How to Invest in The Indian Stock Market From the U.S.? 

An immortal sentiment by Phillip Fisher states, “The stock market is filled with individuals who know the price of everything, but the value of nothing.”

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Undeniably precise, Phillip classified stock market investors in an easy line. The uncertainty, yet the regularity of the stock market, requires attention to detail. And that is why there may or may not be a quandary benefit to investing. 

When we talk about the Indian Stock Market, which exemplifies to hold less than 3% of the total global market cap, one would feel delighted and proud to discover that it delivers no less.

As promising and rewarding as markets of the U.S. are, Indian stock exchanges have witnessed unimaginable dimensions. 

What does the Indian Stock Market comprise of? 

Majorly, and rather most popularly, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are considered the backbone of the Indian stock market structure.

Established in 1875 and 1992, respectively, the BSE and the NSE operate on parallel mechanisms, time spectrum, and settlement procedures.

As of March 31, 2021, the BSE had 5565 firms listed, whereas NSE had 1920 firms. 

They follow the processes of open electronic limit book order, which are then compared to the trading computer. The entire chain is order-driven, without any specific involvement of market makers.

Due to this, the identity of buyers and sellers remains anonymous. Such a mechanism helps enhance the transparency of the transactions by displaying them on the trading computer.

Orders placed in these markets are generally through brokers. In contrast, institutional investors may prefer Direct Market Access (DMA), which enables them to utilize trading terminals offered by brokers for placing orders directly. 

According to the provisions of law, the delivery of shares is made in a dematerialized format, operating on a T+2 basis. Exchanges have also established their own clearing-houses responsible for the settlement and related aftermaths.

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The Indian Stock Market also puts forth two profound indices, Sensex and NIFTY. The Sensex is an index of top 30 firms filtered by market capitalization. It was set up in the year 1986.

On the other hand, Nifty enlists the top 50 shares sorted by market capitalization. Established in 1996, the name NIFTY comes from Standard and Poor’s CNX Nifty. 

Nonetheless, the overall market is regulated by the Securities Exchange Board of India (SEBI). Companies enlisted on stock exchanges have to necessarily operate under SEBI guidelines, while the other companies continue to follow the Company’s Law. 

Who can Invest in the Indian Stock Market? 

Not until the 1990s, India started accepting foreign investments in the form of FDIs and FPIs. Before that, the stock market was considered in its infancy and not competent enough regarding exposure.

But the Foreign Direct Investments and the Foreign Portfolio Investment gave a needed push to our stock market model. 

Even as of now, foreigners can not directly invest in the markets of India. Provided the dynamics and the requirements, SEBI accepts individuals with a net worth of at least $50 Million. 

Investing in the Indian Stock Market from U.S.?  

It is a matter of utmost consideration because the Indian Market has its pros and cons. We can not expose the market freely to the forces of foreign investments.

Stepping in this direction would lead to the drainage of our resources. But at the same time, it’s good to cheer at a global level. Therefore, the law applies limits and restrictions to keep a check on the entitlement and possession of the securities dealt. 

To invest in the Indian Stock Market from the U.S., one must consider the legal implications and tax provisions. Not limiting your resources, but it is essential to follow the guidelines and procedures laid by the concerned governing bodies. 

Any person investing in the Indian Stock Market from the U.S. must be aware of the processes that need to be followed. Added, not only does it lead to a healthy and legitimate investment but also secures your investment from the uncertainty of obscenity and other human actions. 

Foreign Institutional Investors (FIIs)

Overseas individuals and entities invest and trade in the Indian stock market via institutional investors. Foreign institutional investors comprise mutual funds, pension funds, endowments, wealth funds (sovereign), insurance companies, and asset management companies.

FII and their sub-accounts are exposed to the Indian Stock Market and can directly invest in any recognized stock exchanges. FIIs are also empowered to invest in unlisted securities outside the scope of stock exchanges.

Such an investment is subject to RBI’s prior approval. Unless otherwise agreed, FIIs must channelize 70% of their investment towards equity. The balance that is 30% can be directed towards debts. 

Foreign Institutional Investors, categorizing both FDIs and FPIs, must maintain a specific non-resident bank account that operates in rupee domination to circulate funds in or out of India. 

Portfolio Investment Scheme

Under the Portfolio Investment Scheme, the eligible people, constituting FIIs and NRIs, must maintain an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) bank account.

The key highlighter between the two is that where NRE is repatriable, NRO is not. To simplify, one can transact or send money to their own country or place of residence, giving them the freedom to move the funds, whereas funds in an NRO account can not be repatriated beyond a specific limit, which is $1 Million per annum.

After verifying their account and obtaining the required permission from the RBI, an eligible person can prepare a Demat account and a trading account in the name of the entity.

Certain documents shall be required, and the need of which must be fulfilled by the concerned authority to begin trading.

Restrictions on Firms

Restrictions have also been applied to firms. Along with FIIs, firms have been bound by a ceiling limit, under which they can not accept institutional investments above a specific limit.

Such a limit ranges between 26% to 100% for FDIs. Variations are dependent on the nature of the sector, type of investment, and duration of the investment.

The governing bodies have also restricted the aggregate limit by FIIs to reach a maximum of 24% of paid-up capital unless otherwise agreed. 

Investment by a single foreign institutional investor should not exceed 10% of the paid-up capital of any firm. Provided the regulations be followed strictly unless otherwise agreed or directed by a judicial body. 

Investing via Online Platforms

Trading access to the Indian Stock Market is currently available to Non-Residents and FIIs. By installing and registering oneself on a broker’s website, one establishes their identity, which allows them to invest in the market via online platforms. 

Brokers like Interactive Brokers, Zerodha, and Sharekhan have introduced unfathomable facilities that captivate an investor. With numerous opportunities, they also bring ease.

Not only do these platforms provide us with a list of securities, but they also guide the investors in real-time. They have been known to provide the users with necessary handy information.

Brokerage charged by each platform varies to their terms and conditions, services offered, and nature of security.

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Alternatives to Invest in the Indian Stock Market: 

Exposed non-negotiably by the Foreign Institutional Investors, many mutual funds, which are a central attraction of the Indian Stock Market, have gained recognition amongst the retail investors globally.

Participatory notes, depository receipts, exchange-traded funds, and exchange-traded notes are other instruments through which one can invest in the Indian Stock Market from the U.S. or anywhere globally.

Depository notes consist of American Depository Receipt and the Global Depository Receipt. 

ADRs are dollar-dominated, negotiable certificates issued by the Banks of the U.S. They tend to represent a certain quantity of shares of a foreign company being traded in the territories of the U.S.

They are strictly subject to the guidelines of USSEC (United States Securities and Exchange Commission).

On the parallel tracks, Global Depository Receipts are enlisted on Europe Stock Exchanges. 

Investors can use instruments like exchange-traded funds and notes based on Indian stocks to avail the benefits of the Indian Stock Market without the assistance of FIIs.

One of the most impressive ETN is iPath MSCI India Index Exchange Traded Note. Leading by examples, ETN and ETF put forth a profound opportunity to invest in the dynamics of the Indian Stock Market. 

Conclusion

An epitome of growth, the Indian Stock Market has remarkably created an infrastructure that has enhanced various sectors of our economy.

With empowerment and a better flow of financial resources, the market has exposed the Indian economy to the vulnerabilities of global trade, which has ultimately led to brilliant opportunities for the residents.

Not only has the structure captivated the Indians, but it is undoubtedly promising to other citizens of the globe as well. 

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