidelines which governs the investment by NRIs in Indian share markets. NRIs need to be aware of the various regulatory guidelines, do's and don'ts, before taking the plunge.

Salient rules and regulations governing NRI investment in Indian equity / share markets are given below.

Portfolio Investment Scheme (PIS) One time permission is required before NRIs can begin investing in Indian share markets through stock exchange. Investment by NRIs through stock exchange is allowed under Portfolio Investment Scheme (PIS). RBI has authorized few branches of each authorized dealer (bank) to grant permission to NRIs and administer the PIS.
Designated bank account NRI need to approach the authorized dealer (bank) which has granted it the permission, to open a NRE (Non Resident External) /NRO (Non Resident Ordinary) account under PIS for routing Investments. It is to be noted NRIs are allowed to open only one such account and all inflows/ outflows regarding the investments have to be routed through this account.
Demat & Trading Account NRI have to open Demat Account with Depository Participant and Trading account with SEBI registered broker to execute trades.
Investments Allowed NRI's are allowed to invest in the following instruments: Shares Convertible debentures Government securities and Treasury Bills. However note NRIs are not allowed to invest in bearer securities Mutual funds Bonds issued by a public sector undertaking (PSU) in India Shares in Public Sector Enterprises being disinvested by the Government of India Exchange traded funds
Repatriation NRI Investment in stock market can be both on repatriation and non-repatriation basis. NRIs need to be cognizant of the following points. Payment for purchase made on repatriation basis has to be made by way of inward remittance of foreign exchange or out of funds held in NRE/FCNR (B) account. If the shares are purchased on non-repatriation basis, funds in NRO account can be utilized in addition to the above If the shares sold were held on repatriation basis, the sale proceeds (net of taxes) may be credited to the NRE /FCNR (B)/NRO accounts. Whereas sale proceeds of non repatriable investment can be credited only to NRO accounts NRIs are allowed to open two separate trading and demat accounts, based on repatriation and non-repatriation
Intra-day trading Not Allowed. NRI Investor has to take delivery of shares purchased and give delivery of shares sold. Short Selling is not permitted.
Futures & Options (F&O) NRIs are allowed to invest in F&O segment out of Rupee funds held in India on non repatriation basis (i.e. funds in NRO account), subject to the limits prescribed by SEBI. An NRI, who wishes to trade on the F&O segment of the exchange, is required to apply for a custodial participant (CP) code. Thereafter he can open a trading account and start trading in derivatives
Currency derivatives Not Allowed. Kindly note vide Union Budget 2013, Foreign Institutional Investor (FII) have been allowed to participate in currency derivative segment to the extent of their Indian rupee exposure in India, however NRI's are still not allowed to trade in currency derivatives
Off market transactions Not Allowed.
IPO Not Allowed.
Transfer of shares acquired under PIS under private arrangement Shares purchased by NRIs under PIS cannot be transferred by way of sale under private arrangement or by way of gift to a person resident in India or outside India without prior approval of the RBI. However, NRIs can transfer shares acquired under PIS to their relatives.
Monitoring of transactions RBI monitors the investment position of NRIs in listed Indian companies, reported by designated banks, on a daily basis. Contract notes in original for both purchase and sale transactions needs to be submitted within 24 hours to the designated bank to enable designated banks to report the same to RBI.
Additional points to be kept in mind by the broker While executing transactions for NRIs, broker needs to ensure that: Securities are not in RBI ban list before executing the order.
Clear funds are available for purchases.
Securities are available before executing any sell order.
Depending upon whether the purchases are made on repatriation / non-repatriation basis pay-out of the securities needs to be transferred to respective demat account.
Purchase/Sale transactions in cash segment should be settled by delivery only.
Ceiling on Investments under the PIS Individual NRIs can acquire maximum 5% capital / paid-up value of debentures of listed Indian companies. Overall limit for NRI investment is 10%, which can be raised to 24% per cent, if approved by the company.
Rights/bonus shares Rights / Bonus shares can be issued to existing NRI shareholders, subject to adherence to sectoral cap as may be applicable.


The new government at the Centre has led to a revival in investment sentiment in India. Both retail and institutional investors have started putting in money in financial assets. With the general perception about the government changing, even non-resident Indians (NRIs) would be looking to gain from the strong investment scenario.

Investment is expected to soar on the hope that new government will implement infrastructure projects, rationalise the securities transaction tax / commodities transaction tax, along with implementing other reforms.

