FROM-

NIKUNJKUMAR SANGHAVI
ROLL NO.140
SYBBA ‘C’
Indian Financial System
Introduction:

Economic growth and development of any country depends upon a well-knit financial
system. Financial system comprises, a set of sub-systems of financial institutions financial
markets, financial instruments and services which help in the formation of capital. Thus a
financial system provides a mechanism by which savings are transformed into investments
and it can be said that financial system play an significant role in economic growth of the
country by mobilizing surplus funds and utilizing them effectively for productive purpose.

The financial system is characterized by the presence of integrated, organized and regulated
financial markets, and institutions that meet the short term and long term financial needs of
both the household and corporate sector. Both financial markets and financial institutions
play an important role in the financial system by rendering various financial services to the
community. They  operate in close combination with each other.

Financial System

The word "system", in the term "financial system", implies a set of complex and closely
connected or interlined institutions, agents, practices, markets, transactions, claims, and
liabilities in the economy.  The financial system is concerned about money, credit and
finance-the three terms are intimately related yet are somewhat different from each other.
Indian financial system consists of financial market, financial instruments and financial
intermediation

Role/ Functions of Financial System:

A financial system performs the following functions:

* It serves as a link between savers and investors. It helps in utilizing the mobilized savings
of scattered savers in more efficient and effective manner. It channelises flow of saving into
productive investment.
* It assists in the selection of the projects to be financed and also reviews the performance of
such projects periodically. 
* It provides payment mechanism for exchange of goods and services.
* It provides a mechanism for the transfer of resources across geographic boundaries.
* It provides a mechanism for managing and controlling the risk involved in mobilizing
savings and allocating credit.
* It promotes the process of capital formation by bringing together the supply of saving and
the demand for investible funds.
* It helps in lowering the cost of transaction and increase returns. Reduce cost motives
people to save more.
* It provides you detailed information to the operators/ players in the market such as
individuals, business houses, Governments etc.
Components/ Constituents of Indian Financial system:
The following are the four main components of Indian Financial system

1. Financial institutions
2. Financial Markets
3. Financial Instruments/Assets/Securities
4. Financial Services.

Financial institutions:
Financial institutions are the intermediaries who facilitates smooth functioning of the financial
system by making investors and borrowers meet. They mobilize savings of the surplus units
and allocate them in productive activities promising a better rate of return. Financial
institutions also provide services to entities seeking advises on various issues ranging from
restructuring to diversification plans. They provide whole range of services to the entities
who want to raise funds from the markets elsewhere. Financial institutions act as financial
intermediaries because they act as middlemen between savers and borrowers. Were these
financial institutions may be of Banking or Non-Banking institutions.

Financial Markets:
Finance is a prerequisite for modern business and financial institutions play a vital role in
economic system. It's through financial markets the financial system of an economy works.
The main functions of financial markets are:

1. to facilitate creation and allocation of credit  and liquidity;

2. to serve as intermediaries for mobilization of savings;
3. to assist process of balanced economic growth;
4. to provide financial convenience 

Financial Instruments
Another important constituent of financial system is financial instruments. They represent a
claim against the future income and wealth of others. It will be a claim against a person or an
institutions, for the payment of the some of the money at a specified future date.

Financial Services:
Efficiency of emerging financial system largely depends upon the quality and variety of
financial services provided by financial intermediaries. The term financial services can be
defined as "activites, benefits and satisfaction connected with sale of money, that offers to
users and customers, financial related value".
Pre-reforms Phase
Until the early 1990s, the role of the financial system in India was primarily restricted to the
function of channeling resources from the surplus to deficit sectors. Whereas the financial
system performed this role reasonably well, its operations came to be marked by some
serious deficiencies over the years. The banking sector suffered from lack of competition,
low capital base, low Productivity and high intermediation cost. After the nationalization of
large banks in 1969 and 1980, the Government-owned banks dominated the banking sector.
The role of technology was minimal and the quality of service was not given adequate
importance. Banks also did not follow proper risk management systems and the prudential
standards were weak. All these resulted in poor asset quality and low profitability. Among
non-banking financial intermediaries, development finance institutions (DFIs) operated in an
over-protected environment with most of the funding coming from assured sources at
concessional terms. In the insurance sector, there was little competition. The mutual fund
industry also suffered from lack of competition and was dominated for long by one institution,
viz., the Unit Trust of India. Non-banking financial companies (NBFCs) grew rapidly, but
there was no regulation of their asset side. Financial markets were characterized by control
over pricing of financial assets, barriers to entry, high transaction costs and restrictions on
movement of funds/participants between the market segments. This apart from inhibiting the
development of the markets also affected their efficiency.

