International Equity Investing: Should you invest in US stocks via NSE IFSC?
The NSE IFSC platform facilitates fractional ownership of US stocks, which otherwise would be difficult for individual investors to buy and own.
Individuals who want to invest in stocks of market leaders and technology innovators in the US have now got a platform to do it directly from India through NSE International Exchange (NSE IFSC), a subsidiary exchange of National Stock Exchange of India. The platform will allow investors to invest in US companies through a demat account with the depository in the Gujarat International Finance Tec-City (GIFT) City under the Liberalised Remittance Scheme (LRS) limits of $2,50,000 each year prescribed by Reserve Bank of India.
The NSE IFSC US stocks are unsponsored depository receipts issued by the NSE IFSC receipts custodian, namely HDFC Bank IFSC Banking Unit. By acquiring these depository receipts, investors could get exposure to the underlying shares and the benefit of certain rights attached to these shares, without acquiring them directly.
Investors will be able to hold the depository receipts in their own demat accounts opened in GIFT City and the entire trading, clearing, settlement and holding of US stocks will be under the regulatory structure of NSE IFSC. To begin with, they will be able to trade in eight stocks—Tesla, Microsoft, Walmart and the five FAANG companies Meta (formerly Facebook), Amazon, Apple, Netflix and Alphabet (formerly Google). Later, the list will increase to 50 stocks.
Joseph Thomas, head of research, Emkay Wealth Management, says the merit of this system is it gives local investors access to the US market. “It facilitates fractional ownership of US stocks, which otherwise would be difficult for individual retail investors to buy and own. So, the receipts perform an important function in facilitating transactions in this market,” he says.
International stocks will help investors to diversify across different geography and business opportunities. Harshad Chetanwala, co-founder, MyWealthGrowth.com, says one should have the core portfolio in Indian stocks. “Investing in international stocks is meant for those who have built reasonable allocation in India-based equities and can look at diversifying their portfolio in International markets,” he says.
NSE IFSC vs mutual fund route
At present, the NSE IFSC platform can work for investors as most of the international mutual funds have stopped accepting new inflows based on guidelines issued by Securities and Exchange Board of India. However, the biggest difference is here the investment can be done in selected stocks whereas in the case of mutual funds it is more diversified and a better route.
Dhaval Kapadia, director, Investment Advisory, Morningstar Investment Adviser (India), says investment in US stocks via NSE IFSC mode is more cumbersome compared to the India domiciled mutual fund route. “Investors would need to open a demat account at an IFSCA registered trading member and complete KYC requirements. They would also need to complete documentation for the Liberalised Remittance Scheme with the bank,” he says.
Any income earned by a resident Indian investor is liable to income tax in India. Such income can be in the nature of dividend or capital gains. Shailesh Kumar, partner, Nangia & Co LLP, says foreign stocks are generally considered to be unlisted shares in India. “Accordingly, any long term capital gains arising from sale of such stocks is taxable at the rate of 20% (plus applicable surcharge and cess), if such foreign stock is held for more than 24 months. If foreign stock is held for up to 24 months, any gain arising from sale of such stock is taxed as ‘short term capital gain’ at normal tax rate applicable to the Indian resident,” he says.
Pros of NSE IFSC platform
— Ability to invest into select shares of interest, rather than having to buy into a diversified basket of stocks.
— Intra-day trading allows investors to benefit from market volatility during trading hours.
— Provision to invest into fractional units of a share.
Cons of NSE IFSC platform
— Investing in depository receipts carries exchange rate risk, price risk, liquidity risk, and settlement risk.
— The onus of security selection and ongoing monitoring and/or re-balancing is on the investors.
— Any re-balancing entails broker-age/transaction charges and leads to tax outgo in the year of sale.