Indian retail investors will be able to transact in stocks like Google or Apple listed on US exchanges, with the NSE International Exchange (NSE IFSC) and the BSE’s India International Exchange (INX) announcing that trading will soon be facilitated through their IFSC platforms in GIFT City, Ahmedabad.
What is the model?
The entire trading, clearing, settlement and holding of US Stocks will be under the regulatory structure of IFSC Authority. Indian retail investors can transact on the NSE IFSC platform within the Liberalised Remittance Scheme (LRS) limits prescribed by the RBI: they can take out or remit $250,000 every financial year. Investors will be provided an option to trade in fractional quantity/ value compared to the underlying shares traded in US markets. Sources say the cap for one unit of a stock is likely to be $8. The offering, facilitated under the Regulatory Sandbox, will be in the form of unsponsored depositary receipts.
“By investing through the NSE IFSC platform, investors will be able to purchase a fraction of a stock. This will increase the affordability of investing in US equities,” said Suresh Swamy, Partner, Price Waterhouse & Co LLP.
BSE’s INX proposes to offer stocks from the US, Canada, the UK, Europe, Australia and Japan, covering about 80% of the investing universe through its IFSC platform. It will eventually provide access to over 130 exchanges across 31 countries.
What’s the advantage for investors?
The NSE IFSC business model will not only provide an additional opportunity for investment but also make the entire process easy and at a lower cost. NSE IFSC Clearing Corporation Ltd will offer its robust risk management framework, facilitate clearing and settlement of all trades in depositary receipts, and provide settlement guarantee in respect of all trades executed on the IFSC platform. All the trades will also be covered under the investor protection framework at NSE IFSC.
The NSE is yet to announce the US stocks to be available for trading; analysts say Google, Facebook and Apple are likely to be available.
How are shares transferred to the investor’s account?
Investors will be able to hold the depositary receipts in their own demat accounts opened in GIFT City and will be entitled to receive corporate action benefits pertaining to the underlying stock. NSE IFSC will announce the operational details shortly. Depositories, banks and brokers have already started working with NSE IFSC to enable these investment products for Indian investors.
“The product enables resident individuals to easily and cost effectively invest in US stocks under the LRS framework. With the guidance of IFSC Authority and the support of all the key stakeholders involved, we hope to operationalise this product soon,” said Vikram Limaye, MD & CEO, NSE.
At present, what are the avenues for investing in the US?
Currently, Indians can open accounts in US brokerages and remit the funds under the LRS limit. This route is cumbersome; besides, investment gains will be taxed in India. Also, many Indian mutual funds are investing in US stocks through fund-of-funds schemes; Indian MF investors cannot hold these directly.
Trading through the IFSC platform move is expected to make the process easier and more accessible. “It is the right time to get such an innovative product especially from an Indian perspective… We have seen over a period that Indians have started investing in global stocks,” said Tapan Ray, MD & Group CEO, GIFT City.
Financial advisors say that while those who understand companies and their businesses can go for direct stock-picking in the US market, for investors who cannot track companies on a regular basis, mutual fund options are better options. Through mutual funds, one can do a monthly SIP of Rs 5,000 and invest in one of the several schemes that are investing in US stocks.
How will these investments be taxed?
Investment in international equity funds attracts debt taxation in India. So if the holding period is less than three years, capital gains are taxed as per the income tax slab; if it is more than three years, it will be taxed at 20% with indexation benefit. By comparison, while there is no long-term capital gains tax (over 1 year) on gains of up to Rs 1 lakh, they attract a 10% LTCG on gains above Rs 1 lakh.
As for direct investment through NSE IFSC, Swamy said, “There is will no securities transaction tax for investing in US equities. Resident investors will have to pay long-term capital gains tax (over 36 months) of 20% with indexation benefit, and short-term capital gains tax at marginal tax rate. While the platform is available to resident Indians, even NRIs/ FPIs can invest through this platform. They will have to pay LTCG of (over 36 months) of 10% without indexation benefit and STCG at 30% or marginal tax rate that may be applicable subject to tax treaties.”
Why invest in US equities?
While the investment route could be either mutual funds or direct equity, there are several benefits of investing in a developed market where large companies innovate and work on new technology, drug research, defence R&D and other key areas.
A large number of market leaders are listed in the US. For Indian investors, who are regular consumers of their products, the new options provide an opportunity to be a part of the growth story of these companies.
They also provide a currency hedge for those who plan to send their children abroad for studies. While all assets in India are valued in rupees, when someone decides to send a child abroad, one has to convert the rupee into dollars and pay. If one parks a part of their overall investment in US equities, it provides a hedge against rupee depreciation against the dollar.