Financial Sector Reforms in India

It was in this backdrop that wide-ranging financial sector reforms in India were introduced as
an integral part of the economic reforms initiated in the early 1990s with a view to improving
the macroeconomic performance of the economy. The reforms in the financial sector
focused on creating efficient and stable financial institutions and markets. The approach to
financial sector reforms in India was one of gradual and non-disruptive progress through a
consultative process. The Reserve Bank has been consistently working towards setting an
enabling regulatory framework with prompt and effective supervision, development of
technological and institutional infrastructure, as well as changing the interface with the
market participants through a consultative process. Persistent efforts have been made
towards adoption of international benchmarks as appropriate to Indian conditions. While
certain changes in the legal infrastructure are yet to be effected, the developments so far
have brought the Indian financial system closer to global standards.

The reform of the interest regime constitutes an integral part of the financial sector reform.
With the onset of financial sector reforms, the interest rate regime has been largely
deregulated with a view towards better price discovery and efficient resource allocation.
Initially, steps were taken to develop the domestic money market and freeing of the money
market rates. The interest rates offered on Government securities were progressively raised
so that the Government borrowing could be carried out at market-related rates. In respect of
banks, a major effort was undertaken to simplify the administered structure of interest rates.
Banks now have sufficient flexibility to decide their deposit and lending rate structures and
manage their assets and liabilities accordingly. At present, apart from savings account and
NRE deposit on the deposit side and export credit and small loans on the lending side, all
other interest rates are deregulated. Indian banking system operated for a long time with
high reserve requirements both in the form of Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR). This was a consequence of the high fiscal deficit and a high degree of
monetisation of fiscal deficit. The efforts in the recent period have been to lower both the
CRR and SLR. The statutory minimum of 25 per cent for SLR has already been reached,
and while the Reserve Bank continues to pursue its medium-term objective of reducing the
CRR to the statutory minimum level of 3.0 per cent, the CRR of SCBs is currently placed at
5.0 per cent of NDTL.

As part of the reforms programme, due attention has been given to diversification of
ownership leading to greater market accountability and improved efficiency. Initially, there
was infusion of capital by the Government in public sector banks, which was followed by
expanding the capital base with equity participation by the private investors. This was
followed by a reduction in the Government shareholding in public sector banks to 51 per
cent. Consequently, the share of the public sector banks in the aggregate assets of the
banking sector has come down from 90 per cent in 1991 to around 75 per cent in2004. With
a view to enhancing efficiency and productivity through competition, guidelines were laid
down for establishment of new banks in the private sector and the foreign banks have been
allowed more liberal entry. Since 1993, twelve new private sector banks have been set up.
As a major step towards enhancing competition in the banking sector, foreign direct
investment in the private sector banks is now allowed up to 74 per cent, subject to
conformity with the guidelines issued from time to time.
 NRI INVESTMENT

Investment Opportunities in India for NRIs

Indian economy has given a feel good factor to the NRIs, especially in the real estate sector.
Many avenues are being created as well as schemes being fashioned for them to maximize
investments from abroad.
All persons residing outside India holding Indian passports and also people of Indian origin
have been granted permission by the Reserve Bank of India (RBI) to invest in both
residential and commercial properties in India. Markets have stabilized and there is an
impressive amount of interest in this segment. NRIs are quick to invest in properties in India
where they see an opportunity for a good deal.

On the anvil is a single-window investment promotion council planned by the government,

which will undertake investment promotional activity. This will involve making extensive
contacts with potential investors, lobbying and interacting with individual companies so that
the overseas Indian finds a suitable investment environment.

