Indian Stock Market. Photo: KnowInsiders
Indian Stock Market. Photo: KnowInsiders

Overview of the Indian Stock Market

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, and settlement process.

As of February 2020, the BSE had 5,518 listed firms, whereas the rival NSE had about 1,799 as of Dec. 31, 2019.3 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. The BSE is the older stock market but the NSE is the largest stock market, in terms of volume. As such, the NSE is a more liquid market. In terms of market cap, they're both comparable at about $2.3 trillion. 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.

Trading Mechanism

Trading at both the exchanges takes place through an open electronic limit order book in which order matching is done by the trading computer.4 There are no market makers and the entire process is order-driven, which means that market orders placed by investors are automatically matched with the best limit orders. As a result, buyers and sellers remain anonymous.

The advantage of an order-driven market is that it brings more transparency by displaying all buy and sell orders in the trading system. However, in the absence of market makers, there is no guarantee that orders will be executed.

All orders in the trading system need to be placed through brokers, many of which provide an online trading facility to retail customers. Institutional investors can also take advantage of the direct market access (DMA) option in which they use trading terminals provided by brokers for placing orders directly into the stock market trading system.

Settlement and Trading Hours

Equity spot markets follow a T+2 rolling settlement.5 6 This means that any trade taking place on Monday gets settled by Wednesday. All trading on stock exchanges takes place between 9:55 a.m. and 3:30 p.m., Indian Standard Time (+ 5.5 hours GMT), Monday through Friday. Delivery of shares must be made in dematerialized form, and each exchange has its own clearing house, which assumes all settlement risk by serving as a central counterparty.

Market Indexes

The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market index for equities; it includes shares of 30 firms listed on the BSE, which represent about 47% of the index's free-float market capitalization.7 It was created in 1986 and provides time series data from April 1979, onward.

Another index is the Standard and Poor's CNX Nifty; it includes 50 shares listed on the NSE, which represent about 46.9% of its free-float market capitalization.7 It was created in 1996 and provides time series data from July 1990, onward.

Market Regulation

The overall responsibility of development, regulation, and supervision of the stock market rests with the Securities and 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. It enjoys vast powers of imposing penalties on market participants, in case of a breach.

Who Can Invest in India?

Photo: The Financial Express
Photo: The Financial Express

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.

For making portfolio investments in India, one should be registered either as a foreign institutional investor (FII) or as one of the sub-accounts of one of the registered FIIs. Both registrations are granted by the market regulator, SEBI.

Foreign institutional investors mainly consist of mutual funds, pension funds, endowments, sovereign wealth funds, insurance companies, banks, and asset management companies. At present, India does not allow foreign individuals to invest directly in its stock market. However, high-net-worth individuals (those with a net worth of at least $50 million) can be registered as sub-accounts of an FII.

Foreign institutional investors and their sub-accounts can invest directly into any of the stocks listed on any of the stock exchanges. Most portfolio investments consist of investment in securities in the primary and secondary markets, including shares, debentures, and warrants of companies listed or to be listed on a recognized stock exchange in India. FIIs can also invest in unlisted securities outside stock exchanges, subject to the approval of the price by the Reserve Bank of India. Finally, they can invest in units of mutual funds and derivatives traded on any stock exchange.

An FII registered as a debt-only FII can invest 100% of its investment into debt instruments. Other FIIs must invest a minimum of 70% of their investments in equity. The balance of 30% can be invested in debt. FIIs must use special non-resident rupee bank accounts in order to move money in and out of India. The balances held in such an account can be fully repatriated.

SEBI recently permitted Qualified Foreign Investors (QFIs) to invest in India without too many regulatory restrictions.

The RBI has further allowed QFIs to invest up to $ 1 billion in the corporate bond market and debt schemes of mutual funds without any lock-in period. Earlier only FIIs, their sub-accounts, and NRIs were allowed to directly invest in Indian markets. This opens up a huge opportunity for foreign nationals to directly participate in the Indian stock markets via the QFI route.

The rules and regulations have been deliberately kept very simple and seamless. Foreigners can put their money into secondary market shares, IPOs, FPOs, OFS as also in mutual funds within the overall limits laid down by SEBI and RBI from time to time. QFIs can buy up to 5% of the paid-up capital of a company, with an overall limit capped at 10% in a company. Most importantly, these investment limits are over and above that for FIIs and NRIs, which have already been in existence.

QFI will be distinct from FII and non-resident Indians (NRI) and such QFI can be a foreign individual investor in Germany or any other country, who can buy into stocks of any listed company in India. All a QFI needs is to complete a few basic requirements like the Know Your Customer (KYC) norms.

Can Foreigners Buy or Invest in the Indian Stock Market?

Before, India had a policy that only qualified Indian personnel could invest in the mutual schemes section of the stock market. This policy was lifted in the year 2012 where a new law was passed stating that all qualified foreign individuals can now invest directly into the Indian stock market. This new rule was introduced to further deepen the Indian capital market. Though Qualified Foreign Investors are allowed to invest in the Indian stock market, they do not have direct access to the Indian equity market.

For those who are abroad and want to invest in the Indian stock market there are some rules that they need to follow to accomplish the task. Foreigners who want to invest in India are subjected to the Foreign Exchange Management Act (FEMA) and the Foreign Direct Investment Policy.

The Indian stock market is an opportunity for anyone to make profit off of other companies through the buying and selling of shares and seeing how the shares pan out. Though many may not know about the vast possibilities of the Indian stock market, it is making a name for itself on the worldwide basis. According to statistics, the Indian stock market is making investors profit up to 30% more than their investment on a yearly basis. However, the way the Indian market pays off an investor is all dependent on the investor himself/herself.

