Let us first get to know the Indian stock market in brief before we dive into how you can invest in it.
The two top stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). BSE is the oldest stock exchange established in 1875 while NSE established in 1992 is the biggest stock in India in terms of volume. NSE provides higher liquidity than BSE despite having a lower number of listings than the BSE. The market capitalization of NSE is at about $2.27 trillion and BSE is $2.1 trillion. BSE index Sensex has 30 companies while NSE’s index Nifty has 50 companies.
All the stock exchanges in India are regulated by the Securities and Exchange Board of India (SEBI).
Investing in Indian stocks from the US
The most common choice among investors includes investing in India-focused mutual funds in the US, Exchange-Traded Funds (ETFs), and Exchange-Traded Notes (ETNs) based on Indian stock or American or Global Depositary Receipts (ADRs or GDRs).
To have access to the Indian stock market from the US, you will have to either open an account with an international brokerage firm regulated by the U.S. Securities and Exchange Commission (SEC) or open an account with a SEBI-registered Indian stockbroker.
You can open an account with any known Indian brokerage firm such as Motilal Oswal after providing the prerequisites to start trading in the Indian stock market.
International brokers such as Interactive brokers having a presence in the NSE allows you to trade in Indian shares, options, futures, indices. You can open a brokerage account to start buying and selling of stock directly from the Indian stock exchange.
Non-Resident Indians, as well as resident Indians, have the opportunity to open specific accounts with such brokers. Through these accounts, Indian investors can also access NSE stocks based on their location.
Fidelity Investments or Charles Schwab are other brokerage firms that also offer trading services. You will need to pay additional commissions fees and currency conversion costs. Since stocks are traded in the Indian currency, keep in mind the foreign exchange rates. Compare the top money transfer companies before sending your money to India to get the best exchange rate and save on transfer fees.
Investing in ADRs or GDRs
You may already have access to Indian stock through American depositary receipts (ADRs) or Global depositary receipts (GDRs) through your brokerage firm. ADRs are listed on the New York Stock Exchange (NYSE) and the NASDAQ exchange. While GDRs are listed on the London Stock Exchange (LSE).
Some of the publicly traded companies in India have their shares listed on the US and UK stock exchanges via their depositary receipts. ADRs are negotiable certificates issued by a US bank which represents a specified number of shares of a foreign company that are traded in the U.S. stock exchange.
India focused ETFs
These indexes are made up of Indian stocks and are already found listed on the NYSE and Nasdaq. Some popular India focused ETFs are:
And a popular ETN includes iPath MSCI India ETN (INPTF). These are good investment options for foreign investors.
You can buy these ETFs from independent brokerages like Interactive Brokers, TD Ameritrade for a very low commission fee.
Portfolio Investment Scheme (PIS)
The Reserve Bank of India developed a scheme called the Portfolio Investment Scheme (PIS) that grants permission to Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs), and Foreign Institutional Investors (FIIs) to trade in the primary and secondary capital markets in India. Under PIS, FIIs and NRIs can buy shares or debentures of companies listed on the stock exchange in India.
Can foreigners invest in Indian stocks?
As for now, foreign individuals can not directly invest in the Indian stock market. Although individuals with a high net worth (at least $50 million) can register with SEBI as a Foreign Institutional Investor (FIIs).
Under the PIS, eligible entities can open either an NRE/NRO bank account to be able to trade. Only then they will be allowed to open a trading account with a SEBI registered brokerage firm. You are then required to also open a Demat account (for storing your securities electronically). You have to submit a Permanent Account Number (PAN) card (for tax purposes) along with the necessary documents for identity verification.
Read more on taxation and managing capital gains in India.
Do keep in mind only one account (either NRE or NRO account) is to be associated with one trading account and Demat account.
NRE/NRO is a rupee account. The main difference between these accounts is that NRE is repatriable and NRO is non-repatriable. This means you can send your money in the NRE account back to your country of residence while the money in the NRO cannot be repatriated beyond $1 million per year.
Additionally, the government of India has put a certain ceiling on investments. For example, overall investment for FIIs should not exceed 24 percent of the paid-up capital of the Indian company (this 24 percent can be raised to sectoral cap after gaining approval of the company’s board and shareholders) and 10 percent for NRIs/PIOs (can be raised to 24 percent after approval from the board).
How to manage your investments from abroad as an NRI?
As an NRI, you are required to do a Foreign Account Tax Compliance Act (FATCA) declaration before you open your trading and Demat account.
Do keep in mind that NRIs are not allowed to trade in certain Indian stocks. Thoroughly check with your brokers for such information to avoid penalties.
India is one of the top emerging markets in the world with foreign investment steadily rising over the years. If you are looking to diversify your investment portfolio through investment in foreign stocks, investing in the Indian stock market could be a smart move.