To an NRI, a base in the homeland also brings with it a sense of security. The number of
NRIs who are investing in property for sentimental reasons and for better investment returns
is quickly multiplying.
The government including RBI and Foreign Exchange Management Act (FEMA) has
liberalized the rules and regulations for the NRIs to make investment in real estate.
Liberalization along with the added advantage of repatriation of the capital invested and
even the rental proceeds under the circumstances prescribed by RBI have also encouraged
NRI investments in real estate. Capital gains can be taken back after paying capital gains
tax. Apart from India being a safe destination, 10 to 12 per cent returns on the investments
are assured.
As opposed to earlier times when an NRI had to struggle with Municipal rules, income tax
and wealth tax issues, succession legislations for all religions, the Hindu joint family Act, land
ceilings and others, these are times that have NRIs being welcomed with a red carpet. The
flexibility in rules has elicited an extraordinary response from the NRI community.
The NRI investor can raise finances from financial institutions to purchase an apartment. The
Housing Development and Finance Corporation (HDFC) and other financial institutions in
India are facilitating the NRI investment in property speedily and efficiently. Though the rates
of property tax are slightly different from what Indian residents pay, the NRI also enjoys the
same status as any other property owner. NRIs pay property tax to the concerned
authorities.
NRIs are considered the safer bet eligible for availing a home loan in India facility to
purchase a property in India as they are prompt on repayment. The repayment of the home
loan can be made through a normal banking channel by way of inward remittance. For those
who earn an income in India through rent, dividends, pension, etc the loan can be repaid by
way of direct debit into the accounts of Non-residents (External) [NRE] or Non-resident
Indians. The existing balances in the Non-Resident (Non-Repatriable) rupee accounts have
been allowed to be credited on maturity to convertible NRE account. This has boosted the
real estate business.
The rules relating to investment and repatriation have been liberalized to the advantage of
the NRIs. Foreign exchange dealers have been suitably empowered to deal with the matter
of remittances. NRIs are free to repatriate in foreign currency their current earnings in India
such as rent, dividend, pension, interest and the like based on appropriate certification.
Online NRI banking in India and these accounts for NRIs have made life much easier for
transactions involved in NRI investment in India. 

What has also made NRIs flock to India has been the initiative by builders and real estate
dealers to ensure transparency about the projects on offer and fairness in dealings. NRIs
consider their investments to be safe and rewarding when they park their money in real
estate India. 

Many developers in Mumbai, Gurgaon, Pune, Delhi, Gujarat and Kerala have decided to
plan expensive projects. The vast majority of NRIs is spread across the globe is one of the
prime reasons that a large number of builders and developers are making painstaking efforts
to woo the non-resident Indian. The Indian real estate developers are leaving no stone
unturned in tapping the overseas markets. High-quality construction in India is attracting
huge NRI investment in real estate. The surge in demand came as soon as the investment
laws were revised to aid NRIs in moving their investments freely in and out of the country. 

Group housing for NRIs is also being contemplated. The general pattern in investment
shows that NRIs are investing in residential property in the above average and high
segment.

NRIs are welcome to participate in real estate investments by way of huge investments in
the construction of residential and commercial projects, SEZs and infrastructural facilities
The pan Indian interest in property buying has spawned a new league of businessmen who
pitch in for tracking and tracing of property and offer customized investor services to NRIs.
Gulf NRIs have been buying property in India over the years to have a good real estate
portfolio back home.
Portfolio Investments Schemes

The Foreign Exchange Management Act 2000 defines the Portfolio Investment Scheme,
permitting non-resident Indians and foreign institutional investors to buy and sell shares and
convertible debentures of Indian companies, and units of domestic mutual funds at any of
the Indian stock exchanges. Purchase of shares of any company from the secondary market
is subject to a ceiling of 5% of the paid-up share capital and 5% of the paid-up value of each
series of debentures.

Application for the PIS

Banks designated by the RBI can accept applications at branches located close to the
nearest stock exchange. A NRI can operate the PIS through only one selected branch. To
operate from more than one branch, special permission from the RBI is required. The
following documents are generally required by designated banks to apply for the PIS:

 PIS application form

 RPI or NRI Form, with details of shares bought from the primary market
 Tariff Sheet of the PIS
 Demat Account opening form

Sale of shares

The PIS allows for sale of shares, bonds and debentures by NRIs to residents through
private arrangements with the approval of the RBI. General authorization from the RBI is
also available for transfer of shares, bonds and debentures by way of gifts to resident close
relatives
For sale or transfer of shares and debentures of Indian companies to other NRIs, no
permission is required from RBI. The transferee NRI, however, would require permission for
purchase of the shares.Short-selling or selling the shares bought by NRI investors before
delivery is prohibited.

