How US Based NRIs Can Invest In Indian Equities
In an earlier article we saw how Non Resident Indians (NRI) can open demat and trading accounts in India in order to participate in the Indian equity markets. Well, if you are an NRI settled in the US, it might not be as straightforward for you. Here's why:
B Gopkumar, Executive Vice President, Kotak Securitiesexplains, "Generally, Indian regulations do not restrict investment by NRIs based in US and Canada. However these countries have certain regulations on restrictions on solicitation of clients based in their country for investment in securities market."
According to the Securities Exchange Act, 1934, it's against the law for unregistered foreign brokers to offer services to or solicit residents of the US. These regulations apply to foreign brokers around the world. While this may seem restrictive, the SEC here is only trying to protect the interest of investors based in the US.
Then, how you can invest:
K Sandeep Nayak, Executive Director and CEO – Centrum Broking, says that as long as there is no solicitation by the broker, NRIs can invest. "Trading accounts are opened by clients when they are in India and on a voluntary and need basis. Generally there is no solicitation involved on the part of the Indian intermediary/ broker and it is customer initiated whilst in India. As a part of the general 'Know Your Client' (KYC) guidelines, a copy of the prospective client's passport along with Visa details is kept by brokers as proof that account was opened when the customer was in India on a visit."
So you need to be in India to open your securities accounts. But you will find that, because of these regulations, each broking house in India has its own policy and procedure on this. Most leading brokers will also have restrictions on the online platform because the SEC interprets the use of internet website as being the same as a telephone call to a client. In such cases, you will have to transact through an official of the broking house.
There are sub-brokers too that will help you with this. However, the procedure remains the same. Says an official from Profit Shastra, a sub broker, "A trader is assigned who executes trade orders in the client's portfolio. Trader has the mandate to move money from NRE and/or NRO account to PINS bank account and also execute the trades in the demat account linked to the PINS account. US and Canadian resident investors can log into their trading portal to view investment portfolio performance and securities held in their investment accounts."
Similar types of regulation also apply to mutual funds and you will find that each fund house in India follows its own policy.
If for any reason you are unable to open your demat and trading account in India, that should not stop you from participating in the Indian stock markets while you are in the US. We now tell you about some alternatives available.
1) Investing in US based funds with India exposure
There are four types of funds offered by US based fund houses that will allow you access to the Indian equity market. Mutual Funds (MFs), Exchange Traded Funds (ETFs), Close ended funds (CEFs) and Exchange Traded Notes (ETNs).
Dr Sam Subramanian, Editor of AlphaProfit MF and ETF Newsletters explains, "Among these various choices, retail investors find ETFs and mutual funds quite convenient for the ready diversification and liquidity that they provide. ETNs are slightly more complicated in terms of accounting and taxation."
There are quite a few ETFs that invest in India such as WisdomTree India earnings fund, PowerShares India Portfolio, iPath MSCI India Index fund etc.
"The most popular one is WisdomTree India Earnings, EPI with a net asset base of USD 1.3 billion and average annual return of nearly 10% in the past three years. The ETF uses fundamentally weighting. The top holdings include Reliance Industries, Infosys Technologies, and ONGC. The ETF has an expense ratio of 0.88%. On average, nearly 2.6 million shares of the ETF currently trade a day," Dr Subramanian says.
Read this detailed article on Top India focused funds for US based NRIs to invest in
American Depository Receipts, commonly known as ADRs, are also a good way to invest in equity shares of Indian companies. Since directly listing on a stock exchange in the US is a slightly more complicated matter, many Indian companies choose the ADR option, which is easier and less cumbersome. In an ADR, the company deposits a large number of its shares with a bank in the US.
The bank issues depository receipts against these shares, each receipt having a fixed number of shares as an underlying. For instance, in the case of Infosys, 1 equity share held/traded in India is equivalent to 1 ADR traded/ held on the NASDAQ. These receipts are issued to the public and listed and traded on the stock exchange. The price of the ADR will usually move in line with the price of the underlying stock.
For the lakhs of Indians working abroad and their families back home in India, these are indeed good times. The sharp depreciation in the local currency means the money they send home fetches more rupees on conversion.
In fact, a World Bank report says that India's migrant workers are expected to rush back more dollars home this year to take advantage of the weak rupee. At an estimated $71 billion (Rs 4,40,200 crore), India will be the top recipient of official remittances this year. This is besides the huge sums of money sent back home through informal channels.
If you are among such NRIs, you would want to put the money to productive use by investing in high return generating instruments. Despite the ongoing slowdown, India continues to offer numerous investment opportunities for foreign investors, who do not enjoy such high rates in their country of work. The current volatility has created attractive entry points for NRIs across a range of asset classes. If you are looking to invest in India, what are the options you should consider? Before we delve into the choice of investments, let us consider the formalities and procedures that NRIs have to follow to be able to invest in India.
How to begin
If you wish to invest in India, the first step is to open a savings bank account. There are three basic types of bank accounts for NRIs.
Go for a non-resident external (NRE) rupee account if you are looking to remit overseas earnings to India and hold them in rupees, as also repatriate the proceeds of your investments back to your home country without any restrictions. An NRE account is completely tax-free and no tax is payable on the interest earned on the balance.
But you cannot put income from rent, salary and dividends in the NRE account. For that you need a non-resident ordinary (NRO) account. However, the interest earned on the NRO account is taxed at the marginal rate of 30% plus surcharge and cess. The balance in the account is also subject to wealth tax.
The advantage is that NRO accounts can be jointly opened with a resident Indian. If you do not wish to be exposed to exchange rate risk, you can instead open a foreign currency non resident (FCNR) account with a local bank, where your funds are held in the foreign currency, and not converted to rupees.
In order to open an account, you can either visit the nearest branch of the Indian bank in your home country, if any, or send the completed application form (you can get it online) along with the documents to any of the branches in India (see box).
Tax liability for NRIs
You should be aware of the tax implications on investments in Inida. Although there is no difference in the tax rates for NRIs and resident Indians, the tax is compulsorily deducted at source in case of NRIs. So your share broker, mutual fund and bank will deduct tax before giving you the redemption proceeds.
Worse, the TDS is charged at the highest applicable tax rate for that investment category irrespective of the actual liability (see table). For instance, you may not have any tax liability due to losses incurred on another investment but your broker will still deduct the tax.
Where to invest
For many NRIs, property is the primary choice of investment. The bulk of their money is directed towards real estate investments. However, some experts feel this is not the ideal route for all NRIs.
S.P. Dhanapal, financial planner, Sudha NRI Consultants, insists, "Often, NRIs lock-up a chunk of their money in property, which remains unused. This leaves no scope for liquid investments. They would be better off making liquid financial investments." Also, real estate investments here involve a lot of hassles and the lack of transparency makes it a tough proposition to find a desirable property.
If you are willing to look beyond property, there are a lot of options to park your funds. While considering any of these options, the major deciding factor should be the expected return, and not the exchange rate, asserts Hemant Rustagi, CEO, Wiseinvest Advisors.
"NRIs stand to benefit from investments here when the rupee appreciates against the dollar. Since the exchange rate can go either way, you should focus more on taking a longterm view and picking high-return instruments," Rustagi adds.
As a start, NRIs should take advantage of the superior rates of interest offered on deposits in India. Interest rates are at high levels but are expected to come down in the near future.