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, settlement process, etc. At the last count, the BSE had about 4,700 listed firms, whereas the rival NSE had about 1,200. Out of all the listed firms on the BSE, only about 500 firms constitute more than 90% of its market capitalization; the rest of the crowd consists of highly illiquid shares.
Almost all the significant firms of India are listed on both the exchanges. NSE enjoys a dominant share in spot trading, with about 70% of the market share, as of 2009, and almost a complete monopoly in derivatives trading, with about a 98% share in this market, also as of 2009. 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.
Market Regulation
The overall responsibility of development, regulation and supervision of the stock market rests with the Securities & Exchange Board of India (SEBI), which was formed in 1992 as an independent authority. Since then, SEBI has consistently tried to lay down market rules in line with the best market practices.
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.
A. INVESTORS & TYPES
FIIs__foreign institutional investor (FII):
FIIs__foreign institutional investor (FII) is a person or a group of people operating or registered in a country that’s not their domicile. Foreign institutional investor groups often operate as hedge funds, pension funds, insurance companies, and mutual funds.
FIIs are mostly associated with India, which has had, until recently, very restrictive laws on foreign investment. FIIs in India are still regulated by India’s Securities and Exchange Board (which is similar to the Securities and Exchange Commission in the United States). Foreign investment in India by FIIs has played a substantial part in India’s economic growth. This was true even under India’s restrictive foreign investment laws. Until recently, FII’s were limited as how much equity they could purchase in a domestic Indian company. The interest was always less than 50%.
But recently, India has changed its foreign investor laws to allow FIIs to own up to 100% of Indian companies in certain industries. This change, made in 2014, brings India into conformance with other countries foreign investment policies. Because of the change, India expects FIIs to make investments in India that will help its economy double in size in 2015.
Note - FIIs need account on stock market to invest in india
FDI__FOREIGN DIRECT INVESTMENT
An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation’s stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.
Note - An example of foreign direct investment would be an INDIAN company taking a majority stake in a company in China.
FDI Limititations
RBI — Recently banned FDI in Tobacco.
NOTE
Automatic Route
FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.
Government Route
FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs.
ODI - OUTWARD DIRECT INVESTMENT
A business strategy where a domestic firm expands its operations to a foreign country either via a Green field investment, merger/acquisition and/or expansion of an existing foreign facility. Employing outward direct investment is a natural progression for firms as better business opportunities will be available in foreign countries when domestic markets become too saturated.
Note - The increase of a nation’s outward direct investment can be seen as a proxy that the nation’s economy is booming to the extent that sufficient risk capital is available for further ventures.
FPIs - Foreign portfolio investment
Foreign direct investment (FDI) involves establishing a direct business interest in a foreign country, such as buying or establishing a manufacturing business, while foreign portfolio investment (FPI) is investing in financial assets, such as stocks or bonds, in a foreign country. A number of other differences follow from the basic difference in the nature of the two types of investments.
FPI typically has a shorter time frame for investment return than FDI. As with any equity investment, FPI investors usually expect to quickly realize a profit on their investments. Unlike FDI, FPI doesn’t offer control over the business entity in which the investment is made. Because securities are easily traded, the liquidity of FPIs makes them much easier to sell than FDIs. FPIs are more accessible for the average investor than FDIs, since they require much less investment capital.
When making foreign investments, investors have to consider economic factors as well as other risk factors, such as political instability and currency exchange risk.
Note:
A program that permits certain licensed international investors to participate in india stock exchanges.Prior to QFII, foreign investors were not able to buy or sell shares on india stock exchanges because of india’s tight capital controls. With the launch of the QFII program, licensed investors can buy and sell RUPPEE-denominated “A” shares. Foreign access to these shares is limited by specified quotas that determine the amount of money that the licensed foreign investors are permitted to invest in india’s capital markets.
Participatory Notes p-notes
Financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India to invest in Indian securities. Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.