Tax Obligations

Investors under the Portfolio Investment Scheme are liable to pay Capital Gains Tax on their
investments which depends on the tenure of their stocks. Prevailing rates are deducted at
source by the designated bank.

Repatriablity of PIS

Proceeds of sale of stocks purchased under the PIS from NRE or FCNR accounts or from
foreign remittances are repatriable. Investments made in the PIS from NRO accounts are not
eligible for repatriation.A combination of repatriable and non-repatriable investments under
the PIS is permitted, though these would have to be operated through NRE and NRO
accounts respectively. Exclusive NRE and NRO accounts have to be maintained for PIS,
which can be held by joint account holders.

Portfolio Investments from Foreign Institutional Investors

Portfolio investment from Foreign Institutional Investors (FIIs) has been in operation since
1992. FIIs including institutions such as Pension Funds, Mutual Funds, Investment Trusts,
Asset Management Companies, Nominee Companies and Institutional Portfolio Managers or
their power of attorney holders can invest in all the shares, debentures and warrants issued
by listed companies on the primary and secondary markets.
The RBI issues a “watch list” which informs NRIs and FIIs of the companies that have
reached their maximum ceiling on investments under PIS. A “caution list” sends an alert on
the investment ceiling nearer to 2% of the upper limit.
NRIs and Life Insurance

The life insurance industry has been a dynamic one ever since the gates were thrown open
to the private players. A lot has happened in terms of product innovation, product training,
customer focus and the like.

All this frenzied activity has also seen insurance companies consciously focus their attention
on selling life insurance keeping in mind the customers specific needs. One set of customer
is the Non Resident Indians (NRIs). Life insurance products with their flexibility have the
potential to make for a good fit in the NRIs financial portfolio. NRIs keep hearing of the range
of insurance options at their disposal but do not have anyone giving them an objective
evaluation of the same. Here, we have tried to fill that void by evaluating the life insurance
options at the NRIs disposal and how he should go about selecting the one most suitable to
him.

Term insurance
A term plan is a pure risk cover plan without any maturity benefits. This is because there is
no savings element in the premium being charged to the individual; hence maturity benefits
do not accrue. NRIs should compare the term life insurance premium rates in their countries
of residence vis-a-vis term life insurance premium rates in India. Go for the term plan one
that is cheaper. While evaluating the premium rates, dont delve too much on the difference
in exchange rates between the rupee and the currency of your country; over a 20-30 year
term, its practically impossible to take a call on where a particular currency is headed over
that long a period.

A term plan is also helpful in case the NRI is servicing a home loan or plans to do so in the
future. For example, if he has bought property in India and got it part financed by a loan,
either for himself or for his dependants, then buying a term plan in India will help in fulfilling
the loan obligations in case of his absence.

Unit Linked Insurance Plans (ULIPs)

Before proceeding on ULIPs, it first becomes imperative to understand them. Simply put, a
ULIP is a market-linked life insurance plan, which invests the premium money in various
proportions in the equity and debt markets. In effect, this ensures that the returns on such
plans are linked to the performances of the markets while also offering the individual an
insurance cover at the same time.

ULIPs come in various forms like endowment ULIPs, child plan ULIPs and retirement ULIPs

While ULIPs have been a rage with NRIs, we have noticed that the enthusiasm is often mis-
placed. Many a times, NRIs have bought unit linked plans without understanding how they
function or where their monies are being invested. We have also come across instances
when unscrupulous agents have sold ULIPs without informing the NRI about the expense
structure. The expenses incurred by the ULIP ultimately impact its returns- the lower the
expenses the higher will be the returns and vice versa This seems like simple arithmetic, but
someone needs to point this out to you. Right now, its not happening the way it should.

As with expenses, the fund management team and style too hold significance while
considering a ULIP. Also, in our view, ULIPs should not act as a pure investment vehicle but
should go hand in hand with other investment instruments like mutual funds. You should
strike a balance between ULIPs and other investment avenues. So ULIPs should find a
place in your portfolio, but this presence should not be overwhelming and certainly not at the
expense of other lucrative investment options like mutual funds for instance. How should you
go about determining the investment mix? Your investment consultant is best placed to
guide you in this matter.