Investors who want to profit off of the Indian stock market should have a good ideal of what they are investing into and the outcome for their investment. Investors should also take note of the amount of money they are adding into the investment and keep a check on the regular outcome of the stocks.

Only those investors who have strategically invested their money in stocks at the right time are constantly aware of where their money is flowing are able to make immense amounts of profit off of the stock market.

Read More: What Time Does the Indian Stock Market Open & Close?

How to Invest in the Indian Stock Market

Photo: Business Standard
Photo: Business Standard

Foreign Direct Investment

A Non-resident entity can invest in India, except in the prohibited sectors or activities. These investments are subject to Foreign Exchange Management Act (FEMA) regulations and the FDI policy, including sectoral caps. An Indian company can receive FDI through:

Automatic route: FDI is allowed without prior approval either of the government or the RBI in sectors specified in the FDI policy. These are, typically, strategic long-term investments.

Government route: FDI in activities not covered under the automatic route requires the prior approval of the government, which is considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs and Ministry of Finance.

Foreign Portfolio Investment

Portfolio Investment Scheme (PIS) allows eligible entities, such as foreign institutional investors (FIIs), non-resident Indians (NRIs), persons of Indian origin (PIOs) and qualified foreign investors (QFIs) to invest in shares and convertible debentures of Indian companies, and units of domestic mutual funds, on any of the Indian stock exchanges.

FII: An FII is an institution, which is established abroad and wants to invest in securities in India. The RBI has granted permission to Sebiregistered FIIs to do so under the PIS route.

NRI, PIO: NRIs and PIOs are eligible to buy and sell shares, convertible debentures of Indian firms through a registered broker on a recognised stock exchange in India. NRIs can also buy and sell mutual funds units.

QFI: QFIs include individuals, groups or associations resident in a country, which is a member of the Financial Action Task Force (FATF). QFIs can invest in mutual funds, equity shares and corporate and government bonds.

Foreign venture capital investors

A Foreign venture capital investor (FVCI) is the one who is incorporated or established outside India, and can invest either in a domestic venture capital fund or a venture capital undertaking (domestic unlisted company).

SEBI: FVCIs have to seek a separate registration from Sebi and have to invest at least 66.67% of the investible funds in unlisted equity shares or equitylinked instruments of an Indian venture capital undertaking.

Other investments:

NRIS and FIIs can also invest in government securities, treasury bills, listed nonconvertible debentures, bonds, commercial papers issued by Indian companies, and units of domestic mutual funds, subject to certain restrictions laid out by the RBI. (Like NRI, PIO, QFI, FII)

Non-repatriable investments

An NRI or PIO can purchase shares in rupees through an NRO savings bank account. In case of investment on non-repatriation basis, the sale proceeds are credited to the NRO account. The amount invested under the scheme and the capital appreciation is not allowed to be repatriated abroad.

Investing in Indian Stocks From the US

The most common choice among investors includes investing in India-focused mutual funds in the US, Exchange-Traded Funds (ETFs), and Exchange-Traded Notes (ETNs) based on Indian stock or American or Global Depositary Receipts (ADRs or GDRs).

To have access to the Indian stock market from the US, you will have to either open an account with an international brokerage firm regulated by the U.S. Securities and Exchange Commission (SEC) or open an account with a SEBI-registered Indian stockbroker.

You can open an account with any known Indian brokerage firm such as Zerodha, Sharekhan, Motilal Oswal after providing the prerequisites to start trading in the Indian stock market.

International brokers such as Interactive brokers having a presence in the NSE allows you to trade in Indian shares, options, futures, indices. You can open a brokerage account to start buying and selling stock directly from the Indian stock exchange.

Non-Resident Indians, as well as resident Indians, have the opportunity to open specific accounts with such brokers. Through these accounts, Indian investors can also access NSE stocks based on their location.

Fidelity Investments or Charles Schwab are other brokerage firms that also offer trading services. You will need to pay additional commissions fees and currency conversion costs. Since stocks are traded in the Indian currency, keep in mind the foreign exchange rates. Compare the top money transfer companies before sending your money to India to get the best exchange rate and save on transfer fees.

What is the Purpose of a Stock Market Exchange?

Stock markets are the reflection of the revenue that a country makes on a daily basis. Though the stock market runs on behalf of the country, the prime reason for the existence of the stock market is to help companies around the world raise money. For companies to raise money through stocks they must sell their private ownership of the company to the public in the form of stocks. These stocks are the firm’s capital formation. Stocks keep increasing or decreasing over time depending on the number of stocks that they have in the market and the value of those stocks.

Other functions of the stock market include regulated trading of stocks for investment purposes. Stocks are exchanged on a global basis and anyone around the world can buy or sell their stocks to other people across the globe. Since stocks come with all information relating to them, investors find it easier to understand which stock to buy and how they should invest in it.

What Holidays is the UK Stock Market Closed in 2022? What Holidays is the UK Stock Market Closed in 2022?

The stock market closes on some UK holidays. Check out the full list of market holidays for LSE in 2022!

What Holidays is Canada Stock Market Closed in 2022? What Holidays is Canada Stock Market Closed in 2022?

Canada Stock Market is closed on some official holidays in 2022. Check out the full list of holidays.

Top 10 Best Online Stock Brokers for Non-US Residents Top 10 Best Online Stock Brokers for Non-US Residents

If you are looking to invest in the US stock market, below is a list of the 10 best online brokers for non-US residents.