International stocks, by and large, have been in the limelight, enticing enthusiastic investors with their spectacular returns, especially those posted by the U.S. tech giants and the global disruptive trends such as meme investing which make room for massive speculative gains.
The distinguished relatability with the consumer tech companies abroad (whose products millennial investors extensively interact with), lack of renowned companies in globally emerging industries in the home country, currency tailwinds over the long-term and the need for diversification, have earned global stocks the admiration of a new cohort of investors.
Investing from India
Traditionally, investments in U.S. stocks have been made through mutual funds with a U.S. or global focus. In recent times, direct investing has been on the uptick and is facilitated either through an international brokerage firm or through an Indian brokerage firm, which has an affiliation with a U.S. brokerage firm.
In either case, the international brokerage firm buys the shares and holds them in an omnibus for the Indian investor. Thus, the custody of these stocks lies with the U.S. broking houses. Further, the direct investment options entail huge costs in terms of fixed foreign exchange conversion costs for every transaction (approximately INR 500 for every $500) and a high bid-ask (difference between the bank’s buy and sell rates) of 2% from the spot rate.
In a bid to enable Indian investors to diversify their portfolio, the NSE International Financial Services Centre or the NSE IFSC, one of the two recognised stock exchanges in Gujarat International Finance Tec-City (“GIFT City”), has introduced a product offering to enable retail Indian investors to trade in select U.S. stocks, viz., the top 50 stocks by market capitalization and top 5 exchange traded funds (ETFs) by assets under management, at the IFSC.
GIFT IFSC in Gandhinagar, Gujarat is the maiden IFSC in India, dealing with the flow of finance, financial products, and services across borders. Despite being located on Indian soil, it is deemed as a foreign territory and all transactions in the IFSC are carried out in foreign currency other than Indian rupees.
The way it works is simple:
- The NSE IFSC lists the U.S. stocks in the form of unsponsored depository receipts (“DRs”).
- These unsponsored depository receipts are negotiable instruments, backed by the underlying stocks and mirror the price of the actual scrips.
- As on November 21, 2021, the bellwether FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks trade at $345, $160, $3676, $6785, and $2978 respectively, which are not affordable to most retail investors. To make the stocks inexpensive to the average Indian investor, fractional units are made available to the investors. For example, a stock of $2,500 may be divided into 500 DRs of $5 each, making the instrument more accessible to the average investor.
- The holder of the DR becomes the beneficial owner of the underlying share and qualifies for corporate action entitlements such as bonus, stock splits, and cash dividends, if the distributable dividend is 10 cents or more.
In a similar vein, India INX, a subsidiary of BSE in IFSC, has announced that it would soon facilitate buying and selling in international equities from over 130 stock exchanges across 31 countries including US, Canada, UK, Europe, Australia, and Japan, at a significant cost advantage to the investor. However, the terms and mode of issue are yet to be rolled out.
Advantages of Investing through GIFT IFSC
In contrast to the existing means for direct investing, the DRs are held in the investors’ own demat accounts, thereby providing complete visibility of the holdings.
The NSE IFSC has tied up with certain preferred banks to reduce the conversion costs to as low as INR 50 with an upper limit of INR 150, depending on the volume of transactions and to maintain the bid-ask spread at not more than 0.5% of the spot rate.
Other Investment Avenues
Alternative Investment Funds: Resident individuals with a minimum net worth of $1 million during the preceding financial year and looking for varied options can invest in Alternative Investment Funds (AIFs) in GIFT City.
AIFs shall invest the funds raised from resident individuals only into overseas investee companies or schemes. Currently, there are 13 AIFs in GIFT City and about 25-30 AIFs are expected to be launched in a span of three to four months.
Bullion Depository Receipts: Resident individuals with a net worth not less than $2,50,000 are eligible to trade on the bullion exchange in respect of bullion depository receipts.Bullion depository receipts, like DRs, are also negotiable instruments, albeit representing an interest in the underlying bullion. While resident investors are currently not permitted to import the bullion underlying, they stand to benefit from the appreciation (or depreciation, as the case may be) in the value of the underlying bullion, without shelling out money for making charges, wastage and other costs conventionally incurred in purchasing jewellery.
Once the bullion exchange is fully operational and gains traction, India can expect to be a price setter of gold and other precious metals, offering competitive pricing to the investors.
Products under Development
The GIFT IFSC is still in its nascent stage; while the basic building blocks are in place, with several prominent banks and brokers having established a base in the IFSC, operational guidelines are yet to be issued, to onboard investors and investees.
Once the operational aspects start taking shape, Indian investors can participate in a wide basket of international securities in GIFT City, comprising of the following:
Sovereign Debt Instruments: The GIFT IFSC has permitted, among other debt instruments, debt securities issued by statutory and supranational institutions and sovereign-guaranteed debt securities to be listed on its exchanges, exposing the Indian investors to a host of secure, virtually risk-free instruments.
REITs: REITs are a global investment class with a cumulative market capitalization of approximately $2 trillion. Given that REITs entered the Indian markets only in 2019 and are still a developing asset class in India, the window to acquire units in well-established REITs from across the globe and gain from the thriving international real estate markets, is a value addition to the Indian investors.
InVITs: With countries battered by the daunting Covid-19 pandemic, it is the infrastructure sector that will be a key driver for the economies. This makes a compelling case for retail investors to partake in the growth story of the highly regulated InvITs.
SPACs: Not long ago, the IFSCA issued regulatory guidelines for listing of Special Purpose Acquisition Companies (SPACs). This move comes at an opportune time, when globally SPACs have gained prominence and are well regarded for the well-established sponsor teams, the unique structure and the limited downside owing to the inherent right of redemption.
Start-ups: Alongside, the IFSCA approved the listing of equity and convertible instruments by start-ups, thereby providing a conducive environment for retail investors to reap returns from the unprecedented growth potential, deep-rooted in start-ups across the globe.
Other Prospects: While the current regulations do not allow remittances under the Liberalised Remittance Scheme (LRS) for trading in derivatives, it is expected that the scope of LRS would be extended to trading of derivatives in GIFT IFSC.
How Does Investing through GIFT IFSC Work?
The Reserve Bank of India (RBI), on February 16, 2021, permitted individual residents in India to make remittances under LRS, to the IFSC, for the purpose of investment in securities issued by non-resident entities. Under the LRS route, resident individuals can remit up to $2,50,000 per financial year, without any prior approval from RBI.
- While it is mandatory to open a demat account at a GIFT IFSC based depository for trading, an offshore dollar-based bank account in IFSC is not mandated.
- Funds can be transferred from the local bank account of the investor to the NSE IFSC registered broker’s bank account in GIFT City.
- Alternatively, non-interest-bearing Foreign Currency Accounts may be maintained in the IFSC.
- However, any funds lying idle in the account for a period up to 15 days from the date of its receipt into the account shall be immediately repatriated to the domestic INR account of the investor in India.
GIFT IFSC has not gained much popularity among the Indian masses. Not all product offerings have been made operational and foreign companies are yet to list their securities on IFSC. However, the capital market ecosystem in GIFT IFSC is fast evolving.
The extent of initiatives endorsed by the IFSCA to build connectivity across international platforms and to create a larger liquidity pool for the investors, could conceivably help GIFT IFSC provide investors with unfettered access to global markets. Retail Indian investors, seeking a safe medium to advance their global investment objectives, could consider investing via the two exchanges in GIFT IFSC.