ULIPs in their various product forms have been dealt with individually below.

Child plans
The NRI may have plans to work abroad but may want his children to be brought up in India.
In such a case, a child policy will help in planning for his childrens future in terms of
education, marriage or seed capital for a business venture.

A regular child plan comes in various options such as money-back plans, traditional
endowment child plans and unit linked plans. While traditional endowment plans and money-
back plans offer moderate returns that may even appear disappointing, unit linked child
plans offer the NRI an opportunity to earn market-linked returns, which from a 10-15 year
perspective can prove very lucrative. Depending on his risk profile and the investment
tenure, the NRI can either opt for a traditional endowment or a ULIP child plan.

Retirement plans
While an NRI may have chosen to go abroad to work, he may wish to spend his golden
years in India. This makes a case for him to plan for a hassle-free and financially
independent retired life in India. This is where pension/retirement plans come in. Such plans
help individuals in building a pool of savings over a period of time and facilitate in meeting
post-retirement needs.

Again, pension plans offer a variety of options to NRIs. Regular as well as unit linked
pension plans are available. Individuals can invest in a pension plan, which suits their risk
profile and long-term objectives best.

Apart from the needs mentioned above, the NRI may also want to build a corpus for buying a
second property or may simply want to invest the surplus that he generates on his income.
Regular as well as unit linked endowment plans can help NRIs achieve this objective. The
NRI can also consider buying an insurance plan in the name of his parents or his
wife/children to secure their financial future.

As we have highlighted in our article, it makes sense for NRIs to consider taking insurance in
India for a variety of reasons. Of course, their needs may differ from the ones we have
mentioned in our note here. But the rationale for considering life insurance in India, which is
what we have tried to highlight, should not be lost
NRI in Real estate

NRI Real Estate Investment has been on a sharp rise in the recent few years. This can duly
be accredited to the tremendous growth in the Indian realty sector with an average of 30%
last year. India being the fifth largest economy in the world and the second largest among
emerging nations, has shown a potential growth in investments destination for the NRI
population. 

Special NRI quota is also provided for various land sales by Government. Special Grants
and services are also provided to the NRI population to lure more and more foreign
investment. All the leading banks and financial institutions have separate NRI dealing
services that cover NRE, NRO bank accounts, housing loans and other home loan related
products. You can also refer to the various bank websites to find out further details about
the NRI investment procedures and the help available. 

NRI Real Estate Investment in India

 

The real estate bubble is blooming with huge investments from all sides, the Government of
India (GOI), individual builders, infrastructure developers, large conglomerates and NRI's or
the Global Indians. The contribution of the Indian Government and other factors to the
attraction for NRI investments in realty sector of India includes:

i. Sale of land for residential, commercial and industrial development.

ii. Infrastructure support for the realty development all across the country
iii. Promotion of NRI investments and FDI
iv. Policies for transparency and facilitation of real estate transactions
v. Liberalization of rules by GOI and RBI regarding NRI property and NRI homes
investment.
vi. No restriction on the maximum number of properties that can be bought
vii. Easy finance availability
viii. Simpler repayment processes like normal inward remittances or debit in their
NRE or NRO bank account.

The various above-mentioned factors have given the Indian real estate market a potential of
touching USD 30 million in the next five years. An estimate of 5 million homes recorded
sales in 2005-2006. Even the returns from the real estate investments have out performed
other investments. Easy home loan availability by financial institutions in India, NRI
remittances and repatriation procedures and easy operability of NRE, NRO and NRCS
bank accounts has emerged as the best of all the available prospects for the NRI's looking
forward to returning to India.

