©Reuters. File photo: The new logo of the Bombay Stock Exchange (BSE) building seen on July 12, 2023 in Mumbai, India.Reuters/Francis Mascarenhas
Jayshree P. Upadhyay
MUMBAI (Reuters) – India's stock market has overtaken Hong Kong to become the world's fourth-largest, as investors flock to the fast-growing alternative to struggling Chinese indexes.
With elections coming up this year, India continues to attract foreign investors with a variety of investment avenues.
Overseas portfolio investment
Foreign investors have to go through the Foreign Portfolio Investment (FPI) route to invest in shares of Indian listed companies. Investors, whether individuals or companies, must register with national market regulators and comply with their disclosure requirements. Most of the 10,800 FPIs are funds.
There are no restrictions on investing in Indian companies through this route, but an FPI cannot hold more than 10% stake in a listed company. If an FPI invests more than his 10% in any company, it is classified as foreign direct investment and there are restrictions in some areas.
All FPI investments must be made in Indian Rupees and traded through a broker. All his FPI transactions are subject to taxes equivalent to those applicable to domestic investors. This includes capital gains of 15% for short-term holdings of less than one year and 10% for long-term holdings, as well as surcharges and securities transaction taxes.
Disclosure matters
The Securities and Exchange Board of India (SEBI) has taken a hands-off approach when it comes to registering offshore funds, but it does require custodian banks through which foreign funds flow into India to disclose details of investors in these funds. It is mandatory to do so.
The custodian is usually an Indian branch of a domestic bank or a foreign bank. According to the SEBI website, there are a total of 17 custodian banks in India including Citi Bank, Deutsche Bank, ICICI Bank, Kotak Mahindra Bank, DBS Bank, HSBC, State Bank of India, Standard Chartered (OTC:) Bank, etc. is registered.
Under India's anti-money laundering rules, regulators also require details of so-called beneficial owners, or investors who hold more than 10% of a fund's assets.
Additionally, SEBI has strengthened disclosure requirements for funds with concentrated holdings in a single group of companies.
Investment in non-residents
Non-resident Indians can invest in the Indian stock market through portfolio investment schemes and trading is done through Non-Resident Ordinary Savings Accounts (NRO) savings accounts. The overall investment limit in shares for NRIs and individuals of Indian origin (PIO) is 10% of the paid-up capital of the company. The upper limit for personal investment is 5%.
NRIs cannot engage in intraday trading, must take delivery of stocks, and cannot trade in derivatives.
offshore derivatives
If foreign investors do not want to go through the registration process with SEBI, they can invest in Indian equities through offshore derivative products or Participating Notes (P Notes). SEBI defines these instruments as instruments issued abroad by his FPI against securities held by his FPI in India.
Taking a short position in India requires up-front disclosure, but investors can disclose through P-notes to obscure their positions.
Foreigners can also invest in around 150 US and Global Depositary Receipts (ADRs/GDRs) of Indian companies listed on offshore exchanges. In recent years, the number of companies raising funds through ADR/GDR has decreased.
