In a remarkable turn of events, India’s stock markets have surged to become the fourth largest globally, surpassing Hong Kong, and attracting investors seeking alternatives to China’s less favorable stock indexes. As the country gears up for elections this year, foreign investors are increasingly drawn to India’s rapidly growing economy. This article explores the various avenues available for foreign investors to participate in India’s stock market, ranging from traditional routes like Foreign Portfolio Investments (FPI) to innovative options such as offshore derivatives and American and Global Depository Receipts (ADRs/GDRs).
Foreign Portfolio Investments (FPI)
To invest in shares of India’s listed companies, foreign investors primarily utilize the FPI route. This involves registration with India’s markets regulator and adherence to disclosure requirements. With over 10,800 FPIs, the majority are funds.
While there are no restrictions on investing in Indian companies through this route, FPIs are limited to holding a maximum of 10% in a listed company. Exceeding this limit categorizes the investment as foreign direct investment (FDI), which may have restrictions in certain sectors. All FPI transactions are conducted in Indian rupees through registered brokers and are subject to the same tax rates as domestic investors.
Disclosures
The Securities and Exchange Board of India (SEBI) maintains a hands-off approach to offshore funds’ registrations. However, custodian banks, through which foreign funds flow into India, are mandated to disclose investor details. Custodians in India are generally domestic banks or branches of foreign banks. As per information available on the SEBI website, there are a total of 17 registered custodian banks in India, including well-known entities such as Citi Bank, Deutsche Bank, ICICI Bank, Kotak Mahindra Bank, DBS Bank, HSBC, State Bank of India, Standard Chartered Bank, and others.
SEBI’s anti-money-laundering rules also require disclosure of beneficial owners holding 10% or more of a fund’s assets. Enhanced disclosure requirements are in place for funds with concentrated holdings in a single corporate group.
Non-Resident Investments
Non-resident Indians (NRIs) can invest in the Indian stock market through the portfolio investment scheme, utilizing transactions routed through a non-resident ordinary (NRO) savings account. The overall investment limit for NRIs and persons of Indian origin (PIO) is capped at 10% of a company’s paid-up capital, with individual investments limited to 5%. NRIs cannot engage in intra-day trading, must take delivery of shares, and are restricted from trading derivatives.
Offshore Derivatives
For foreign investors avoiding the SEBI registration process, investing in Indian shares is possible through offshore derivatives like Participatory Notes (P-notes). These instruments are issued overseas by an FPI against securities held in India. While short positions require upfront disclosures, P-notes provide a way for investors to obscure their positions.
ADRs/GDRs
Foreigners can also invest in Indian firms through approximately 150 American and Global Depository Receipts (ADRs/GDRs) listed on offshore exchanges. Although the number of companies using this avenue has reduced in recent years, ADRs/GDRs offer an alternative for global investors seeking exposure to Indian markets.
India’s stock markets have emerged as a compelling destination for global investors, with diverse avenues catering to different investment preferences. From traditional FPIs to innovative options like offshore derivatives and ADRs/GDRs, the country’s dynamic economy continues to attract foreign capital. As the nation heads into elections, the robust performance of India’s stock markets underscores the confidence of international investors in its economic potential.
