MUMBAI: Investing in US shares by resident Indians just got closer to home with NSE International Exchange (NSE IFSC), an NSE subsidiary, offering the top 50 American shares on its trading platform from March 3 at Gift City Gujarat, an international financial services centre, where banks, stock exchanges, and financial services firms run their global operations.
For starters, eight stocks including Google, FB, Netflix, Apple, are on offer from March 3, with 42 more to be made available this week on the platform, said a top NSE official. The route to invest is under the RBI’s liberalised remittance scheme (LRS) which allows resident Indians to transfer up to $250,000 per head per year for buying properties, shares, paintings, for medical treatment, private trips, etc among the specified uses, with a bar on derivatives trading.
For now, 15 state-owned and private banks have set up IFSC Banking Units (IBUs). A resident wishing to invest can transfer money from her bank account to her broker’s account in the IBU. Around 15 top brokers have opened subsidiaries in Gift City and are members of NSE IFSC.
Unsponsored Receipts
The shares will be held in the form of IFSC depository receipts, as the exchange is offering trading in fractionalised form to make it more attractive, like an ADR or GDR of an Indian share traded in New York or London. A broker, requesting anonymity, said the pricing of a receipt would be in the $5-15 range.
A Netflix share at around $360 will become 24 times cheaper at the upper end of the receipt. Similarly, an Apple share would be 11 times cheaper. The receipts will be stored digitally in the depository at IFSC and accessed through Depository participants who are the brokers through whom the client will trade.
Receipt creation
The receipt is created by the Exchange appointed custodian, HDFC Bank, which has an IBU. The international market maker, also appointed by the exchange, credits the shares with HDFC Bank’s overseas unit. The bank, in turn, issues the unsponsored receipts against the shares credited.
The market maker down-sells these at NSE IFSC. It provides both buy and sell quotes and earns some money through the bid-ask spread. The client’s broker at IFSC buys and sells the receipts on her behalf. Thus, the market maker provides the needed liquidity.
Brokerage & tax
Brokerage of the just commenced operations is expected to be competitive with no stamp duty or securities transaction tax, as on the domestic exchanges. The broker quoted earlier said brokerage under the LRS route tended to be a flat $7-10 whether a client bought 1000 or 10000 shares - a so-called line order. Apart from that, there will be custody charges. Gains on the shares will be taxed based on the holding period.
If the shares are held for less than two years, they will be treated as short-term capital gain, added to the income slab of the resident, and taxed. If the holding period is over two years, a long-term capital gain tax of 20% is charged, said Amol Joshi, founder of PlanRupee Investment Services.
What are the risks
The liquidity and price impact cost are the risks. Currently, brokers conduct proprietary trades on derivatives at exchanges in Gift City, which LRS does not cover. With the depository coming up to hold the unsponsored receipts on behalf of the client, the depository participants are in the process of getting clients to participate.
If participation is low, the bid-ask spread might not be too attractive and that could increase the cost of the transaction. “This opens up an avenue for participants to open accounts with IFSC brokers and trade US equities,” said Chirag M Shah, a securities lawyer with Mansukhlal Hiralal & Co and a market veteran. “They will have to assess whether this is a preferred route since these are ‘unsponsored’ receipts and not actual underlying shares.”