INVESTING IN INDIAN CAPITAL MARKET - HOW TO GO ABOUT IT?

An NRI can invest in the Indian capital market by buying in the secondary market or by subscribing to public offers by corporates.

Secondary market operations:

NRIs can invest in the secondary market only under the Portfolio Investment Scheme (PIS) as formulated by the Reserve Bank of India. The salient features of the scheme are:
•A permit is required to be obtained from the RBI before trading under PIS can commence. The permit can easily be obtained through a designated branch of a bank where the NRI investor should have an account.
•Investments can be done either on repatriable basis or on non-repatriable basis or both. In either case RBI permit is mandatory and separate permits are required for repatriable and non-repatriable investments.
•Shares can be bought and sold only on delivery basis. Intra-day squaring off is not permitted.
•Applicable tax on profits made will be deducted at source. For details please refer to the section on Taxation.

If you are a first time investor, you need to open 3 different kinds of accounts to be able to buy and sell in the secondary market
1. An NRE/NRO bank account with a designated bank branch.
2. A Depository account
3. A Trading account.

NRE/NRO Bank account

You need to open an NRE account if you wish your investments to be repatriable; if not an NRO account is sufficient. These accounts can be in single or joint names. A separate RBI permit is required for each account. Documents to be submitted are

•Application in the prescribed form
•Photograph of each holder. If RBI permit is sought, 2 additional photos are required.
•Copy of passport towards proof of identity
•Copies of visa pages as proof of NRI status
•2 bank drafts payable to yourself for a minimum of INR 5000/- for SB A/c and INR 7000/- for PIS A/c.
•If you already hold shares, you are required to make a declaration to this effect in the prescribed format indicating date of acquisition and price of acquisition.

Depository account

Most shares being available only in the electronic (dematerialized) form, a Depository account is a precondition for trading in the secondary market. Depository accounts can be opened either in single name or jointly up to a maximum of 3 holders. Documents to be submitted are:
•Application in the prescribed form
•A photograph of each holder
•Copy of the passport
•Copy of RBI permit if purchase of shares from the secondary market is intended.
•Digital communication agreement authorizing DP to send you digital statement/reports.
•PAN Card

Trading Account

A trading account will enable you to buy and sell shares in the secondary market. One may open an NRE or an NRO account depending on whether or not the investment is to be repatriated. As mentioned earlier, an RBI permit is required in both cases. The trading account is always in the name of an individual but the account can be tied to a jointly held depository account provided the trading account holder is any one of the holders of the joint depository account. The following documents are required for opening a trading account:
•Application in the prescribed form
•One photograph
•Copy of passport with Visa pages
•Copy of RBI permit
•PAN Card

Trading and settlement

Buying: Before you can place a buy order it is necessary to ensure that your PIS account is 100% pre-funded.

Selling: An order may be placed to sell any of the shares held in your depository account. As mandated by you, your depository account will be debited to the extent of your sales obligation. The net sales value will be credited into your PIS account along with a copy of the contract note.

Note: All buy and sell transactions in a PIS account are required to be reported to the Bank on the same day as the transaction.

Taxation

All profits made from secondary market trades come under the purview of the prevailing tax laws. Profits realized within a period of less than one year will attract short term capital gains tax @ 10% which will be deducted at source by your bank. Tax is calculated and deducted for each transaction. In other words, the profits made in one transaction cannot be set off against the loss made in another. You can, however, file your tax returns at the end of the year and claim refunds if any. Profits realized from shares that were held for more than one year are long term capital gains. From the financial year 2003-04 onwards, tax on long term capital gains from capital markets has been abolished. There is, however, a transaction tax of 0.15% on all trades. Currently, all dividends are also tax-free in the hands of the investors.

Primary market

Public offers of shares are made by Indian corporates from time to time. Many such issues represent opportunities for good long term investments. Investors should, however, be selective and invest only in companies that have good credentials. Most public issues come with a portion reserved for NRIs on repatriation basis. As the issuing company would have obtained a general RBI permission for the issue, NRIs need not have individual RBI permission for subscribing to public offers. In most cases, a depository account is necessary for being able to apply to public offers.