In a major shift in the policy to attract investment from Indians living outside the country, the Reserve Bank of India (RBI) increased the limits for investment by NRIs and OCIs in equity instruments traded on the stock market without SEBI registration are being increased. The same facility is being extended to all individual Persons Resident Outside India (PROIs) at par with NRIs and OCIs.
Persons Resident Outside India (PROIs) is an overall category of individuals (as well as companies), who do not fulfil the category of being an Indian resident. NRIs, OCIs, or individuals holding foreign citizenship.
As per the revised rules, Persons Resident Outside India (PROI) will be permitted to invest in equity instruments of listed Indian companies through the Portfolio Investment Scheme, which was available only to NRIs/OCIs. The investment limit will be increased for an individual PROI under this scheme from 5% to 10% in any company, with an overall investment limit for all individual PROIs to 24%, from the current 10%. The new rules will also simplify onboarding and reduce compliance requirements.
How can NRIs invest in India
Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) are permitted to invest in most Indian securities. However, the process comes with additional documentation, account requirements and regulatory restrictions that resident investors do not face.
Under Indian regulations, OCI cardholders are treated at par with NRIs for investment purposes and enjoy the same permissions and exemptions. This means that both NRIs and OCIs can invest in equity shares, government securities, domestic mutual funds, exchange-traded funds (ETFs), listed bonds and debentures, infrastructure debt funds, PSU bonds and certain bank-issued debt instruments. They are also allowed to participate in equity derivatives, subject to specified conditions.
The first step for an NRI or OCI investor is setting up the required banking and market infrastructure. Typically, an investor needs an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) bank account, a demat account and a trading account. Those who wish to invest in shares on a repatriation basis through stock exchanges also require a Portfolio Investment Scheme (PIS) permission issued by an authorised dealer bank on behalf of the RBI.
The choice between NRE and NRO accounts is important. Investments made through NRE accounts generally allow free repatriation of capital and income, while NRO accounts are used for income earned in India and carry limits on repatriation. Interest earned in NRE accounts is exempt from Indian tax, whereas interest earned in NRO accounts is taxable.
Restrictions
Unlike resident investors, NRIs face tighter restrictions in stock market trading. In the cash market, only delivery-based transactions are allowed. Intraday trading and short selling are prohibited. An NRI must take delivery of shares purchased and can sell only shares already held in the demat account. While investment in futures and options is permitted on a non-repatriation basis, trading in currency derivatives is not allowed.
Another important limitation relates to transferability of shares. Shares purchased under the PIS route generally have to be sold through stock exchanges and cannot be freely transferred through private arrangements or gifted without prior RBI approval, except in certain cases such as transfers to relatives or charitable trusts.
Mutual funds offer a relatively simpler route. NRIs and OCIs can invest in Indian mutual funds after completing KYC formalities and can do so on both repatriable and non-repatriable bases. They can invest directly with asset management companies or through distributors. However, some fund houses do not accept investments from NRIs based in the US and Canada because of stringent overseas regulatory requirements.
Documentation
Apart from a PAN card, investors need valid passport details, visa or residency documents, overseas address proof, bank account proof and KYC verification. FATCA declarations are mandatory, particularly for US citizens and green card holders.
Taxation is often the most complex aspect of NRI investing. Capital gains tax applies to equity and mutual fund investments, while banks typically deduct tax at source before crediting sale proceeds. Investors may also face tax obligations in their country of residence and should review local regulations before investing.
