A non resident Indian (NRI) is an Indian residing abroad and earning in foreign currency. Such NRIs have the facility to invest in Indian equities and mutual funds through the opening of a PINS account with an authorized bank. Can the NRI open a demat account in India and can the resident demat account be continued in case the person becomes an NRI?
An NRI can also open a demat account in NSDL or CDSL through any of the recognized DPs in India. However, the NRI demat account is different from the normal resident demat account in the sense that it is designated as a NRI Demat account and the existing restrictions on repatriation of profits and capital apply to a NRI demat account.
What exactly is a demat account?
Demat stands for dematerialization. Instead of holding physical certificates of shares, bonds and ETFs, one can hold these assets in electronic form. These shares are held as credits to the demat account and when they are sold then the demat account is debited. A demat account is like a bank account for shares. Instead of cash, the demat account holds shares in custody in the form of electronic entries. A demat account essentially stores shares in an electronic format. Having a demat account means there is no need for physical share certificates. A depository (NSDL or CDSL) being the two principal depositories, maintain demat accounts. However, such demat accounts are not administered by the depository but by the depository participants (DP). Typically, your broker or a bank can be a DP in the Indian context and you need to approach a DP to open your demat account with NSDL or CDSL. Under the SEBI regulations, for residents and for NRIs, holding a demat account with the depository company is a must to trade in the stock market.
How can NRIs hold shares in demat form?
In India, both residents and non-residents can open a demat account to trade in shares and hold shares in electronic custody. There is a small difference. If a Non-Resident Indian (NRI) wants to open a demat account, they are required to follow the rules of the Foreign Exchange Management Act (FEMA), which is the overarching regulation that governs all flows of foreign currency transactions in India.
There are some basic things to know about an NRI demat account. As per the extant rules of the Reserve Bank of India (RBI), an NRI is permitted to hold up to 5% of paid-up capital in an Indian company. However, these rules now stand modified post the Union Budget 2019-20 presented by Nirmala Sitharaman on 05th July 2019. Under the new rules post the budget, NRI investments in India equity will be governed by the Foreign Portfolio Investments (FPI) regulations. So NRIs can register as Category 3 FPIs and invest in India in line with the RBI regulations.
What is an NRI already has a resident demat account?
What if an NRI already has a demat account opened prior to becoming a NRI? The resident demat account cannot be used by a NRI and he will be required to transfer all his shares into a NRI demat account. There will be no capital gains on this transfer since it is a transfer to his own account. Therefore, if a person has a demat account before gaining the status of NRI, they can convert it into the NRO category to trade after leaving the country or they have to open a new NRI demat account. Either way, shares previously owned will be transferred to the new NRO holding account.
An NRI can invest in Initial Public Offers (IPOs) on a repatriable basis by using NRE demat and funds in their Non-Resident External (NRE) bank account. If the NRI invests on non-repatriable basis, then the Non-Resident Ordinary Rupee (NRO) account and NRO demat will be used. Effectively, the NRI will have to have a separate demat account mapped to his Non Resident External (NRE) account and a separate demat account that is mapped to his Non Resident Ordinary (NRO) account.
Linking NRI demat account to his PINS account
An NRI can use the demat account through Portfolio Investment Scheme (PINS) to make investments in India. The PINS scheme allows an NRI to transact in shares and mutual fund units. Of course, now NRIs can also enter Indian markets as Category 3 FPIs.
The following are the key documents required to open a NRI demat account
- Duly filled demat application form
- Copy of attested passport with original for verification
- Copy of attested PAN card copy with original for verification
- Copy of Visa
- Overseas address proof, like utility bills, or rental/lease agreement, or sale deed
- Local (India) proof of residence
- Passport size photograph
- FEMA declaration in prescribed format
- Cancelled check leaf of NRE/NRO account with name imprinted
All the above documents should be attested at the Indian Embassy of the country where the NRI resides.
How an NRI can benefit by opening a NRI demat account?
An NRI can make investments in the Indian share market from any part of the world. He can also use the online trading facility. For an NRI who is normally residing abroad, this reduces the risk of forgery, loss of physical documents, late delivery, and other problems. The process of demat account opening for a NRI can be completed quickly if all the documents are in place.