Startups that offer international trading have reported a spike in new accounts and volumes; large players like Zerodha and Upstox, too, are working on this feature.
Indian stock markets are not enough for young traders who are scouting for opportunities in international stock exchanges. During the lockdown, which has seen the economy come to a grinding halt, there has been a jump in new traders and many of them are opening trading accounts outside India as well. Several tech-backed discount brokers are getting ready to cash-in on the rush.
Bengaluru-based Stockal, which offers the service through multiple large brokerage houses, claims a spike in inquiries for investing in global stocks. It has seen at least a four-time jump in trading volumes as well.
Mumbai-based brokerage startup Upstox is in the process of launching this facility for its traders. “We are currently in the beta-testing stage but we believe there is a market opportunity where consumers will be keen on buying shares of large technology companies,” Upstox chief executive officer Ravi Kumar told Moneycontrol.
The startup would offer Indian investors the opportunity to trade on 60 exchanges across 25 countries through a single platform, Kumar said.
Upstox has almost 7.3 lakh active traders, National Stock Exchange data shows. The Tiger Global-backed profitable startup is aiming to expand the trading market beyond metro cities and gets around 60 percent of its new traders from tier two, three and beyond cities.
Bengaluru-based Zerodha, the country’s largest broking platform, is trying to do the same. The bootstrapped unicorn has already identified a broker in the United States to start global investing but is still a few days from going live.
“There is a segment of the population in the age group of 20 to 30 years, they make good money and could be looking at opportunities in this space. Further, with small savings rates falling, they would need to park their money elsewhere,” Zerodha CEO Nithin Kamath said.
He draws an interesting parallel. If Indians were consuming Netflix, using an Apple device or spending a large chunk of time on Google, Facebook and Twitter, then they might want to own a piece of that company as well, he said.
How does it work?
While Upstox and Zerodha are still testing, startups like Vested or Stockal are already offering this service.
Stockal, which is based in Bengaluru, works with multiple large stockbrokers to offer investment opportunities in the United States.
The Reserve Bank of India’s Liberalised Remittance Scheme (LRS) allows Indians to send $250,000 abroad in a financial year and the route can be used to invest money in overseas stock markets.
“We have a partner entity in the US, Drivewealth, through whom Indians can create a trading account in the US and then wire money from India into the account for investments there,” Stockal executive chairman Vinay Bharathwaj said.
For the KYC requirements, investors need to submit their address and identity proofs and all transactions have to be done through a bank account.
Bharathwaj said Stockal data trends showed that most of the traders were aged between 30 and 45 years and primarily hail from Delhi, Mumbai and Bengaluru. In many cases, techies, who might have returned from the US and did not have a brokerage account there, could be using this route to invest in American companies.
“The interest of Indians is driven by the fact that most of the technology companies Indians relate to are listed in the US and that is where we see maximum buying and selling, stocks like Tesla, Google, Microsoft, Shopify and others,” said Bharathwaj.
Stockal is looking at the lockdown period as a bumper business opportunity as its new account opening volumes shot up 150 percent. Trading volumes, which used to be at Rs 2.5 crore per day, grew to Rs 10 to 12 crore per day, said Bharathwaj.
“We have seen a fall of the average amount parked in the broking account to Rs 3.5 lakh during the last few months, which shows that retail participation is going up, this number was Rs 7 lakh in the past,” he said.
While trading in American and other global exchanges is an attractive proposition, getting it done is not easy. The biggest hurdle is remittances.
Industry insiders say sending money through LRS requires paper documentation, which is done through bank branches and the physical leg of the system makes it cost-ineffective.
“We are trying to address the remittance problem. We have spoken with the Reserve Bank of India and commercial banks as well if they can at least permit online fund transfer till maybe $5,000, even then this market could become sizeable,” said Kamath of Zerodha.
Further, the 5 percent tax at source imposed in the last year’s budget has been a dampener, he added. In the Finance Bill 2020, the finance ministry said any person sending money outside India will have to pay a 5 percent tax at the origin itself.
Stockal is trying to address the physical leg of the process by offering a pickup and drop service. Through Stockal, consumers get a pre-filled LRS form that they would need to put their signature on and keep for a pick-up, Bharathwaj said.
At the backend, Stockal connects the investor with the bank branch that deals in forex and organises a pickup and drop at the branch.
“After that our operations team follows up with the bank to ensure that the money gets wired to the US quickly,” he said. Stockal has a partnership with seven banks, including HDFC Bank, RBL Bank and State Bank of Mauritius.
Another major challenge is the small size of the population that trades in stocks. While the growth numbers may look impressive, given the small base, the actual number of traders is minuscule. Even for a country like the US, large brokers are not interested in Indian traders because of small volume and their limited ability to invest.
“There could be around five to seven crore potential traders in India, out of that less than a crore are actually trading in the Indian stock exchanges, even within that, a tiny minuscule can trade in foreign exchanges,” Kamath said.
And then there is the price factor--most of the blue-chip technology giants are extremely expensive. For instance, Amazon is trading at more than $2,600 (around Rs 1,97,724) and Alphabet, the holding company of Google, at more than $1,400 (Rs 1,06,467).
For Indian traders to buy a substantial chunk of these companies is not easy. Hence Stockal offers a fraction of a share on its platform. Even Upstox is working on allowing fractional investments. This shows that not a lot of retail traders will be able to acquire large shares in these companies.
This, however, hasn’t stopped companies from betting on international markets because most of the new-generation tech giants are getting listed on the American bourses.For instance, Chinese majors like Tencent and Baidu are listed in the US. Brokers feel that millennial Indians will naturally be attracted to these tech companies. If more Indian startups were to get listed at home, perhaps a similar explosion in young retail traders could be seen here but that seems a long way off. Until then, brokers are trying to do business by connecting young Indians to global exchanges.