B. Depository Receipt
Say if an Indian company wants to mobilize capital from abroad, can it do it? Even a novice will instantaneously come up with an answer like ‘NO’. We have too many controls which will not allow raising of capital abroad easily. This is what we ‘perceive.’ As we are liberalizing our economy, raising of capital from outside the country is slowly enabled by the government. ADRs and GDRs are the result of such liberalization.
ADR American Depository Receipt
A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction.
This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq as well as OTC.
GDR Global Depository Receipt
A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches.
A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros.
C.IDR Indian Depository Receipts
Indian Depository Receipt (IDR) is a financial instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets
EDR European Depository Receipt
A negotiable security (receipt) that is issued by a European bank, and that represents securities which trade on exchanges outside of the bank’s home country. Abbreviated as “EDRs”, these securities are traded on local exchanges and used by banks – and issuing companies in the U.S. and other countries – to attract investment capital from the European region.
C. CITIZEN’s TYPES IN ABROAD
NRI non-resident Indian
NRI is a citizen of India who holds an Indian passport and has temporarily immigrated to another country for six months or more for employment, residence, education or any other purpose.
the term non-resident refers only to the tax status of a person who, as per section 6 of the Income-tax Act of 1961, has not resided in India for a specified period for the purposes of the Income Tax Act.The rates of income tax are different for persons who are “resident in India” and for NRIs. For the purposes of the Income Tax Act, “residence in India” requires stay in India of at least 182 days in a calendar year or 365 days spread out over four consecutive years. According to the act, any Indian citizen who does not meet the criteria as a “resident of India” is a non-resident of India and is treated as NRI for paying income tax.
PIO(Person of Indian )
Person of indian origin is a person of Indian origin or ancestry but who is not a citizen of India and is the citizen of another country. A PIO might have been a citizen of India and subsequently taken the citizenship of another country, or have ancestors born in India or other states.
Other terms with vaguely the same meaning are overseas Indian and expatriate Indian. In common usage, this often includes Indian-born individuals (and also people of other nations with Indian ancestry) who have taken the citizenship of other countries.
Government of India considers anyone of Indian origin up to forty generations removed to be a PIO, with the exception of those who were ever nationals of Afghanistan, Bangladesh, Bhutan, Nepal, Pakistan, or Sri Lanka.The prohibited list periodically includes Iran as well.
The government issues a PIO Card to a PIO after verification of his or her origin or ancestry and this card entitles a PIO to enter India without a visa. The spouse of a PIO can also be issued a PIO card though the spouse might not be a PIO. This latter category includes foreign spouses of Indian nationals, regardless of ethnic origin, so long as they were not born in, or ever nationals of, the aforementioned prohibited countries.PIO Cards exempt holders from many restrictions that apply to foreign nationals, such as visa and work permit requirements, along with certain other economic limitations.
OCI Overseas Citizenship of India
In response to persistent demands for “dual citizenship” particularly from the Diaspora in North America and other developed countries and keeping in view the Government’s deep commitment towards fulfilling the aspirations and expectations of Overseas Indians.
The Overseas Citizenship of India (OCI) Scheme was introduced by amending the Citizenship Act, 1955 in August 2005. The Scheme was launched during the Pravasi Bharatiya Divas convention 2006 at Hyderabad. The Scheme provides for registration as Overseas Citizen of India (OCI) of all Persons of Indian Origin (PIOs) who were citizens of India on 26th January, 1950 or there after or were eligible to become citizens of India on 26th January, 1950 except who is or had been a citizen of Pakistan, Bangladesh or such other country as the Central Government may, by notification in the Official Gazette.
