Navigating Foreign Investment in Indian Stock Markets

India's equity markets have escalated to become the fourth largest globally, surpassing Hong Kong and presenting a viable investment alternative as China’s market performance wanes. The rise is timely as the nation prepares for its electoral process, during which it continues to draw the attention of international investors. Those looking to participate have several avenues to explore investment opportunities in India.

Foreign Portfolio Investments (FPI)

One primary method for foreign investors to put their money into Indian public companies is through the FPI route. To engage in FPI, one must register with the market overseer, SEBI, and comply with its reporting regulations. Most of the FPIs, numbering over 10,800, are investment funds. Investing via FPI doesn't have overarching restrictions, but there is a stipulation that an FPI's stake in a company can't exceed 10%. Exceeding this threshold reclassifies the investment as foreign direct investment (FDI), which comes with sector-specific limitations.

FPIs must transact in Indian currency and work through authorized brokers. They are subject to the same taxation as local investors, including a 15% capital gains tax for assets held under one year, 10% for longer-term assets, and additional charges like surcharge and securities transaction tax.

Disclosure Requirements

The Indian regulator SEBI facilitates overseas fund registrations while ensuring that custodian banks accurately disclose investment details. These custodians are usually local or the Indian branches of international banks. SEBI mandates that the custodian banks disclose the identity of 'beneficial owners', those who own 10% or more of a fund's assets. Additionally, funds with substantial investments in a single corporate group have enhanced disclosure obligations.

Non-Resident Investments

Non-resident Indians and people of Indian origin have the leeway to invest in Indian markets through a portfolio investment scheme, with all transactions conducted via an NRO savings account. Collective investments by non-residents are capped at 10% of a company's paid-up capital and 5% for individual holdings. Furthermore, non-residents are barred from intraday trading and derivative transactions; they must take delivery of purchased shares.

Offshore Derivatives and Depository Receipts

Investors not keen on SEBI registration may instead opt for offshore derivatives like participatory notes (P-notes) against domestic securities held by FPIs. While taking shorts in India requires transparency, P-notes can be employed to conceal positions. Foreign investors also have the option to invest via approximately 150 ADRs/GDRs of Indian companies listed internationally, though the trend for fundraising via ADR/GDR has been on the decline.

India, Investment, Stocks