Portfolio Investment Scheme (PIS) Account for NRI

A Portfolio Investment Scheme (PIS) account is often required for NRIs (non-resident Indians) as per the Reserve Bank of India (RBI) framework. In the past, the Portfolio Investment Scheme (PIS) was the system used by the RBI for NRIs to invest in listed Indian equities.

Today, investments can be made either through PIS or non-PIS structures depending on the route taken, the repatriation requirements and the broker's arrangements.

The RBI also plays a vital role in regulating investments made through PIS accounts, mandating ownership ceilings and requiring fund routing through only designated NRE/NRO accounts. 

Designated banks also have to report financial transactions directly to the RBI. As an NRI, you have to connect your designated PIS account with NRI demat and trading accounts. Only one PIS bank account can be opened at a time.

Let us look at what the account is, how it works, why it was introduced, opening modalities and the eligible investments, among other crucial factors. 

Key Takeaways

• PIS is one of the regulatory routes open to NRIs who wish to invest in listed Indian equities.
• The requirements set out by PIS vary according to the investment route and the broker framework.
• Not all NRI investments need a PIS account.
• IPOs, mutual funds and a number of other investment products can be obtained outside the normal PIS framework.
• Before investing, NRIs should check with their broker and bank to confirm the current requirements.

What is a PIS Account?

The PIS account is a specific banking setup that allows eligible NRIs to invest in listed Indian equity shares in the secondary stock market under RBI regulations. Here are the key aspects: 

• PIS accounts are linked to NRE (Repatriable) or NRO (Non-Repatriable) savings bank accounts. They are connected to the demat and trading accounts in turn. 
• The PIS regulatory framework has been set up under the FEMA (Foreign Exchange Management Act), enabling NRIs to buy or sell shares and convertible debentures of companies on recognised exchanges. 
• The RBI permits specific designated banking branches for administering the PIS. 
• There are RBI-mandated ceilings for foreign holdings as well
• The RBI also stipulates that PIS transactions should only be delivery-based. Intra-day and short selling are not allowed. 
• Each time an NRI implements a buy or sell trade through the broker, the designated banking branch will automatically report the transaction to the RBI. 

Do NRIs Still Need a PIS Account?

It isn't always necessary. Nowadays, a great many NRIs make their investments via non-PIS routes, especially when the investments are being made on a non-repatriation basis using NRO accounts.

The need for a PIS account will vary according to the investment route, the repatriation requirements, the broker's policies and the current FEMA and RBI regulations.

Therefore, investors should check with their broker to confirm what the applicable framework is before opening an account.

Why Was the Portfolio Investment Scheme Introduced?

The portfolio investment scheme was introduced by RBI to enable and regulate investments made by non-resident Indians (NRIs) in the Indian capital markets, while complying with FEMA guidelines, RBI tracking and limits on foreign investments. Here are some of the key aspects in this regard. 

• FEMA Compliance

It ensures that all non-resident cross-border transactions will comply with the FEMA guidelines. Sale and purchase of listed shares will be routed through designated AD (authorised dealer) banks. Legal compliance for overseas participants is thus simplified without needing complex and direct filings for each trade. 

• RBI Tracking

The Reserve Bank of India will be monitoring market ownership and aggregate foreign capital influx in real time. It will leverage the ban and caution lists to manage company-based threshold proximity. It will also supervise foreign exchange movements. 

• Foreign Investment Limits

Aggregate and individual ceilings are enforced for NRI stakeholders in Indian entities. This prevents excessive or huge foreign control or sudden market fluctuations in sensitive industry sectors. Breaches are automatically flagged where the portfolio limits transform into direct foreign investment limits. 

• Regulatory Reporting

Mandatory transaction reporting has been standardised through designated bank branches. There is also seamless tracking of capital gains, cost bases and tax deductions (TDS). 

• Investor Protection

Market integrity is safeguarded by prohibiting unauthorised short selling or risky intraday positions for participants in the scheme. Repatriation pathways are also secured for legitimate principal amounts and the gains/earnings. 

How Does a PIS Account Work?

Here is how an NRI PIS account works: 

NRE / NRO Account: You should maintain a designated bank account in the country to enable capital for investments. 

