The Indian Stock Market: What Do You Know? — Part II
In the previous article on the Indian stock market overview, we share the details of two Indian stock exchanges (BSE and NSE), trading mechanisms, trading hours, market indexes, etc. We will continue building your foundation with deep dives into who will invest in India, restrictions, investment ceilings, etc.
Can Everyone Invest in India?
It was not possible to invest in the Indian stock market from the outside until the 1990s. There are two categories of foreign investments, such as foreign direct investment (FDI) and foreign portfolio investment (FPI).
The investments in which an investor gets involved in the daily management and operations of the company are FDI. Meanwhile, the investments in shares that do not offer investors any control over management and operations are FPI.
You should register as a foreign institutional investor (FII) or as the sub-account of a registered FII to build an investment portfolio. The market regular (SEBI) grants both registrations.
Foreign institutional investors mainly focus on mutual funds, pension funds, sovereign wealth funds, insurance companies, asset management companies, etc. Foreigners cannot directly invest in the Indian stock market, yet high-net-worth individuals who reach at least $50 million can become a sub-account of an FII.
Thus, FIIs and their sub-accountants can directly invest in any of the listed stocks on any Indian stock exchange. Portfolio investments mostly comprise securities in the primary and secondary markets, such as shares, debentures, and warrants.
What about unlisted securities outside stock exchanges? FIIs can still invest in them as long as they have the approval of the price by the Reserve Bank of India.
In the case of an FII having the registration as a debt-only FII, 100% of its investment will be turned into debt instruments. Meanwhile, other FIIs can invest 70% of their investment in equity. The other 30% of the investment will be debt.
What About the Restrictions and Investment Ceilings?
The government of India stipulates a limited level of FDI and different ceilings for different sectors. The ceilings progressively increase over a period of time. Mostly, FDI ceilings fall from 26% to 100%.
Typically, the FDI limit determines the max limit for portfolio investment in a specifically listed firm for the sector to which the firm belongs. Yet, two additional restrictions on portfolio investment can also affect portfolio investment.
The aggregate limit of investment by all FIIs is the first type. Its fixed rate is 24% of the paid-up capital. However, it can rise up to the sector cap in case the company’s boards and shareholders approve.
The second restriction is that investment by a single FII in any firm does not go beyond 10% of the paid-up capital of the company. In the case of a foreign corporation or individual as a sub-account, the ceiling is only 5%. It is also applicable to equity-based derivable trading on stock exchanges.
What Should You Know About Investments for Foreign Entities?
Institutional investors can help foreign entities and individuals gain exposure to Indian stocks. Retail investors grow in the favor of many India-focused mutual funds. Besides, investments can happen through some offshore instruments like participatory notes (PNs), depositary receipts like American depositary receipts (ADRs), and global depositary receipts (GDRs), ETFs, and ETNs.
A participatory note represents an underlying Indian stock according to Indian regulations. FIIs can issue the relative offshore only to regulated entities. On the other hand, small investors can invest in ADR (American depositary receipts) representing well-known Indian firms listed on the New York Stock Exchange (NYSE) and Nasdaq.
There are two options that retail investors can choose for their investments, including ETFs and ETNs. The stock indexes mostly include the ones that are already listed on the NYSE and Nasdaq.
According to the database of 2020, iShares MSCI India ETF (INDA) and the Wisdom-Tree India Earnings Fund (EPI) are the top two prominent ETFs based on Indian stocks. Meanwhile, the prominent ETN is iPath MSCI India Index Exchange Traded Note (INPTF). Outside investors can profit from both ETFs and ETNs.
In a Nutshell
India is among the emerging markets with fast growth in engines. The household savings of Indians investing in the domestic stock market account for a very low percentage. Yet, the gross domestic product (GDP) grows around 7% and 8% every year marking the Indian stock market as a bandwagon you should not miss.
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