OCI is not to be misconstrued as ‘dual citizenship’. OCI does not confer political rights. The registered Overseas Citizens of India shall not be entitled to the rights conferred on a citizen of India under article 16 of the Constitution with regard to equality of opportunity in matters of public employment
Foreign Currency (Non-Resident) Account (Banks) Scheme _FCNR
NRIs (individuals / entities of Bangladesh / Pakistan nationality / ownership require prior approval of RBI)
Non-Resident (External) Rupee Account Scheme [NRE Account]
NRIs (individuals / entities of Bangladesh / Pakistan nationality/ownership require prior approval of RBI)
Non-Resident Ordinary Rupee Account Scheme [NRO Account]
Any person resident outside India (other than a person resident in Nepal and Bhutan). Individuals / entities of Pakistan nationality / ownership, entities of Bangladesh2 ownership and erstwhile Overseas Corporate Bodies5 require prior approval of the Reserve Bank.
D. ACCOUNTS
NOSTRO ACCOUNT
A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts are used to facilitate settlement of foreign exchange and trade transactions. The term is derived from the Latin word for “ours.” Conversely, accounts that are held by the domestic bank in its home country for foreign banks are called vostro accounts
For example, a U.S. bank may have nostro accounts with one or more Canadian banks. These accounts will be denominated in Canadian dollars, which enables efficient settlement of transactions that are Canadian dollar denominated. Nostro accounts also minimize the exposure of the U.S. bank to undue exchange rate risk.
Note A nostro is our account of our money, held by the other bank
VOSTRO ACCOUNT
The account that a correspondent bank, usually located in the United States or United Kingdom, holds on behalf of a foreign bank. A vostro account is one in which the domestic bank (from the point of view of the currency in which the account is held) acts as custodian or manages the account of a foreign counterpart. Also known as a loro account.
Note - A vostro is our account of other bank money, held by us
Note - Simpley saying foregin investments with indian market
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, settlement process, etc. At the last count, the BSE had about 4,700 listed firms, whereas the rival NSE had about 1,200. Out of all the listed firms on the BSE, only about 500 firms constitute more than 90% of its market capitalization; the rest of the crowd consists of highly illiquid shares.
Almost all the significant firms of India are listed on both the exchanges. NSE enjoys a dominant share in spot trading, with about 70% of the market share, as of 2009, and almost a complete monopoly in derivatives trading, with about a 98% share in this market, also as of 2009. 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.
Market Regulation
The overall responsibility of development, regulation and supervision of the stock market rests with the Securities & Exchange Board of India (SEBI), which was formed in 1992 as an independent authority. Since then, SEBI has consistently tried to lay down market rules in line with the best market practices.
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.
A. INVESTORS & TYPES
FIIs__foreign institutional investor (FII):
FIIs__foreign institutional investor (FII) is a person or a group of people operating or registered in a country that’s not their domicile. Foreign institutional investor groups often operate as hedge funds, pension funds, insurance companies, and mutual funds.
FIIs are mostly associated with India, which has had, until recently, very restrictive laws on foreign investment. FIIs in India are still regulated by India’s Securities and Exchange Board (which is similar to the Securities and Exchange Commission in the United States). Foreign investment in India by FIIs has played a substantial part in India’s economic growth. This was true even under India’s restrictive foreign investment laws. Until recently, FII’s were limited as how much equity they could purchase in a domestic Indian company. The interest was always less than 50%.
But recently, India has changed its foreign investor laws to allow FIIs to own up to 100% of Indian companies in certain industries. This change, made in 2014, brings India into conformance with other countries foreign investment policies. Because of the change, India expects FIIs to make investments in India that will help its economy double in size in 2015.
Note - FIIs need account on stock market to invest in india
FDI__FOREIGN DIRECT INVESTMENT
An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation’s stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.
Note - An example of foreign direct investment would be an INDIAN company taking a majority stake in a company in China.