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PIS Approval / Reporting (where applicable): Your designated bank will secure the PIS permission letter or RBI-compliant allotment letter to track the equity ownership limits in listed companies. 

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Trading Account: The account will be linked to your PIS bank ledger through a SEBI-registered broker for placing delivery-only equity buy or sell orders (intraday trading is not allowed). 

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Demat Account: The account will store your purchased shares electronically and safely under your profile. 

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Purchase & Sale of Shares: Buy orders will deduct money automatically from your PIS-linked bank balance, while sell orders will trigger TDS/capital gains tax processing wherever it is applicable.

Funds and securities are exchanged via the stock exchange clearing corporation. The bank then reports completed transaction logs to the RBI. 

PIS Permission Letter

The PIS permission letter is an official approval document that may be required for NRIs (non-resident Indians) to trade in secondary market equities, while also helping track ownership ceilings and manage the movement of funds.

Historically, PIS investments were subject to RBI-prescribed ownership limits. Investors should refer to prevailing FEMA and RBI regulations for the latest investment limits and reporting requirements.

Here are some key things worth knowing about the permission letter: 

• It grants official and legal authorisation as per FEMA, permitting NRIs, OCIs (overseas citizens of India) and PIOs (persons of Indian origin) to buy or sell shares/convertible debentures on recognised exchanges. 
• It also enables monitoring of the overall NRI investment limits in listed Indian entities. 
• It is issued by authorised dealer banks or designated branches of RBI-approved commercial banks in India (where the NRI holds accounts). 
• The bank will process the application and operationalise the tracking system on behalf of the RBI. 
• Permission may be required depending on the investment route and broker process for secondary market compliance, tracking transactions, and broker account onboarding (during the trading and demat account opening process or while activating secondary market trading segments for NRIs). 
• Brokers need the PIS bank account details and approval references for routing the sale or purchase contract notes properly. 
• The PIS account can be linked to a non-resident external (NRE) account where the principal and sale proceeds may be freely and fully repatriated overseas. Alternatively, it may be connected to a non-resident ordinary (NRO) account for funds that remain restricted in the country, subject to local tax rules. 
• Only one active PIS designation can be mapped to a particular bank and linked through the brokerage at one time by an individual. 

How to Open a PIS Account

These are the steps involved in opening a PIS account - 

Step 1: Open an NRE or NRO Savings Account with the authorised dealer (AD) bank. 

Step 2: Choose a bank offering PIS services (where applicable), checking for PIS letter approvals and other designated branch services. 

Step 3: Complete the PIS application form and also the FEMA declaration form. 

Step 4: Submit KYC and supporting documents, including your passport, visa, PAN card, overseas address proof, etc. (attested copies)

Step 5: Receive the PIS approval/permission (where required) from the bank. 

Step 6: Link the PIS-enabled bank account with your trading and demat account through the broker. 

Step 7: Begin investing in eligible securities within the permitted limits. 

Is PIS Account Mandatory for NRIs?

A PIS account is not mandatory for all NRIs. The requirement depends on the nature of the investment, repatriation requirements, broker operating model and prevailing regulations. 

Certain investments may be available through non-PIS routes, while others may require additional compliance procedures.

The system has also been designed to route, tax and validate the seamless outflow of sale proceeds back to the foreign bank accounts.

NRIs under the present regulatory framework may only hold a single designated PIS bank account that is linked to one authorised bank branch.

Intraday trading, margin leverage and short selling are also strictly prohibited; all trades need 100% upfront funding and final delivery. Designated banks also have to automatically report all sale and purchase transactions directly to the RBI. 

Investments where PIS may still apply: 

• Buying and selling listed company shares on the NSE/BSE with Repatriable NRE funds in the secondary equity market. 
• Secondary market transactions in equity-linked convertible instruments on the repatriation basis. 

Investments that may not require PIS: 

• Mutual funds 
• IPOs (initial public offerings)
• Derivatives like Futures and Options (F&O) on the non-repatriation basis 
• Fixed income assets (Government securities, treasury bills and non-convertible debentures outside secondary equities)

It is always important to check with the brokers and stay updated on the RBI guidelines before going ahead. 

Who Should Open a PIS Account?

