The complete guide to derivatives trading for NRIs

Introduction:

What are Derivatives?

A derivative is an instrument that derives its value from an underlying asset. Think of derivatives as curd, which is a by-product of milk. Without milk, you wouldn’t have curd. Similarly, without an underlying asset, derivatives cannot exist. Underlying assets can be stocks, a stock market index, commodities, bullion, currency, or anything else.

Derivatives are unique products which can help with managing risks in your investment portfolio. At the same time, they can be used to take advantage of arbitrage or speculative opportunities.

In India, there are essentially two derivatives that people, including NRIs, can invest in. These are:

Futures

Futures are contractual agreements to buy or sell the underlying security on a specified date at a pre-decided price.  There are two kinds of futures derivatives available:

• Index Futures
• Stock Futures

Options

Options are derivative instruments that give a buyer the option but not an obligation to buy or sell a security at a predetermined price on a particular date. Once again, the two types of options available are:

• Index Options
• Stock Options

Are all NRIs eligible to trade in Derivatives?

Yes. All NRIs can trade in derivatives subject to certain norms as prescribed under the Foreign Exchange Management Act (FEMA) and as mandated by the Reserve Bank of India, Securities and Exchange Board of India, National Stock Exchange, Bombay Stock Exchange and other regulatory bodies from time to time.

Also Read: NRI Demat Account Online Procedures & Charges

What are the derivative instruments offered to NRIs?

NRIs are offered all the above types of derivative instruments, which are:

• Index Futures
• Stock Futures
• Index Options
• Stock Options

Are NRIs allowed to use Shares as Margin for Derivatives trading?

No. Shares as a margin facility is not available to NRI customers

How can NRIs trade in Derivatives?

As per regulatory guidelines, NRIs can trade in derivatives only with their NRO account on a non-repatriable basis. NRIs can trade in derivatives through their NON-PINS NRO account.

What are the documents required as proof for derivatives registration?

• NRI derivatives form
• Verified copies of PAN
• Valid passport copy
• Copy of documents indicating financial details is given below (any one):

   

  • Copy of Latest Income Tax Return acknowledgment (Latest IT Return)
  • Copy of Latest Annual Accounts
  • Latest Form 16
  • Copy of Latest net worth certificate
  • Latest Salary Slip
  • Copy of Bank account statement for the previous 6 months (this will be from the date of inward. Also, you don’t have to give a separate copy of bank statement if the same has been given as address proof and meets the 6-months condition).
  • Copy of demat account holding statement.

Also Read: NRI Investments in NCDs: Eligibility Rules and Tax Implications

Hence to trade in derivatives market in India, NRIs have to open NRO Non PINS account and submit the above documents. The existing customers of a broking house may need to submit less documents as they already have an account and investors need to check with their respective broker.