FDI Limititations
- Agriculture-100%
- Asset Reconstruction Companies–100%
- Civil Aviation–100%
- Commodity Exchanges–49%
- Courier Services–100%
- Credit Information Companies–74%
- Defence–49%
- Insurance–49%
- Multi Brand Retail–51%
- Pension–26%
- Petroleum and Natural Gas–49%
- Power Exchanges–49%
- Print Media–49%
- Private Sector Banks–100%
- Public Sector Banks–20%
- Single Brand Retail–49%
- Special Economic Zones–100%
- Stock Exchanges/Clearing Corporations–49%
- Tea Plantation–100%
- Telecom–100%
- Tourism–100%
RBI — Recently banned FDI in Tobacco.
NOTE
Automatic Route
FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.
Government Route
FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs.
ODI - OUTWARD DIRECT INVESTMENT
A business strategy where a domestic firm expands its operations to a foreign country either via a Green field investment, merger/acquisition and/or expansion of an existing foreign facility. Employing outward direct investment is a natural progression for firms as better business opportunities will be available in foreign countries when domestic markets become too saturated.
Note - The increase of a nation’s outward direct investment can be seen as a proxy that the nation’s economy is booming to the extent that sufficient risk capital is available for further ventures.
FPIs - Foreign portfolio investment
Foreign direct investment (FDI) involves establishing a direct business interest in a foreign country, such as buying or establishing a manufacturing business, while foreign portfolio investment (FPI) is investing in financial assets, such as stocks or bonds, in a foreign country. A number of other differences follow from the basic difference in the nature of the two types of investments.
FPI typically has a shorter time frame for investment return than FDI. As with any equity investment, FPI investors usually expect to quickly realize a profit on their investments. Unlike FDI, FPI doesn’t offer control over the business entity in which the investment is made. Because securities are easily traded, the liquidity of FPIs makes them much easier to sell than FDIs. FPIs are more accessible for the average investor than FDIs, since they require much less investment capital.
When making foreign investments, investors have to consider economic factors as well as other risk factors, such as political instability and currency exchange risk.
Note:
- Investment less than 10% –FPIs
- greater than 10% — FDIs
A program that permits certain licensed international investors to participate in india stock exchanges.Prior to QFII, foreign investors were not able to buy or sell shares on india stock exchanges because of india’s tight capital controls. With the launch of the QFII program, licensed investors can buy and sell RUPPEE-denominated “A” shares. Foreign access to these shares is limited by specified quotas that determine the amount of money that the licensed foreign investors are permitted to invest in india’s capital markets.
Participatory Notes p-notes
Financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India to invest in Indian securities. Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.
B. Depository Receipt
Say if an Indian company wants to mobilize capital from abroad, can it do it? Even a novice will instantaneously come up with an answer like ‘NO’. We have too many controls which will not allow raising of capital abroad easily. This is what we ‘perceive.’ As we are liberalizing our economy, raising of capital from outside the country is slowly enabled by the government. ADRs and GDRs are the result of such liberalization.
ADR American Depository Receipt
A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction.
This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq as well as OTC.
GDR Global Depository Receipt
A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches.
A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros.
C.IDR Indian Depository Receipts
Indian Depository Receipt (IDR) is a financial instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets
EDR European Depository Receipt
A negotiable security (receipt) that is issued by a European bank, and that represents securities which trade on exchanges outside of the bank’s home country. Abbreviated as “EDRs”, these securities are traded on local exchanges and used by banks – and issuing companies in the U.S. and other countries – to attract investment capital from the European region.
C. CITIZEN’s TYPES IN ABROAD
NRI non-resident Indian
NRI is a citizen of India who holds an Indian passport and has temporarily immigrated to another country for six months or more for employment, residence, education or any other purpose.
the term non-resident refers only to the tax status of a person who, as per section 6 of the Income-tax Act of 1961, has not resided in India for a specified period for the purposes of the Income Tax Act.The rates of income tax are different for persons who are “resident in India” and for NRIs. For the purposes of the Income Tax Act, “residence in India” requires stay in India of at least 182 days in a calendar year or 365 days spread out over four consecutive years. According to the act, any Indian citizen who does not meet the criteria as a “resident of India” is a non-resident of India and is treated as NRI for paying income tax.