A PIS account may be helpful for these users: 

• NRIs investing in listed equity shares in the secondary market. 
• NRI investors who are using eligible NRO/NRE accounts. 
• Individuals whose brokerages require PIS reporting. 

Documents Required to Open a PIS Account

Here is a closer look at the documents required to open your PIS account. 

*Note that documentation requirements may vary from one bank to another. 

What Investments Can Be Made Through a PIS Account?

Here are some of the investments that can be made via PIS accounts. 

PIS Account vs Non-PIS Account

Here is a brief comparison of PIS accounts with their non-PIS counterparts. 

Here is a more detailed comparison for your understanding. 

Benefits of a PIS Account

Some of the key benefits of a PIS account include: 

• Regulatory Compliance
  It ensures legal compliance with the FEMA and RBI rules, while monitoring overall foreign investment limits. Individual company stakes are capped at 5%, with aggregate limits set at 10% of the paid-up capital. 
• Transparent Reporting
  Daily transaction reporting has been automated via designated banks to the RBI. Clear and transparent electronic records are generated for TDS (tax deducted at source) and capital gains calculations. 
• Access to Indian Equity Markets
  Trading is allowed in convertible debentures and equity shares on recognised stock exchanges. Investment growth is enabled through repatriation (NRE accounts) or non-repatriation (NRO) pathways. 
• Seamless Settlement
  Secondary market buy-and-sell orders are automated via broker reporting. Physical paperwork and share certificates are eliminated with synchronised and electronic transactions. 
• Linked Banking and Investing
  There is direct linkage with the NRI savings account (NRE/NRO), demat account and trading account. Fund transfers are automated for purchases and also sale credits without needing any manual intervention. 

Limitations of a PIS Account

Some of the probable limitations of a PIS account may include the following: 

• Additional documentation needs
  The RBI-compliant PIS permission letter is needed from the designated authorised dealer (AD) bank before the start of secondary market equity trading.

KYC needs are also there, along with extensive CRS/FATCA declarations, notarised overseas address proof and proof of non-resident status. 

• Bank dependency
  Investors are limited to just one designated PIS bank account at one time. Also, the account should only route equity trades and handle automatic TDS (tax deduction at source) calculations. This prevents switching conveniently between multiple institutions/banks. 
• Reporting requirements
  Every sale and purchase transaction should be explicitly reported to the RBI by the designated bank for tracking the overall foreign ownership thresholds.

Compliance teams also actively monitor individual and aggregate ceilings for investments in listed Indian entities. 

• Operational complexity (as compared to non-PIS models)
  This system is strictly restricted to delivery-based equity investments. Short selling, intraday trading and exchange-traded derivatives/F&O are not allowed under PIS.

There are higher fees for annual maintenance, transaction-based reporting charges, and costly contract notes compared to affordable, simplified non-PIS systems. 

Common Mistakes to Avoid

Some of the common mistakes to avoid with PIS accounts include: 

• Assuming every investment needs PIS
  You should not make the mistake of perceiving PIS as mandatory for all assets in India. It is only compulsory for equity delivery trading in the secondary market.

Government bonds, mutual funds and IPOs generally leverage non-PIS routes. 

• Opening the wrong account type
  Many NRIs end up confusing NRE (Repatriable) and NRO (non-Repatriable) PIS linkage is a common error. Another issue is mistakenly using PIS for derivatives, such as Futures & Options.

NRE-PIS linkage should be used for moving gains overseas without limitations. NRO-PIS is suitable for local funds, while non-PIS accounts are ideal for F&O trading. 

• Confusing PIS with trading or demat accounts
  Many erroneously believe that PIS bank approval will function as the stock trading platform. Remember that it is only the RBI-approved bank's designated bank permission/account system. This should be linked separately to a demat and trading account with a SEBI-registered brokerage. 
• Ignoring broker and RBI limits
  Do not make the mistake of trying to open multiple PIS bank accounts or attempting any short selling or intraday transaction.

The RBI rule must be strictly followed, permitting only one active PIS bank account for each designation type. One should only stick to delivery-based selling or buying. 

• Not updating KYC
  Not submitting the present proof of overseas address, periodic KYC updates or passport pages is a big error. You should always submit the updated documents to the bank and brokerage early to prevent any temporary account freezes or rejection of transactions.