 
NRIs Returning Home

NRIs, especially those looking to return to India are making informed decisions on investing
in property, houses and real estate in India.
Many NRI and Global Indians are also actively investing in real-estate There are several real
estate agents in India , financers and other organizations specializing in financing and
mortgages for NRIs, high-net worth Indians.
The Government of India has made various facilities and privileges available to NRIs who
are returning to India for permanent settlement. They can reduce and manage their direct tax
liabilities by property allocating their funds deposits under various investment scheme.
Companies like L& T Infotech, Network Appliances Inc. and Wipro Technologies, Motorola's
'Return to India' program seek NRIs moving back to India.
There is a large population of Indians who have plans to settle in India after they complete
their stint in the US, Far East, Middle East and Africa. With a developed taste for a good and
comfortable life and a high standard of living, some projects are specifically underway for
this community. Ganga-Goel Developers are at the helm of promoting this concept and they
have their hands full with projects near completion in various parts of Pune.
Real estate developers cater to NRIs & Expatriates for their requirements of international
standard condos, houses and plots in metros and suburbs like Gurgaon, Greater Noida.
Those returning to India can also avail themselves of the investment opportunities in pre-
launch and completed projects in agreement with leading developers for exclusive
investment and/or joint development. They can look at attractive and lucrative investment
options for their level of efficiency and high profit margins.
Investments in Real-Estate Funds and Real-Estate Investment Trusts (REIT) and Software
Technology Park (STP), Special Economic Zones (SEZ) and Shopping Malls are other
options.

MOIA calls for more NRI Investments in Indian Economy

A Diaspora Knowledge Network is an ambitious project undertaken by the Ministry of

Overseas Indian Affairs, which will allow non-resident Indians and persons of Indian origin
(NRIs and PIOs) to work on India based projects without re-locating to India.
This was shared by the Minister for Overseas Indian Affairs, Vyalar Ravi at the Harvard
University in Boston against the backdrop of the India@60 extravaganza in New York.
A Global Indian Foundation has also been proposed by the Ministry which would direct the
philanthropic initiatives of NRIs towards projects related to health, education and rural
development.
The MOIA is eager to increase the interaction between India and its diaspora through the
Overseas Citizenship of India scheme, the Overseas Indian Facilitation Centre, the
Knowledge Network and the Global Foundation.
The Minister appreciated the fact that NRIs and PIOs comprised a select intellectual elite
overseas, sharing an economic output of USD 400 million. However, their success has not
been shared enough with the Indian economy, he observed.
NRIs and PIOs could perform a broader role in building up the Indian economy. Lauding the
role of NRI remittances which helped tide over the financial crisis in 1991, the Minister said
these continue to contribute to the nation’s reserves.
However, diaspora investments can definitely be bettered over their current levels The total
foreign direct investment sourced from NRIs is a mere USD 8 billion, comprising just 5% of
the total FDI in India.
NRIs choose to make portfolio investments in India for a short duration of 3 years. The
Minister called on the overseas Indian community to invest in social and human capital,
where India seeks to invest heavily in the coming years.
Overseas Indians can form resource groups and facilitate trade and investments with their
adopted country, and share knowledge and skills. The Indian diaspora can contribute
significantly to social entrepreneurship, with its knowledge of “best practices, innovations
and good governance”, said the minister.
Problem faced by NRI investors

Beware of profit/commission driven advice

A lot of the advice that is offered to investors, including NRIs, is driven by commissions. A
significant majority of investment consultants recommend schemes which offer them higher
commissions as against schemes that suit the clients needs and objectives. While in a bull
market you may not get hurt by getting invested in poorly managed schemes; over a stock
market cycle you can almost be sure that the poor choice of funds will reflect in the returns.

Sometimes, distributors of mutual funds either lack accurate information on taxation or do

not pass on the correct information to their NRI clients. To take a case in point, if an NRI
decides to shift within a particular mutual fund scheme, from say, the dividend re-investment
option to the growth option, then the same falls under the tax purview for the NRI. This is
because such transactions are considered as a sale by the concerned authorities.

Cumbersome paperwork/documentation
Another issue pertaining to NRIs is the cumbersome paperwork and documentation. For
instance, while mutual fund forms are common for both resident Indians as well as for NRIs,
refilling them on account of errors made can become a cumbersome proposition in the case
of NRIs on account of the distances involved.

The distributor needs to ensure that his NRI client is guided properly through the form-filling
process and that the form is error-free. Failure to follow simple guidelines may sometimes
result in money and opportunities being lost. On their part, NRIs should exercise greater
caution while filing forms and ensure that any overwriting/modifications/cancellations are
authenticated.