PIO(Person of Indian )
Person of indian origin is a person of Indian origin or ancestry but who is not a citizen of India and is the citizen of another country. A PIO might have been a citizen of India and subsequently taken the citizenship of another country, or have ancestors born in India or other states.
Other terms with vaguely the same meaning are overseas Indian and expatriate Indian. In common usage, this often includes Indian-born individuals (and also people of other nations with Indian ancestry) who have taken the citizenship of other countries.
Government of India considers anyone of Indian origin up to forty generations removed to be a PIO, with the exception of those who were ever nationals of Afghanistan, Bangladesh, Bhutan, Nepal, Pakistan, or Sri Lanka.The prohibited list periodically includes Iran as well.
The government issues a PIO Card to a PIO after verification of his or her origin or ancestry and this card entitles a PIO to enter India without a visa. The spouse of a PIO can also be issued a PIO card though the spouse might not be a PIO. This latter category includes foreign spouses of Indian nationals, regardless of ethnic origin, so long as they were not born in, or ever nationals of, the aforementioned prohibited countries.PIO Cards exempt holders from many restrictions that apply to foreign nationals, such as visa and work permit requirements, along with certain other economic limitations.
OCI Overseas Citizenship of India
In response to persistent demands for “dual citizenship” particularly from the Diaspora in North America and other developed countries and keeping in view the Government’s deep commitment towards fulfilling the aspirations and expectations of Overseas Indians.
The Overseas Citizenship of India (OCI) Scheme was introduced by amending the Citizenship Act, 1955 in August 2005. The Scheme was launched during the Pravasi Bharatiya Divas convention 2006 at Hyderabad. The Scheme provides for registration as Overseas Citizen of India (OCI) of all Persons of Indian Origin (PIOs) who were citizens of India on 26th January, 1950 or there after or were eligible to become citizens of India on 26th January, 1950 except who is or had been a citizen of Pakistan, Bangladesh or such other country as the Central Government may, by notification in the Official Gazette.
OCI is not to be misconstrued as ‘dual citizenship’. OCI does not confer political rights. The registered Overseas Citizens of India shall not be entitled to the rights conferred on a citizen of India under article 16 of the Constitution with regard to equality of opportunity in matters of public employment
Foreign Currency (Non-Resident) Account (Banks) Scheme _FCNR
NRIs (individuals / entities of Bangladesh / Pakistan nationality / ownership require prior approval of RBI)
Non-Resident (External) Rupee Account Scheme [NRE Account]
NRIs (individuals / entities of Bangladesh / Pakistan nationality/ownership require prior approval of RBI)
Non-Resident Ordinary Rupee Account Scheme [NRO Account]
Any person resident outside India (other than a person resident in Nepal and Bhutan). Individuals / entities of Pakistan nationality / ownership, entities of Bangladesh2 ownership and erstwhile Overseas Corporate Bodies5 require prior approval of the Reserve Bank.
D. ACCOUNTS
NOSTRO ACCOUNT
A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts are used to facilitate settlement of foreign exchange and trade transactions. The term is derived from the Latin word for “ours.” Conversely, accounts that are held by the domestic bank in its home country for foreign banks are called vostro accounts
For example, a U.S. bank may have nostro accounts with one or more Canadian banks. These accounts will be denominated in Canadian dollars, which enables efficient settlement of transactions that are Canadian dollar denominated. Nostro accounts also minimize the exposure of the U.S. bank to undue exchange rate risk.
Note A nostro is our account of our money, held by the other bank
VOSTRO ACCOUNT
The account that a correspondent bank, usually located in the United States or United Kingdom, holds on behalf of a foreign bank. A vostro account is one in which the domestic bank (from the point of view of the currency in which the account is held) acts as custodian or manages the account of a foreign counterpart. Also known as a loro account.
Note - A vostro is our account of other bank money, held by us
Note - Simpley saying foregin investments with indian market
