How can NRIs Invest in IPOs in India?

IPO stands for Initial Public Offering, the process by which a private company or corporation sells a portion of its stake to investors. This is when the entity transitions to a public company to raise capital from public investors. However, for NRIs, investing in an IPO comes with specific rules, such as the need for an NRI demat account and funding through NRE/NRO accounts.

Investments from NRE accounts are generally repatriable, while NRO accounts are non-repatriable. An NRI can apply for IPO using UPI or the ASBA (Application Supported by Blocked Amount) method, depending on their bank. Most NRIs apply via ASBA. UPI-based IPO applications are generally not available for NRI bank accounts and depend on bank-specific support. Keep reading further to know how NRIs can invest in IPOs in India.

What is an IPO?

An Initial Public Offering (IPO) is the process by which private companies sell their shares to the public to raise capital from them. An IPO transitions the entity into a public company. When a firm 'goes public,' it lists its shares on stock exchanges, helping the company to raise funds for expansion or debt payment. Simultaneously, it also offers a chance to investors to own a portion of the business from the start.

What are the Accounts Required to Invest in an IPO for an NRI?

You need to set up a few accounts before investing in an IPO. These accounts will help you manage rupee-based investments and hold your shares:

Portfolio Investment Scheme (PIS) and PINS Approval

An NRI can invest in Indian shares and mutual funds under the Reserve Bank of India's Portfolio Investment Scheme. All your purchase and sale transactions are reported to the RBI by your bank through a PIS account. Additionally, for share trading, NRIs may also need the PINS approval (Portfolio Investment Scheme Approval).

The bank managing your PIS account is the entity responsible for handling the PINS approval. The approval letter ensures that every transaction is compliant and transparent.

Demat and Trading Accounts

You need an NRI demat account to hold shares digitally, which is linked either to your NRE or NRO bank account, based on whether you wish your investments to be repatriable or non-repatriable.

Additionally, if you plan to sell the shares in the future or invest in secondary-market stocks, you will need a trading account with a registered broker.

NRE, NRO, and FCNR Accounts

• NRE Account: NRE (Non-Resident External) account is used for earnings you bring from outside India. It is a rupee-denominated account that offers full repatriation. It means you can send the entire principal and interest amount back to your country of residence.
• NRO Account: NRO (Non-Resident Ordinary) account is used for income earned in India (rent, dividend, pension, etc.). These accounts have repatriation limits of up to US$ 1 million per financial year. Also, withdrawals may trigger taxes. If you plan to keep funds in India to use later, this account can be a preferable choice.
• FCNR Account: A Foreign Currency Non-Resident account is an optional fixed deposit account, allowing NRIs to hold funds in foreign currencies such as US dollars or pounds. It is generally not used directly to invest in IPOs. However, it safeguards savings against currency fluctuations and can be helpful for long-term financial security.

Before moving further, let's understand what's repatriable and non-repatriable investments.

Repatriable Vs. Non-Repatriable Investments

Repatriable investments are those where both your principal and profit amount can be sent abroad freely. An NRE account offers full repatriation to NRIs, making it ideal for managing foreign income and useful if you want to send money back to your resident country.

Non-repatriable investments mean funds or investments cannot be freely remitted outside the country where they were generated. An NRO account is non-repatriable beyond the permitted limit, and funds are largely kept in India. It is often used when you plan to hold the proceeds within India or when the IPO issuer doesn't allow NRI participation on a repatriation basis.

Required Documents to Open NRI Demat/Trading Account

You will be required to submit the following documents to open an NRI demat/trading account and apply for an IPO.

• Identification Proof: Passport, visa, and overseas address proof.
• Bank Account Details: Proof of NRE or NRO account (chequebook copy or statement).
• PAN (Permanent Account Number): A tax identification number needed to invest in India.
• PIS approval letter: It's a letter that confirms that your PIS account has been set up (where applicable), issued by your bank.

How NRIs Can Apply for IPOs?

Consider and follow the steps below to apply for IPOs in India as an NRI:

• NRIs' Eligibility to Invest

There are some companies that reserve IPO shares specifically for Indian residents. You must check the company's Red Herring Prospectus or ask your broker to confirm if NRIs are allowed to subscribe.

NRIs from the USA and Canada are generally not allowed to apply for Indian IPOs. Additionally, ensure to use an NRO account if the firm permits only non-repatriable investments.

• Use the ASBA Facility

For IPO subscriptions, India uses the ASBA method (Application Supported by Blocked Amount). It means, when you apply for an IPO, the money in your bank account gets 'blocked' and not 'debited'. Funds will be debited only when you receive shares. Most bank offers ASBA via net banking or mobile applications. Here is how the ASBA method works:

1. Log in to your bank's net-banking portal: Log in to the portal and look for the investments or IPO section.
2. Choose the IPO and provide details: Enter your name, demat number, bid quantity, and price. Select the bank account from which the funds will be blocked, either NRE or NRO.
3. Confirm and Submit: Once you select the account, the required funds will be blocked by the bank. If you receive shares, the money is debited, and shares are credited to your demat account. If not, the blocked funds will be released.

Some brokers may also allow IPO investments using the UPI (Unified Payments Interface) method. However, not every bank may support UPI for NRI accounts, so ensure to check with your bank before applying.

• Don't Use Both Accounts Simultaneously

Since both NRE and NRO accounts are linked to your PAN, you must choose only one of the accounts to apply for an IPO. Submitting more than one application can lead to rejection.

• After Allotment

On the date of allotment, check whether you have received the shares. If yes, then:

• The shares will be credited to your NRI demat account. You can choose to hold them or sell them in the future using your trading account.
• The funds will be debited from your bank account. If you don't receive the shares, the blocked funds will be released.
• Your broker may ask you to provide annexures and a bank statement to update the PIS ledger if you operate using a PIS account.

What are the Tax and Compliance Considerations for NRI IPO Investments?

Here are some tax and compliance considerations to keep in mind while applying for an IPO as an NRI:

• Dividend Tax: Dividends received from an Indian company may be subject to taxation in India and your country of residence. Check if your company has a tax treaty with India.
• Trading Restrictions: NRIs are restricted to carry out only delivery-based trades. They are prohibited from intraday trading and short selling.
• Restriction on Investment: An individual NRI cannot hold more than 5% of a company’s paid-up capital. The aggregate NRI holding is capped at 10%, which can be increased up to 24% with shareholder approval.
• Capital Gains Tax: Profits received from selling IPO shares are subject to capital gain taxation in India. As compared to long-term gains, short-term gains (shares sold within 12 months of their allotment) are taxed at a higher rate. Several countries impose tax on overseas income, so consider using the DTAA (Double Taxation Avoidance Agreements).

Final Thoughts

Indian IPOs (Initial Public Offerings) offer NRIs a valuable chance to invest in high-growth companies from the very beginning. Although the process might include extra steps compared to local investors, it becomes easier once your bank, demat, and trading accounts are in place. Select an account type that aligns best with your repatriation goals and use the ASBA method to block the funds in your account safely. Additionally, ensure to pay extra attention to the taxation and compliance rules.

Furthermore, investing in India as an NRI can seem complex if you are unaware of the rules and processes. This is when Savetaxs can be your best choice. We have a team of experts who can help you open an NRI demat account and understand the requirements for applying for an Indian IPO. They will help you choose the best account as per your goals and make everything easier.

Reach out to us now and participate in India's vibrant equity market with full confidence.