Investment is commonly recommended as a strategic component of personal finance. This is for two main reasons. The first is that through strategically placed investments, an individual can protect their wealth from loss or depreciation, setting it up to grow gradually over time. The second is that, in some cases, growth can be more significant in the short term, and investment can become a source not only of stability but of supplemental income. Despite these clear potential benefits and the common recommendation to invest, the Indian population has not, historically, shown particularly strong interest in the practice. Lately, however, this appears to be changing. Last year, an update on investment data throughout the country revealed that the number of demat accounts (an account used for holding shares and securities) in India had “crossed the 10 crore mark for the first time.” Notably, however, this happened just two years after the five crore mark was passed, indicating accelerating interest in the Bombay Stock Exchange.
Because of this accelerating interest and the fact that there are now more than 10 crore Indians known to be active in trading markets, now is a good time to consider the legality and regulation of investing practices. Below, we will explore these matters with regard to two of the most popular forms of investment in the world: the forex trade and the stock exchange.
To provide a brief, introductory overview for those who may not be active investors, the forex trade is another name for the international currency exchange. It is a market in which people are able to buy and sell currencies against one another with hopes of profiting off of value fluctuations. For example, at the time of this writing, 1 euro costs roughly 88 rupees. If you used 88 rupees to buy that euro, and the euro subsequently gained more value against the rupee, you could then take advantage of that value to buy back more rupees than you had to begin with. This is a simple illustration, but it speaks to how the forex market works in a general sense.
By contrast, the stock exchange is the trading environment within which investors are able to buy shares in companies with hopes of profiting from those companies’ successes. For example, if you had purchased a share of Eicher Motors on the Bombay Stock Exchange at the beginning of this year, it would have cost you about 3,229 INR. At the time of this writing, that share is worth about 3,409 INR, meaning you could sell it and end up with 180 INR more than you started with.
These processes and examples speak to the nature of forex and stock trading. But what are the legal situations surrounding these popular investment methods?
Forex trading is, unfortunately, a tricky prospect in India. While the practice itself is not forbidden, it has effectively been outlawed in its most traditional form. This is because forex trading platforms are banned, as well as because the Foreign Exchange Management Act (FEMA) forbids “binary trading,” a common form of currency trading. As of this writing, attempting to trade forex on an unauthorized platform is a violation of FEMA 1999, constituting a penal offense.
So, what can you do if you are interested in the currency exchange?
Notably, it is still legal to engage in the forex market, so long as it is done through a SEBI-registered broker and concerns only permitted currency pairs. In practice, this means that Indian investors have the ability to trade forex options (wherein they can buy and sell currency pairs at set prices) through recognized stock exchanges: the Bombay Stock Exchange, the Metropolitan Stock Exchange, and the National Stock Exchange. Pairs including the Indian rupee (INR), such as USD/INR, EUR/INR, GBP/INR, and JPY/INR (involving the U.S. dollar, euro, British pound, and Japanese yen, respectively), are tradable.
Indian investors seeking to engage with the forex trade also have the option of accessing online and mobile tools that can inform their trades. A currency converter, for example, can provide a quick look at what a given amount in a specific currency will be worth in another; it is useful for considering trading amounts. A pip calculator meanwhile can help to forecast the results of a trade based on the type of account at hand, the amount purchased (and in which currency) and any leverage applied. This will help a trader gain a clear picture of each forex trade’s potential.
Using tools like these is permitted so long as the trade itself is conducted through one of the aforementioned recognized and reputable stock exchanges. Before making any forex trade, it is wise to check the credentials of the platform at hand for SEBI registration.
Stock market trading is a more straightforward matter. Previously, we mentioned that SEBI registration is an indication that a platform can be trusted as a legal investment hub. SEBI stands for Securities and Exchange Board of India, and it was established in 1988 for the express purpose of regulating the country’s securities market. There is also something called the Securities Contracts Regulation Act (SCRA), which was designed in 1956 to regulate securities – such as stock shares – traded on SEBI-registered exchanges.
What this means today is that investors are free to buy and sell stock shares in exchanges adhering to SEBI regulation and recognized by the SCRA. Two such exchanges – the Bombay Stock Exchange and the National Stock Exchange – dominate Indian stock trading. Both are considered to be legal and well-regulated environments for investors. Notably, it is also permitted for Indian investors to buy foreign stocks traditionally listed at exchanges abroad. This can be done through the India INX exchange, which functions as an international division of the Bombay Stock Exchange, as well as via the NSE IFSC, a National Stock Exchange subsidiary. These options give investors more ways to legally diversify portfolios with shares in foreign companies.
The most important thing in the end is to check for proper regulation and legal recognition before making any investment in India. By and large, however, the primary exchanges can be relied upon to support legal trading activity.
We hope this has clarified the legal picture surrounding the increasingly popular practice of personal investment in India. If you have any further questions about financial law, please feel free to visit us again!