India’s stock market is a well-developed mechanism for raising capital. Millions of Indians have been trading in equity, and the market indicator—Sensex (and later Nifty)—has been in a continued upward trend since the end of the dot-com bubble. The markets have gained 800% in 20 years.
It is natural that to ensure liquidity, the government would allow NRIs to participate. Besides, allowing NRIs to participate brings valuable foreign currency into the country.
NRI participation in equity markets is possible through the Portfolio Investment Scheme under Section 3 of the Foreign Exchange Management Act, 2000.
What is the Portfolio Investment Scheme (PIS)?
It is a scheme of the RBI that allows NRIs to buy and sell shares and debt instruments on Indian stock exchanges. The payment and receipts are routed via the NRI savings account held by the individual. An NRI is not allowed to participate as a day trader and has to hold the share overnight. Proceeds from PIS-based share trading can be repatriated.
The main purpose of PIS is for the RBI to keep close scrutiny so that though the markets gain through increased liquidity, share transactions by an NRI do not turn into some type of money-laundering operation (whether unintentional or deliberate).
What type of account is needed for share trading?
An NRI can choose to repatriate proceeds or let them accumulate. For the former (intention is to repatriate), a PIS with NRE account is required. If he decides to let the profits accumulate, a PIS with NRO account is sufficient.
Under some circumstances (Category III FPIs), PIS is unnecessary, and the NRI or NRI-backed entity can directly operate a Demat account. However, that facility is not offered by all brokers due to the complexity of record-keeping and compliance.
An NRI with an NRE/NRO account, as needed, has to apply for the PIS facility activation. The RBI monitors all PIS-enabled accounts and is the authority that grants permission.
Also, not all branches are able to function as a PIS-designated branch. Few major branches of every bank offer the facility.
- The PIS is only for the spot market, and not Futures and Options. For trading in derivatives, a simple NRO/NRE account is sufficient.
- PIS-enabled NRE accounts can be held with a single branch of one bank at a particular time.
- PIS-enabled NRE accounts cannot route proceeds from any transaction apart from buying and selling shares.
- All other transactions related to shares, such a brokerage, dividend warrants, etc., have to be through a non-PIS NRE account.
- The sale of shares received through stock splits is allowed.
- Buying and selling mutual fund units are not allowed through PIS-enabled NRE accounts.
- Sale of shares acquired through IPO, rights issue, or bonus issue are not allowed through a PIS-enabled NRE account.
- Sale of shares the NRI had purchased while a resident of India is now allowed through a PIS-enabled NRE account.
Note: PIS-enabled NRE account (and not NRO) is mentioned more often because, due to the very nature of share trading, the NRI would usually want to repatriate profits from time to time instead of allowing it to remain in India.
Documents required for PIS-enabled account
- Copy of valid passport
- Copy of residence visa or employment visa
- Proof of address at the country of residence
- Proof of address in India, if you need a communication address
- PAN card
- FATCA documents in the case of U.S.-based NRI
- The PIS-enabled account can only be held in the name of one NRI. It cannot be held jointly with an NRI spouse or non-NRI sibling or parent.
- The maximum investment can be 5% of the paid-up value of shares or debentures.
- IPO cannot be bought using the PIS account.
- A private placement is not allowed using the PIS account.
- If NRI becomes Resident But Not Ordinarily Resident (RNOR), an NRI must immediately inform the PIS account bank branch upon deciding to return to India. Within a few months, the PIS account would be converted to an ordinary saving and Demat account used by resident Indians.
Though the process sounds complicated, it is, in effect, quite simple. An NRI can buy and sell shares and debentures using an exclusive NRE/NRO account that is PIS-enabled.
This allows him to buy shares, hold at least overnight, and sell. The profits can be repatriated if they wish. The NRI is allowed to set off capital losses at the portfolio level in some cases.
On the whole, it is a smooth process, but one that is watched minutely by the RBI. If the PIS-enabled account is used to buy and sell shares, as intended, it works perfectly well, similar to a resident savings and Demat account.
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