"Traditionally, NRIs have preferred to invest in real estate. But this would block large funds for a longer period of time. With equity markets aiming higher, investments in stocks fetch better returns in a shorter span of time, with high liquidity," says Rashmi Roddam, director, WealthRays Securities.

If the rupee appreciates further in the future, it will be a big positive for NRIs investing in debt now. "Interest rates in India are at an all-time high, amongst emerging markets. The current view is also supportive, since the expectation is that rupee will appreciate two to three per cent. Even though bond yields have come off a bit, with the appreciation in the rupee, debt investments can give nine to 10 per cent, which is a good return for NRIs."

While there is no restriction on the asset classes that NRIs can invest in, there are some restrictions with regard to repatriation of money, or in the way the money can be remitted abroad. Let us take a look at what these conditions are:



Debt investment

NRIs can invest in either a non-resident ordinary (NRO) fixed deposit or non-resident external (NRE) fixed deposit. Currently, the rates are eight to nine per cent. In these deposits, the investment is in rupees. You can remit freely from the NRE account. But in NRO accounts, there is a cap of $1 million in a financial year.

Another difference is that the interest earned in NRE accounts is not taxable, while in the case of NRO accounts it is subject to tax.

Even for investment in other asset classes such as real estate, gold or equities, it is essential to open an NRE or NRO account. In this case, you can open a savings or current account.

NRIs can also invest in foreign currency non-resident (FCNR) deposits, where the investment is in foreign currencies such as the dollar, yen, pound and euro. These are only term deposits and the interest is linked to the London Interbank Offered Rate for that particular currency. There is no tax on the interest income from FCNR deposits.

NRIs can also invest in government securities and bonds, Non-convertible debentures issued by companies and company-fixed deposits.

Investment in debt also looks attractive to lock-in money at higher rates for the medium term, as there is a possibility of softening of rates over the next one year.

The debt instruments that are off-limits for NRIs are Public Provident Fund and National Savings Certificates issued by post offices.



Equity investment

NRIs can invest in direct equities through the portfolio investment scheme (PIS) or equity mutual funds. Roddam feels in the current market scenario, with the Sensex touching lifetime highs, mid- and small-cap mutual funds are also good investments.

The condition for direct equity investments is it cannot exceed 10 per cent of paid-up capital of private companies and 20 per cent for public sector companies. These investments should be routed through Portfolio Investment Scheme regulated by the Reserve Bank of India wherein NRE or NRO bank accounts are opened. These can be linked to trading accounts, which can be opened with any stock broker in India. For this, investors will be charged a management fee, usually with a profit-sharing agreement



Real estate

There is no restriction on the residential or commercial properties NRIs can invest in. But they cannot invest in agricultural land, farm house and plantations in India.

Currently, there is a revival of sentiment in the real estate sector on expectation that the economy will improve. And, real estate is heavily dependent on sentiment. But there is still some time for this to translate into action. Typically, NRI activity is seen in the real estate sector towards the year-end in the November-December period. It could be better this year.

While NRIs can buy and sell property without any problem, when it comes to repatriating the money, there are restrictions. For instance, if the property was purchased by funds in the FCNR account, the repatriation cannot exceed the amount paid through this account. If it was purchased using funds in the NRE account, the repatriation cannot exceed the foreign exchange equivalent of the amount in the NRE account. If you purchased the property using the balance in your NRO account, the sale proceeds must be credited to your NRO account and you can repatriate to the extent of $1 million, the condition for NRO accounts.

Taxation

The taxation rules for an NRI for different asset classes is the same as residents, except for the following differences:

Equities
• Long-term capital gains are tax-free;
• Short-term capital gains are taxed at 15 per cent;
• In the case of long-term capital gains arising on shares and debentures (unlisted), they are not allowed the benefit of indexing the cost of acquisition;


Mutual funds
• Long-term capital gains on equity funds is exempt;
• Short-term capital gains on equity funds is taxed at 15 per cent;
• Long-term capital gains on debt funds (10 per cent without indexation and 20 per cent with indexation), whichever is lower;
• Short-term capital gains on debt funds, according to the slab rates


Bank FDs, real estate transactions and gold are taxed in the same way as for residents.
In all the above cases, there are prescribed rates for withholding taxes as well. For instance, while sale of property attracts long-term capital gains tax of 20 per cent, NRI investors can approach the income-tax assessing officer to get the Tax Deducted at Source lowered or exempted. They can put up a case saying they plan to invest the proceeds in other property and get the exemption. While this can reduce the tax outgo, it does not mean there is no tax.

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