Another case in point pertaining to documentation - our experience tells us that sometimes,
the account statements do not reach the NRI. One way of tackling this problem is asking for
the account statement via E-mail. That way, the need for physical delivery would be
eliminated.

Incorrect/incomplete information on country-specific guidelines

Many NRIs are not informed by their distributors about some country-specific guidelines for
the purpose of making investments. For example, the SEC guidelines prohibit Indian funds
not registered in the US from mobilising monies from US based NRIs. Mutual funds in India
(not registered in the US), whose parent companies are registered in the US (and therefore
governed by the SEC), do not accept monies from US based NRIs.

Also observed is the fact that some NRIs are not in the know with respect to how to go about
making payments from their NRE/NRO bank accounts. For example, if the NRI makes
payments from his NRO account, then repatriation is not allowed. But if the same payments
are made from the NRE account, then the investment is allowed to be repatriated. This fact
has to be conveyed to the NRI by the distributor so that the NRI is able to plan his
investments properly.

Unnecessary duplication of efforts

At times, fund houses ask for a certificate authenticating the NRIs status; the same has to be
procured from the bank through which the NRI has invested his money. This is so even
when the NRE/NRO account cheques have a clear mention on the cheque itself of the status
of the cheque (i.e. the cheque being an NRE/NRO account cheque). We feel that the very
mention of the cheque being an NRE/NRO account cheque should act as sufficient proof of
the individuals or the accounts status and that the NRI should not be put through any further
hassles before investing. NRIs on their part can stay prepared for such situations by arming
themselves with necessary documentation.

Having come this far in our note, one may be wondering as to how NRIs can overcome all
the obstacles mentioned above. Given below are some guidelines, which NRIs can follow to
ensure that they have a trouble free investment experience.

Select the investment advisor/consultant carefully

The first and foremost thing for NRIs to do is to ensure that they choose their investment
advisor/distributor wisely. NRIs must ensure that the advisor they transact with has
successfully cleared the Association of Mutual Funds of India (AMFI) accredited
examination. Make sure that he has sound knowledge of the financial markets and
instruments and manages portfolios soundly keeping the investors asset allocation in mind.
This becomes an important criterion, as NRIs, like most investors, do not have the time or
skill sets to conduct their own investment exercise.

It would further help if the investment consultant gives value added services like tools and
calculators for online tracking of investments. Also, the advisor should provide the NRIs with
timely after sales support like servicing transfers and redemptions.

Also ensure that the advisor is updated on the various procedures/requirements while
investing in various instruments, as he will ultimately act as an interface between the NRI
and the financial institution.

Ensure that the documentation is in order

Ensure that all the documentation is in order. NRIs should preserve all the statements of
accounts and such other documents that concern their investments. Such documents should
also be photocopied. Ensuring that all cheques have NRE/NRO printed on them also helps.

Look at country-specific guidelines if any

NRIs should confirm before investing money into a scheme from any mutual fund house
whether they are allowed to invest into the scheme, given their country of residence. Such
details are given in the offer document distributed by the asset management company
(AMC) and a copy of which the distributor also has. For example, NRIs residing in USA
cannot invest in schemes from Fidelity Mutual Fund, DSP Merrill Lynch Mutual Fund or
Franklin Templeton Mutual Fund in India.
Some NRI-friendly options 

NRIs should preferably consider the direct credit option while investing into a mutual fund
scheme in India. Such an option ensures that when redemption happens, money from the
AMC is directly credited to the NRIs bank account. This helps save time and money.
Otherwise, if the cheque were to be couriered to the NRI, then the whole process of
couriering, depositing and the bank crediting the NRIs account would take around two to
three weeks.

Many NRIs do not have a PAN (Permanent Account Number). While it is not always
necessary that an NRI has to furnish his PAN, it is always advisable to obtain this number
and furnish it wherever necessary. This will help NRIs in quoting the number for the purpose
of claiming refunds on TDS among others.

All in all, having understood the various difficulties that NRIs may have to endure, it is not
really difficult to fathom the correct way of going about investing in India. Ensuring that all the
guidelines given above are diligently followed will certainly help. But at the same time, NRIs
should also ensure that they themselves are involved as much as possible during critical
junctions like while selecting the investment advisors. This will go a long way in ensuring
NRIs a hassle free and a bright India investment story