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's 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).
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 Zerodha, Sharekhan, 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 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.
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 that represent a specified number of shares of a foreign company that are traded in the U.S. stock exchange.
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.
One can trade in stocks in 3 different ways: desktop, web, and mobile app. The desktop-based platform is the fastest trading platform among the three trading platforms. One needs to install the software on the desktop/ laptop after downloading it from the broker's website. Whereas for the web-based platform, one can access the login page via web browsers like Firefox or Chrome. Nowadays, there is an app for almost everything. Most major stockbrokers now have Android and iOS apps for trading services.
Currently, trading access to the Indian financial markets is only available to NRIs and FIIs (Financial Institution Intermediaries).
Given below are some of the popular online trading platforms:
Interactive Brokers (IB) is an international online broker based in the U.S. It is considered the top pick among professional stock traders mainly because of its institutional-grade desktop trading platform and low margin rates.
IB's web-based platform, its premiere Trader Workstation (TWS), is one of the best trading platforms in the industry. IB also offers mobile trading apps for both Android and iOS mobile devices.
Its $0 trades and user-friendly web platform may also attract casual investors. One major plus-point with IB is that investors have access to a vast range of global markets and products and research tools. It is regulated globally by several top-tier financial authorities such as the U.S. SEC and the UK's Financial Authority (FCA).
NRIs have trading access on the NSE through the IB-India subsidiary. For the time being, only Futures and Futures Options trading are available through the F&O segment. Stock trading is not yet available. Also, FII is currently not supported.
NSE trades cost a low flat rate of Rs 20 per order for stocks, futures, and options. There is no minimum deposit required by IB. Pricing for NRI includes $500 (equivalent in INR) minimum for a subscription to market data and research for NSE listed stocks and derivatives and minimum brokerage fees of Rs 600 per month for NSE trading accounts and $10 for overseas trading accounts.
Zerodha is India's largest online discount broker by active clients base, market volume, and new customer acquisition. It is regulated by SEBI. Known for its lowest brokerage rates for futures and options, commodity trading, equity, mutual funds, and bonds, it also offers highly advanced trading tools.
Direct mutual funds investments and equity (NSE, BSE) come with 0 charges. And flat Rs 20 or 0.03% on intraday trades across equity, currency, and commodity trades.
Zerodha offers a range of in-house platforms for online trading and as a dashboard such as Kite (web-based), Kite Mobile (mobile trading app), Coin, Console, etc., and various partner products such as Smallcase, Streak, and more. It is suitable for all kinds of traders-active and passive traders, beginner traders, and algo traders.
NRIs can invest in the equity segment and mutual funds but are not allowed to trade the currency or commodity markets in India. Brokerage charges are Rs 100 per order for futures and options and Rs 200 or 0.1% per executed order for equity.
With over 2 million customers, Sharekhan is one of the top full-service brokers in India. Full-service brokers provide investment advice, stock recommendations, research reports, trading tips, training for trading, and a relationship manager in addition to buying and selling of shares.
Investors can choose from a wide range of products and services such as equities, mutual funds, currency, derivatives, Portfolio Management Services (PMS), IPOs, stock quotes, news alerts on the stock market, and so on. It also offers free online seminars/workshops for investors. It also offers NRIs services.
Sharekhan trading platforms include Trade Tiger, Sharekhan.com, SharekhanMobile, ComMobile Pro, InstaMf App. Trade Tiger comes in two versions: Trade Tiger Basic for casual traders and Trade Tiger Advanced for professional traders.
Full-service brokers typically charge a percentage (0.1 to 0.5%) of the transaction value as brokerage, so the total brokerage is high if your investment amount is huge.
Robinhood is an online discount brokerage that lets investors trade stocks, options, ETFs, and cryptocurrency with no commission and fees. Currently, it is one of few brokers that offers cryptocurrency trading.
It appeals to active traders looking for free-commission trading and beginner traders. Investors can trade on the web-based portal or use their mobile trading app.
If you are interested in buying Indian stocks from the U.S., you can buy shares of Indian companies listed on the U.S. stock exchange. Robinhood offers options trading and access to over 650 global stocks through American Depositary Receipts (ADRs).
Income from the sale of equity shares comes under 'Capital Gains': when the shares are sold at a higher price than the purchase price.
Tax on Short term capital gains: If you sell equity shares listed on a stock exchange within 1 year of purchase, the gains are taxable at 15%.
Tax on Long term capital gains: Tax is exempted on gains made on stocks held for over 1 year. However, if the long-term capital gain is more than Rs 1 lakh, a tax of 10% is levied. The benefit of indexation is also not available to the seller.
Tax on income from F&O: Treated as a business income, it will be taxed according to the tax slab rates in India.
STT is a direct tax levied on the purchase and sale of securities listed on the recognized stock exchanges (not on commodities or currency trades). Different STT rates are applicable for Equity, and Futures and Options trades.
For commodities, the Commodities Transaction Tax (CTT) is levied.
In addition to STT, there will be additional charges Exchange charges, Statutory Tax, and service tax.
Read more on taxation and managing capital gains in India.
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).
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 on a repatriation basis. PIS account allows investors to trade in the equity segment only.
Under the PIS, eligible entities can open either a Non-Resident External-NRE or Non-Resident Ordinary-NRO bank account to be able to trade.
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.
You are then required to open a Demat account (for storing your securities electronically) and trading account. Before you open a Demat and trading account, get a PIS-permission letter from the RBI. Only then you will be able to open the Demat and trading account with a SEBI regulated brokerage firm of your choice by linking your NRE or NRO bank account.
You have to submit a Permanent Account Number (PAN) card (for tax purposes) along with the necessary documents for identity verification.
Do keep in mind only one account (either NRE or NRO account) is to be associated with one trading account and Demat account.
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)
Non-Portfolio Investment Scheme (Non-PIS)
A Non-PIS account is an ordinary NRI saving account opened with any bank in India. The transaction with a non-PIS account is not reported to RBI. With regards to investments, the NRO Non-PIS account can be used to invest in equity, shares, IPOs, mutual funds, and bonds on a non-repatriation basis.
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.