How US based NRIs can invest in Indian equities

If for any reason you are unable to open your demat, trading account in India, it should not stop you from participating in the Indian markets while you are in US.

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 Securities explains, "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.

Other options:

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.

2) ADRs

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.

Dividends are received by the depository bank and paid out to the ADR holder after deducting its fees and charges. But it is important to remember that a buyer of an ADR is only a buyer of the receipt and not the stock itself. As a result, when an issue comes up for voting, the ADR holder will have to instruct the bank issuing the receipt to vote on his/her behalf. Several Indian companies have their ADRs listed on the stock exchange in the US; Dr Reddy, HDFC Bank, , Infosys, MTNL, Tata Motors to name a few.

To sum up

While you may choose other methods like trading through a parent's account or friend's account or not declaring your NRI status to the trading account provider in India, you are likely to face complications at a later date. For instance, your parent will have to pay capital gains taxes on your transactions and file income tax returns in India. Your friend may face questions from the income tax authorities about the source of funds. And it is simply against regulations for you to hold a resident demat and trading account while you are actually an NRI.

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