By Mohammed Waseem
Indian stock market is often underestimated in developed countries. Many consider it just another market. In reality, India is among the best markets for investors to consider; it is among the most promising markets in the world. India is a country which has young population and youngsters are encouraged to take part in the stock trading.
India has as many as 22 recognized stock exchanges, including 8 permanent ones. Most of these are limited to local stock trading and are open for Indian citizens alone. However, 2 stock exchanges among these, which are primary trading exchanges, allow foreign investors to take part in the trading; they are National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
Until 1990, no foreign entity was allowed to trade in the Indian stock market. Then, foreign investment was permitted in two forms: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). Investments which involve taking part in managing a business fall under the FDI category, and investments which do not involve taking part in the management of business fall under FPI. For portfolio investments, one has to be registered as an FII (Foreign Institutional Investor) or as one of the sub-accounts of a registered FII. The FII stock trading recently led to over Rs. 5000 crore (@828 million) inflow in just two weeks, according to the Securities and Exchange Board of India (SEBI), which regulates the Indian stock market. This was for business investments, but what about investment opportunities for foreign individuals?
Until the beginning of 2012, Foreign Investors (FIs) were not allowed to invest directly in the Indian stock market. They were allowed, however, to invest by the way of American Depository Receipts (ADR) or Global Depository Receipts (GDR), which are stocks that are traded on the investor’s home-country stock exchange, but represent Indian companies. In other words, Indian companies which are listed on foreign stock exchanges can issue GDRs and ADRs. Additionally, they were allowed to trade in FCCB (Foreign Currency Convertible Bonds).
But the Indian government opened up a little to FIs in 2012, which has made it easier for foreigners to invest in the Indian stock market. Having said this, it should be noted that not every foreigner is qualified to invest in the market. One has to be a Qualified Foreign Investor (QFI) in order to qualify for the investment. A QFI is anyone who is a resident in a country that is a member of Financial Action Task Force (FATF) or member of a group which is a member of FATF, or a resident in a country that is signatory to Appendix A of the International Organization of Securities Commissions (IOSCO)’s Multilateral Memorandum of Understanding (MMoU). List of the qualified countries can be accessed here. Additionally, a QFI must not be a resident of India, nor registered as a FII or a sub-account of a FII.
QFI status allows FIs to directly invest in Indian companies via BSE and NSE. However, there is a limit to the investment for an individual QFI, which is 5% of the equity of an Indian company. The aggregate shareholding of QFIs in an Indian company cannot exceed 10%. They can also invest in mutual funds and Indian corporate bonds in addition the limit for which is $1 billion.
All QFI investments should come through a Depository Participant (DP), which acts as an intermediary between the investor and the depository. The list of DPs under National Securities Depository Limited (NSDL) can be viewed here and the list of DPs under Central Securities Depository Limited (CSDL) can be viewed here. The exchange for NSDL is NSE, while for CSDL, it is BSE. In order to trade in the stock exchange, a QFI has to open a Demat account; each QFI is allowed to open only one Demat account.
Investment in the Indian stock market is considered to be among the most exciting investment opportunities of this time by market experts. Investors looking for a good investment opportunity should consider the Indian stock market.