Avenues for NRIs to invest in

If you are in India, it is raining attractive investment options. With interest rates moving steadily up, even cast-iron investments like bank deposits today offer you a 10 per cent annual return. The stock market has fallen to more reasonable levels and top performing mutual funds investing in Indian stocks have recorded a 17 per cent annual return in five years.

Plus, there are mouth-watering one-off opportunities like the Coal India offer and SBI's bond issue, offering 9.75 per cent interest. However, if you are a non-resident Indian (NRI) looking to pep up your portfolio, can you participate in these options? If so, can you repatriate the returns from such investments?

There are restrictions on the avenues in which NRIs can deploy money in India. The SBI's recent bond issue was closed for NRIs, though not all public sector bond offers and corporate bonds are closed for this category of investors.

Non-resident Indians can subscribe to IPOs and also take up shares in public sector enterprises that are being disinvested by the government. Repatriation is allowed provided taxes are paid. We spoke to few tax experts and money managers to put together the following dos and don'ts for NRI investors.

BANK DEPOSITS

Non-resident Indians can open and operate specialised bank accounts in India classified as NRE, NRO and FCNR accounts. While FCNR (foreign currency non-resident) is a foreign currency account and can be opened only as a term (fixed) deposit account, the NRE/NRO (non-resident external/non-resident ordinary) accounts are denominated in rupees and can be opened either as a savings account or a fixed deposit account.

Before approaching a banker, you have to be clear about the purpose for which you are opening the account, as that decides the type of account. If you want to invest in India, you need to have a bank account denominated in Indian rupees — basically either a NRE or NRO account. Again, if you intend to repatriate the income arising from such investments, you need to make that investment only from a NRE account.

A NRO account is basically for making payments on dues in India and receiving rental and other income from your property here, if you own any. It allows credit of funds from your overseas account too. However, what needs to be noted here is that funds in this account have several restrictions on repatriation. Money in this account can be repatriated within a limit of US$1 million in a year on paying the applicable charges to the banker.

A FCNR account , however, saves you from forex rate fluctuations by allowing you to hold the foreign currency without converting it into Indian rupees. Now let's move into the more interesting part — interest income.

A NRE/NRO savings account earns an interest of around 3.5 per cent p.a. currently and this is on par with savings accounts for resident Indians. On a term deposit of maturity period over one year but less than two years, a NRO account will get you 9 per cent p.a. interest while a NRE deposit will get around 2.5 per cent interest — the differentiation is probably account of the source of the deposit. On a FCNR account that is denominated in US dollars, Kotak Mahindra Bank gives an interest of 1.79 per cent p.a. for deposits with maturity period over a year but less than two years. Interest rates here are based on LIBOR rates for the respective currency.

Debt instruments

On paper, NRIs are also permitted to invest in corporate deposits, non-convertible debentures, government securities and PSU bonds issued in India, both on a repatriable and a non-repartiable basis. However, in practice, companies or issuers need to specifically enable the ‘NRI window' in an offer (with permission from the Reserve Bank of India).

Quite a few of the recent PSU bond offers or non-convertible debenture offers did not open their gates to NRI investors. Under the corporate deposits category, a couple that are currently open to NRI investors is DHFL's Aashray deposit (from Dewan Housing Finance Corporation) and the deposit offer from JK Tyres. Running through the application form for each deposit will tell you if the offer is open to NRIs.

EQUITIES

Regulations allow non-resident Indians to invest in primary market (initial public offers) and also in stocks traded in the secondary market. However, for investments in equities in the secondary market (as also convertible debentures), a non-resident investor is required to open a Portfolio Investment Scheme account — also called PINS account — with a bank. The RBI monitors all transactions of NRIs in the secondary market through this PINS account. Individual banks report on transactions in this account to RBI.

Information in the RBI website states that an NRI investor can purchase shares up to 5 per cent of the paid-up capital of a company. Aggregate investments by all NRIs in a particular company, however, cannot exceed 10 per cent (this limit can, however, be raised by the companies by passing a special resolution). A PINS account is basically an NRE/NRO account. Transfers to/from NRE/NRO accounts, foreign inward remittances, and debit/credit from the stock broker are the only transactions allowed in a PINS account.

When non-residents want to make investments in equity shares, they thus need to apply for a PINS (Portfolio Investment Service) bank account, in addition to opening a new NRO demat and a trading account with an Indian broker, says Mr B. Gopkumar, Head-Broking, Kotak Securities. NRI investors, however, need to note that brokers may have internal restrictions on the clients to whom they may offer broking services, based on geography or other considerations. Make enquiries before you plan your investments.

Real Estate Property

Investment by NRIs in immovable property in India is permitted provided it does not fall under the definition of agricultural land. Mr Sandip Mukherjee, Executive Director, Tax & Regulatory Services, PricewaterhouseCoopers, says: “Non-resident Indians are permitted to acquire any immovable property in India, other than agricultural property or plantation or a farm-house under FEMA regulations”.

Now that you can parcel off residential real estate through funds designated as real estate funds, can NRIs invest in them? Mr Mukherjee states: “While the RBI had expressed its concerns that investment by NRI and FIIs could be tantamount to indirect foreign investment in the real estate sector, the Finance Ministry held that there was no specific restriction imposed upon NRIs to invest in real estate funds.”

Sorry, no entry!

There are certain investment classes that are completely sealed off for NRIs by the regulator. These include investments in Public Provident Fund and post-office saving schemes, says Mr Vineet Agarwal, Director, Tax and Regulatory Services, KPMG. From RBI's document on - 'Facilities available to NRI for investment in India', it is further clear that even on a non-repatriation basis investments are not allowed in bearer securities (that includes Kisan Vikas Patrika).

The document however states that investments in National Savings Certificates are permitted on a non-repatriation basis through a NRO account where the source of income is from India. A resident investor who subsequently becomes NRI can, however, hold the above instruments till maturity, adds Mr Vineet Agarwal.

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