The Indian equity trading market consisting of securities, exchange traded derivative contracts like F&O's has become a lucrative option for NRIs looking to diversify their investment activities. Various options, regulated by the concerned SEBI Regulations and FEMA, are available and NRIs can invest in the capacity of an individual as well as a non individual (Partnership firm, LLP etc.)

Investment in securities by NRIs:

As per Schedule II of the Foreign Exchange Management (Permissible capital account transactions) Regulations, 2000 , a person resident outside India which includes an NRI is permitted the Schedule mentioned classes of Capital Account Transactions which includes:

1. Issue of security by a body corporate or an entity in India and investment therein by a person resident outside India;
2. Undertake derivative contracts.
   
   As per Schedule 5 of Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 , an NRI, without any limit, can purchase on repatriation basis - a. Government dated securities (other than bearer securities) or treasury bills or units of domestic mutual funds;
3. bonds issued by a public sector undertaking(PSU) in India;
4. shares in Public Sector Enterprises being dis-invested by the Government of India, provided the purchase is in accordance with the terms and conditions stipulated in the notice inviting bids.
5. A Non-resident Indian or an Overseas Corporate Body may, without limit, purchase on non-repatriation basis, dated Government securities (other than bearer securities), treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds in India, or National Plan/Savings Certificates.

Mode of payment of investments:

1. The payment for investment shall be made by remittance from abroad through normal banking channels or by debit to an account of the investor maintained with an authorized person in India in accordance with the regulations made by the Reserve Bank under the Act.
    
2. As per Schedule III of the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, the mode of payment in case of investments by NRI on repatriation basis is:
   
   The amount of consideration shall be paid as inward remittance from abroad through banking channels or out of funds held in a Non-Resident External (NRE) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
    
3. According to Foreign Exchange Management (Deposit) Regulations, 2016:
   
   1. An authorized dealer in India may accept deposit - (i) under the Non-Resident (External) Account Scheme (NRE account), specified in Schedule 1, from a non-resident Indian;
      
      1. under the Foreign Currency (Non-Resident) Account Banks Scheme, (FCNR(B) account), specified in Schedule 2, from a non-resident Indian;
      2. under the Non-Resident (Ordinary) Account Scheme, (NRO account), specified in Schedule 3, from any person resident outside India;
   2. Without prejudice to sub-regulation (1), deposits under NRE and NRO Account Schemes referred to in clauses (i) and (iii) of that sub-regulation, may also be accepted by an authorized bank, in accordance with the provisions contained in the respective Schedules, subject to the conditions prescribed by Reserve Bank in this regard.
   3. Without prejudice to sub-regulation (1), deposits under FCNR(B) Account Schemes referred to in clause (ii) of that sub-regulation, may also be accepted by a Regional Rural Bank, in accordance with the provisions contained in the Schedule, subject to the conditions prescribed by Reserve Bank in this regard.
   4. Any person resident outside India having a business interest in India may open, hold and maintain with an authorized dealer in India, a Special Non-Resident Rupee Account (SNRR account), specified in Schedule 4.
       
4. The NRE account will be designated as an NRE (PIS) Account and the designated account shall be used exclusively for putting through transactions permitted under this Schedule.
5.  Investment in units of domestic mutual funds shall be paid as inward remittance from abroad through banking channels or out of funds held in NRE/FCNR(B) account.

Apart from the above mentioned, there are two more alternatives available to NRIs keen to invest in the Indian securities market. These are in the form of Hedge Funds and as a Qualified Foreign Investor.

HEDGE FUND

Hedge fund, which is a Category III Alternative Investment Fund, can be established or incorporated in India in the form of:

• a trust or
• a company or
• a limited liability partnership or
• a body corporate.

A hedge fund, like other Alternative Investment Funds, is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors. A hedge fund employs diverse or complex trading strategies and invests and trades in securities having diverse risks or complex products including listed and unlisted derivatives.

Minimum Corpus of a hedge fund - INR 20 Crore.

Minimum Investment by each investor in a hedge fund - INR 1 Crore

In case of Hedge Fund employees, directors or employees , directors of Manager of Hedge Fund - Minimum investment of INR 25 Lakhs is required.

A hedge fund is set up by a person or persons called sponsor which includes promoter in case of a company and designated partner in case of a limited liability partnership. A hedge fund's investments are managed by a fund appointed manager, who may be the same as the sponsor of the fund. The Manager or Sponsor shall have continuing interest in the Hedge Fund of not less than 5% of corpus or INR 10 Crore, whichever is lower.

