India’s stock markets have emerged as the world’s fourth-largest, surpassing Hong Kong’s, as global investors seek refuge in a robust alternative to China’s volatile stock indexes. With elections looming on the horizon, India remains a hotbed for foreign investors, providing a diverse array of investment avenues.
Unlocking Investment Opportunities
To gain exposure to India’s listed companies, foreign investors employ the Foreign Portfolio Investment (FPI) route. With over 10,800 FPIs, mostly comprising funds, there are no explicit restrictions on investing in Indian companies through this route. However, FPIs are capped at holding a maximum of 10% in a listed company, with exceeding investments categorized as foreign direct investment, subject to specific sectoral restrictions.
Navigating Transactions and Taxes
All FPI transactions are conducted in Indian Rupee through registered brokers, with tax implications mirroring those for domestic investors. This includes a 15% capital gains tax for short-term holdings of less than a year, a 10% tax for long-term holdings, and additional surcharges and securities transaction taxes.
Regulatory Oversight and Transparency
The Securities and Exchange Board of India (SEBI) maintains a hands-off approach to offshore fund registrations, relying on custodian banks to disclose investor details. SEBI mandates custodian banks, including prominent names like Citi Bank, Deutsche Bank, and HSBC, to provide information on the so-called beneficial owners holding 10% or more of a fund’s assets. In alignment with anti-money laundering rules, SEBI requires comprehensive disclosures for funds with concentrated holdings in a single corporate group, bolstering transparency and accountability.
Opportunities for Non-Resident Indians (NRIs)
Non-resident Indians (NRIs) have their own avenue to invest in the Indian stock market through the Portfolio Investment Scheme. Transactions are routed through non-resident ordinary (NRO) savings accounts, with an overall investment limit of 10% of a company’s paid-up capital for NRIs and persons of Indian origin (PIO). Individual investments are further capped at 5%. NRIs, however, face restrictions such as the inability to engage in intra-day trading. They must take delivery of shares and are barred from trading derivatives, ensuring a more stable and long-term approach to investments.
Exploring Alternative Investment Avenues
For foreign investors preferring a more streamlined process, the option of investing in Indian shares through offshore derivatives instruments or participatory notes (P-notes) is available. P-notes, defined by SEBI as instruments issued overseas against securities held by an FPI in India, offer a route for investors to obscure their positions, particularly when taking short positions. While taking a short position in India demands upfront disclosures, utilizing P-notes provides a layer of confidentiality. Additionally, foreign investors can explore approximately 150 American and Global Depository Receipts (ADRs/GDRs) of Indian firms listed on offshore exchanges. Although the number of companies opting for ADR/GDR fundraising has reduced in recent years, this avenue still offers an indirect route for global investors to access the Indian market.
As India’s stock markets ascend to the global ranking of the fourth-largest, the nation’s attractiveness to foreign investors becomes increasingly evident. With a myriad of investment avenues, from the conventional FPI route to offshore derivatives and non-resident investment schemes, India offers a diversified and dynamic market. The forthcoming elections add an element of anticipation, as global investors remain observant.
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