Buying Foreign Stocks Made Easier For Resident Indians — How?

The powers that be have decided to make it easier for Indians to invest in securities abroad.

The NSE and BSE plan to launch special platforms at the International Financial Services Centre (IFSC) in GIFT City which will enable Indians to invest in US stocks under the Liberalised Remittance Scheme (LRS) framework of the RBI.

We realise that’s a lot of abbreviations to keep track of. So let’s simplify this.

Foreign Investment Before

When an Indian resident thinks about investing in global stocks, that is, in companies which aren’t listed in India, there are a handful of ways to go about it. Most of them involve brokers or intermediated approaches such as through global equity oriented mutual funds, or international exchange traded funds etc.

When one moves from general to more offhand ideas, there are specific instruments one can subscribe to like GDRs or Global Depository Receipts. These are bank-issued certificates issued in one country to raise capital for companies in another.

The India-centric GDRs are called IDRs or Indian Depository Receipts which foreign companies may use to raise capital from Indian investors. As a matter of fact, IDRs haven’t witnessed much success in India. Standard Chartered was the first and the only bank to issue and list IDRs in June 2010 but after a decade-long failed experiment, decided to delist them in August 2020.

In any case, using GDRs to invest abroad comes with its own set of challenges.

One, a depository bank (or broker) is needed to issue them which may not always be feasible (or even desired). Two, they are unsecured securities backed by no assets except the value of shares held as receipts. Three, forex volatility. Four, most of them are devoid of voting rights for the foreign (i.e. In this case, Indian) shareholders. Five, they can be fairly easily manipulated to defraud the markets and investors, as was seen in the infamous Sujana Universal scam.

Foreign Investment Now

The product that BSE and NSE are now launching would essentially enable investors to hold the depository receipts in their own demat accounts instead of the omnibus account of a broker who used to hold them on their behalf earlier.

In addition, the non-requirement of a broker to execute their trades will save the investors a lot of money in commissions and fees.

More additions: these platforms aim to provide a competitive advantage in terms of tax structure comparable to any other global financial centre i.e. Waiver of securities transaction tax, commodities transaction tax, dividend distribution tax, capital gains tax, GST, stamp duties etc.

This also opens up the doors for fractional ownership of shares by Indian investors. Shares of some companies have large absolute costs, like Alphabet which currently quotes at $2,738 (>₹2L) or Tesla at $714 (>₹50,000). With the new system, a “market-making mechanism” is to be put in place to ensure the buy and sell spreads at reasonable rates (in the range of $3–5 per unit). Hence, more retail investor exposure to these stocks.

NSE will offer stocks in the US markets exclusively whereas BSE will include securities based in US, Canada, Europe and Australia. At the outset, the top 50 US stocks (by market cap) would be offered for investment but the list is eventually pegged to rise till 200–300.

What’s the Catch?

There are three.

First, the demat accounts which enable the direct and tax-free access (plus trading) in foreign securities only refer to those accounts held at the IFSC or financial centre inside the GIFT City located near Ahmedabad.

Second, RBI’s LRS scheme will apply to domestic retail investors who transact on the platform. This scheme requires every investor to remit only up to $250,000 outside India during a financial year and extends to all current or capital account transactions (including trading foreign stocks on the NSE-IFSC platform).

Third, even though the investments (and any gains therefrom) are tax-free, investors will have to pay taxes on the profits which get repatriated from their GIFT City account to the onshore accounts. GIFT City accounts (unlike domestic bank accounts) are treated as offshore destination accounts which is why all trades made in them are dollar-denominated.

Meaning?

Investors who put their money in global stock markets are required to pay a Tax Collected at Source (TCS). This is the key provision in the RBI-mandated LRS framework. Any incoming fund transfers into an international investment account (like the NSE-IFSC demat account) beyond ₹7L ($9,422) will be taxed at the rate of 5%.

Like TDS, TCS expenses can be adjusted against tax liability while filing for income taxes. But the $250,000 per year limit caps the amount of funds that can be sent outside the country, effectively capping the retail investment in foreign stocks using this platform.

Reading Between the Regulatory Ease

The IFSC Authority has been tasked with overseeing most aspects of this project like holding, trading, clearing, settlement etc. The tax-exempt operation is the central perk of the Gujarat IFSC which was started with the aim of attracting all sorts of investments (local + global) and turning into a Singapore-style investment gateway. The GIFT City has had a zero tax regime for 10 years (and continuing) as the Government keeps offering all manners of incentives to investors who transfer assets by the “lock stock and barrel” into the GIFT jurisdiction.

So the answer to the question “Why is this ease only limited to GIFT City Accounts?” lies in two parts. Part one indicates a regulatory sandbox strategy, meaning that the regulators wish to live test the product (i.e. Platform) in a controlled environment. Hence, they have limited it to the GIFT City enclave (a regulatory petri-dish, so to speak).

Part two lies in the Government’s growing drive to attract offshore capital into the country and devising new ways to do it.

Having said that, cost-cutting, lowering the ticket-size of investments and streamlining exchange guarantees to retail investors remains core to the development of the NSE-IFSC platform. Cost of trading through IFSC could reportedly go down by as much as 60–70% under this process.

With more digital investment tools on the rise and an increasing interest of Indian investors in foreign markets the development of this first-of-its-kind platform to ease offshore equity investment seems apt.

(Originally published August 12th 2021 in transfin.in)