A hedge fund can raise funds from any investor whether Indian/ Foreign/ NRI by way of issue of units. The fund shall not solicit or collect funds except by way of private placement. A hedge fund's tenure shall be determined at the time of application for its registration to SEBI. In case of a hedge fund, a minimum lock in period for investment is of 3 years.

Qualified Foreign Investor

An NRI falling within the definition of a qualified foreign investor can invest either in the capacity of an individual or a non individual in the form of a company, trust or partnership firm.

There are permissible transactions allowed for QFI's investing into Indian securities.
QFIs can transact only in the below-mentioned securities:

1. Purchase/subscription of mutual fund units through Demat Account mode (Direct Route) and Unit Confirmation Receipt (UCR) [Indirect Route].
2. Purchase of equity shares in public issues, to be listed on recognised stock exchange(s).
3. Purchase of listed equity shares through SEBI registered stock brokers, on recognized stock exchanges in India.
4. Redemption of mutual fund units purchased/subscribed through direct and indirect route.
5. Sale of equity shares which are held in their demat account through SEBI registered stock brokers.
6. Subscription of equity shares against rights issues.
7. Receipt of bonus shares or receipt of shares on stock split/ consolidation.
8. Receipt of equity shares due to amalgamation, demerger or such other corporate actions, subject to the investment limits.
9. Receipt of dividends and interest payments.
10. Tender equity shares in open offer in accordance with SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
11. Tender equity shares in open offer in accordance with SEBI (Delisting of Equity Shares) Regulations, 2009.
12. Tender equity shares in case of buy-back by listed companies in accordance with SEBI (Buyback of Securities) Regulations, 1998.
13. Purchase and sale of corporate debt securities listed on recognized stock exchange(s).
14. Purchase of corporate debt securities through public issues, if the listing on recognized stock exchange(s) is committed to be done as per the extant provisions of the Companies Act, 1956.
15. Sale of corporate debt securities by way of buyback or redemption by the issuer.
16. Purchase and sale of units of debt schemes of Indian mutual funds.

A QFI is required to open a demat account with any qualified Depository Participant and purchase and sale of all eligible securities shall be transacted through that demat account only.

At present there are two depositories registered with SEBI - National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). The list of registered depository participants of the above two depositories is present on the SEBI website.

A QFI cannot directly place an order with a stock broker. The purchase/sale orders have to be placed with the qualified DP. A QFI can directly interact with a stock broker provided the stock broker itself is the qualified DP or the stock broker has an arrangement with qualified DP for order routing, execution, confirmation, and reporting of trades.

Minimum corpus of QFI - There is no restriction on the minimum volume of investment to be made in the capacity of a QFI. The investment made through the QFI route is freely repatriable, subject to payment of applicable taxes.

End-Notes

1. Authorized person has been defined under Section 10, Foreign Exchange Management Act, 1999
2. Authorized dealer ibid.
3. Hedge Funds are regulated by SECURITIES AND EXCHANGE BOARD OF INDIA (ALTERNATIVE INVESTMENT FUNDS) REGULATIONS, 2012
4. Regulation 2 (h) "corpus" means the total amount of funds committed by investors to the Alternative Investment Fund by way of a written contract or any such document as on a particular date. - SECURITIES AND EXCHANGE BOARD OF INDIA (ALTERNATIVE INVESTMENT FUNDS) REGULATIONS, 2012
5. Minimum investment by each investor in a Hedge Fund is not applicable to an accredited investor as defined in SECURITIES AND EXCHANGE BOARD OF INDIA (ALTERNATIVE INVESTMENT FUNDS) REGULATIONS, 2012.
6. Promoter is defined under Section 2(69), Companies Act, 2013
7. Designated partner is defined under Sections 7, Limited Liability Partnership Act, 2008
8. Regulation 2 (y) "unit" means beneficial interest of the investors in the Alternative Investment Fund or a scheme of the Alternative Investment Fund and maybe fully or partly paid up - SECURITIES AND EXCHANGE BOARD OF INDIA (ALTERNATIVE INVESTMENT FUNDS) REGULATIONS, 2012
9. QFI shall mean a person who fulfills the following criteria:
   
   1. Resident in a country that is a member of Financial Action Task Force (FATF) or a member of a group which is a member of FATF; and
   2. Resident in a country that is a signatory to IOSCO's MMOU (Appendix A Signatories) or a signatory of a bilateral MOU with SEBI:
      
      Provided that the person is not resident in a country listed in the public statements issued by FATF from time to time on-(i) jurisdictions having a strategic Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) deficiencies to which counter measures apply,
   3. jurisdictions that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies:
      Provided further such person is not resident in India:
      Provided further that such person is not registered with SEBI as Foreign Institutional Investor or Sub-account or Foreign Venture Capital Investor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.