Should you invest in US stocks like Amazon, Tesla, Netflix on NSE IFSC?

What is needed to invest in international stocks?

Investors must open a demat account with the depository in GIFT City, Gujarat. They should check whether their broker is a participant with the depository. Large retail brokerages are starting their operations from NSE IFSC.

Currently, there is only one depository in GIFT City, jointly owned by NSE, BSE, Multi Commodity Exchange of India, National Securities Depository Ltd. and Central Depository Services (India) Ltd.

Investors also need to open a trading account with a broker-member of NSE IFSC.

Instead of shares of US companies, investors will get DRs against their investments, which will be held in their demat accounts. Any corporate action such as dividends by these companies will be credited to their accounts to the extent of their DR holdings. However, investors won’t get any voting rights.

How is this facility different from a broker’s service?

In international investing services offered by domestic brokers, the shares are held by a third-party custodian in the broker’s ‘street name’ rather than in the name of the investor. If the broker defaults, the recovery process can be complicated because investors will have to approach the US Securities and Exchange Commission to get their funds back. Domestic brokers may take insurance to cover the risk of defaults by their broker partners. Check if your broker has taken such an insurance cover.

NSE IFSC is an entity regulated by the IFSC Authority, which is an institution. The DRs or NSE IFSC receipts will be held in the investor’s name. NSE IFSC Clearing Corporation will  provide settlement guarantee with respect to all trades executed on the NSE IFSC platform. All the trades will also be covered under the investor protection framework at NSE IFSC.

What is the minimum investment to be made?

NSE IFSC is trying to keep pricing between $5 and $15 per DR, which amounts to Rs 375 per DR at the lower end. One DR is usually a fraction of the original share. By buying a DR, an investor won’t have to pay for the entire share. Investors can buy a fraction of the value of the underlying share and build up gradually.

One Apple share currently trades at about $166, which amounts to Rs 12,500, which would be equivalent to 200 DRs of NSE IFSC receipts. HDFC Bank, the custodian bank that holds the shares underlying the DRs, will try to offer investors fine foreign exchange rates to minimise the impact of foreign exchange fluctuations while placing orders.

Will investors be able to trade in shares of more US companies?

Depending on investor interest, NSE IFSC may add shares of more companies for trading, taking them to 50 from the current eight in three-four days. The exchange can later add the top 300 stocks – or a higher number – from US exchanges. It can even introduce stocks from other overseas markets.

As the companies themselves are not involved, the process would require working with a custodian bank and a market maker to create the DRs.

Taxation and maximum investment

More clarity is needed on how gains on these investments will be taxed.

One view suggests that as DRs are securities that will be listed on NSE IFSC in GIFT City, which is a recognised stock exchange, holding period of more than one year should qualify for long-term capital gains (LTCG), according to Ashok Shah, chartered accountant and founding partner of NA Shah Associates LLP. As per this, LTCG tax rate will be at the option of the taxpayer, either at ten percent without indexation or 20 percent with indexation benefit, and gains for investments of less than a year will be taxed at applicable slab rate.

Another view is that as securities transaction tax (STT) is not charged on NSE IFSC, the gains on DRs will be treated on par with unlisted stocks. So, holding period of more than two years qualifies for long-term capital gains (LTCG), according to Karan Batra, founder of Chartered Club, a tax consultancy. As per this, LTCG tax rate will be 20 percent with indexation benefit and gains for investments of less than two years will be taxed at the investor's slab rate.

Clarity from NSE IFSC or a government body would help to know exactly how gains on DRs will be taxed as it is a new product for resident investors.

DR investments on NSE IFSC can be made under the Liberalised Remittance Scheme stipulated by the Reserve Bank of India, which means the amount invested cannot exceed $250,000 (Rs 1.9 crore) in a financial year.

What are unsponsored depositary receipts (UDRs)?

Indian companies issue American depositary receipts (ADRs) and global depository receipts (GDRs) to raise capital from international stock markets. A bank is roped in that issues the DRs against the underlying shares that it holds. These DRs are known as sponsored depositary receipts because the company is involved in this process.

NSE IFSC will work with HDFC Bank to convert shares of global companies into DRs known as NSE IFSC receipts. As the companies are not involved in this process, they are called unsponsored depositary receipts.

How do DRs get created?
NSE IFSC has appointed a market maker, who will buy shares in the international market and deposit them with HDFC Bank in New York. Against the shares deposited with HDFC Bank, it will issue DRs in GIFT City and credit the account of the market maker.

What should investors do?

For investors just starting to diversify their investments geographically, financial planners say the mutual fund-route is still a better option.

Overseas investing limits are still open for mutual funds investing in ETFs listed abroad, he said. Investors can consider these for now until more clarity emerges about overseas investing limits for mutual funds, Dhawan added.

More savvy investors who understand global companies and global markets can consider investing through NSE IFSC. Keep in mind, that as of now, the facility is being offered under a regulatory sandbox, which means it is being allowed to be launched so that it can be tested.