Mark Twain formerly divided the world into two kinds of people those who have seen the notorious Indian monument, the Taj Mahal, and those who haven’t. The same could be said about investors. There are two kinds of investors those who know about the investment openings in India and those who don’t.
Although India’s exchanges equate to lower than 3 of the total global request capitalization as of 2020, upon near examination, you’ll find the same effects you would anticipate from any promising request. Then we’ll give an overview of the Indian stock request and how interested investors can gain exposure.
The BSE and NSE
Most of the trading in the Indian stock market takes place on its two stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been in existence since 1875.
The NSE, on the other hand, was founded in 1992 and started trading in 1994.
However, both exchanges follow the same trading mechanism, trading hours, and settlement process.
As of November 2021, the BSE had 5,565 listed firms,
whereas the rival NSE had 1,920 as of Mar. 31, 2021.
Almost all the significant firms of India are listed on both exchanges. The BSE is the older stock market but the NSE is the largest stock market, in terms of volume. Both exchanges compete for the order flow that leads to reduced costs, market efficiency, and innovation. The presence of arbitrageurs keeps the prices on the two stock exchanges within a very tight range.
Who Can Invest in India?
India started permitting outside investments only in the 1990s. Foreign investments are classified into two categories: foreign direct investment (FDI) and foreign portfolio investment (FPI). All investments in which an investor takes part in the day-to-day management and operations of the company are treated as FDI, whereas investments in shares without any control over management and operations are treated as FPI.
For making portfolio investments in India, one should be registered either as a foreign institutional investor (FII) or as one of the sub-accounts of one of the registered FIIs. Both registrations are granted by the market regulator, SEBI.
Foreign institutional investors mainly consist of mutual funds, pension funds, endowments, sovereign wealth funds, insurance companies, banks, and asset management companies. At present, India does not allow foreign individuals to invest directly in its stock market. However, high-net-worth individuals (those with a net worth of at least $50 million) can be registered as sub-accounts of an FII.
Foreign institutional investors and their sub-accounts can invest directly in any of the stocks listed on any of the stock exchanges. Most portfolio investments consist of investments in securities in the primary and secondary markets, including shares, debentures, and warrants of companies listed or to be listed on a recognized stock exchange in India.
FIIs can also invest in unlisted securities outside stock exchanges, subject to the approval of the price by the Reserve Bank of India. Finally, they can invest in units of mutual funds and derivatives traded on any stock exchange.
An FII registered as a debt-only FII can invest 100% of its investment into debt instruments. Other FIIs must invest a minimum of 70% of their investments in equity. The balance of 30% can be invested in debt. FIIs must use special non-resident rupee bank accounts in order to move money in and out of India. The balances held in such an account can be fully repatriated.
Restrictions and Investment Ceilings
The government of India prescribes the FDI limit, and different ceilings have been prescribed for different sectors. Over a period of time, the government has been progressively increasing the ceilings. FDI ceilings mostly fall in the range of 26% to 100%.
By default, the maximum limit for portfolio investment in a particular listed firm is decided by the FDI limit prescribed for the sector to which the firm belongs. However, there are two additional restrictions on portfolio investment. First, the aggregate limit of investment by all FIIs, inclusive of their sub-accounts in any particular firm, has been fixed at 24% of the paid-up capital.
However, the same can be raised up to the sector cap, with the approval of the company’s boards and shareholders.
Secondly, investment by any single FII in any particular firm should not exceed 10% of the paid-up capital of the company. Regulations permit a separate 10% ceiling on investment for each of the sub-accounts of an FII, in any particular firm. However, in the case of foreign corporations or individuals investing as a sub-account, the same ceiling is only 5%. Regulations also impose limits for investment in equity-based derivatives trading on stock exchanges.
Investments for Foreign Entities
Foreign entities and individuals can gain exposure to Indian stocks through institutional investors. Many India-focused mutual funds are becoming popular among retail investors. Investments could also be made through some of the offshore instruments, like participatory notes (PNs), depositary receipts, such as American depositary receipts (ADRs) and global depositary receipts (GDRs), exchange-traded funds (ETFs), and exchange-traded notes (ETNs).
As per Indian regulations, participatory notes representing underlying Indian stocks can be issued offshore by FIIs, only to regulated entities. However, even small investors can invest in American depositary receipts representing the underlying stocks of some of the well-known Indian firms, listed on the New York Stock Exchange and Nasdaq. ADRs are denominated in dollars and subject to the regulations of the U.S. Securities and Exchange Commission (SEC). Likewise, global depositary receipts are listed on European stock exchanges. However, many promising Indian firms are not yet using ADRs or GDRs to access offshore investors.
Retail investors also have the option of investing in ETFs and ETNs, based on Indian stocks. India-focused ETFs mostly make investments in indexes made up of Indian stocks. Most of the stocks included in the index are the ones already listed on the NYSE and Nasdaq.
As of 2020, two of the most prominent ETFs based on Indian stocks are the iShares MSCI India ETF (INDA) and the Wisdom-Tree India Earnings Fund (EPI). The most prominent ETN is the iPath MSCI India Index Exchange Traded Note (INPTF). Both ETFs and ETNs provide a good investment opportunity for outside investors.