International equities, on the whole, have been in the spotlight, attracting enthusiastic investors with their spectacular returns, especially those posted by US tech giants and disruptive global trends such as meme investing that are giving way. to massive speculative gains.
The distinguished relationship with overseas mainstream tech companies (whose products interact widely with millennial investors), the lack of well-known companies in emerging industries globally in the home country , favorable long-term currency winds and the need for diversification, have earned global equities the admiration of a new cohort of investors.
Invest from India
Traditionally, investments in US stocks have been made through US or global oriented mutual funds. In recent times, direct investment has increased and is facilitated either by an international brokerage firm or by an Indian brokerage firm, which is affiliated with an American 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 shares rests with the American brokerage firms. In addition, direct investment options come with huge costs in terms of fixed currency conversion costs for each transaction (around INR 500 for every $ 500) and high supply-demand (difference between buy and sell rates). sale of the bank) of 2% against the cash. rate.
In order to allow Indian investors to diversify their portfolio, the NSE International Financial Services Center or the NSE IFSC, one of the two recognized exchanges of Gujarat International Finance Tec-City (“GIFT City”), has introduced a product offering for enable Indian retail investors to trade selected US stocks, namely the top 50 stocks by market cap and top 5 exchange-traded funds (ETFs) by assets under management, at the IFSC.
GIFT IFSC in Gandhinagar, Gujarat is the premier IFSC in India, dealing with flows of finance, financial products and services across borders. Although it is located on Indian soil, it is considered foreign territory and all transactions in the IFSC are carried out in foreign currencies other than Indian Rupees.
The operation is simple:
- The NSE IFSC lists US stocks in the form of unsponsored deposit receipts (“DRs”).
- These unsponsored certificates of deposit are negotiable instruments, backed by the underlying stocks and reflect the price of the actual scripts.
- As of November 21, 2021, FAANG flagship stocks (Facebook, Apple, Amazon, Netflix, Google) are trading at $ 345, $ 160, $ 3,676, $ 6,785 and $ 2,978 respectively, which is not affordable for most individual investors. To make the shares inexpensive for the average Indian investor, fractional units are made available to investors. For example, a stock of $ 2,500 can be divided into 500 DRs of $ 5 each, making the instrument more accessible to the average investor.
- The DR holder becomes the beneficial owner of the underlying share and is entitled to rights to securities transactions such as bonuses, stock splits and cash dividends, if the distributable dividend is 10 cents or more.
In a similar vein, India INX, an ESB affiliate within the IFSC, announced that it will soon facilitate the buying and selling of international equities on more than 130 stock exchanges in 31 countries, including states. United, Canada, UK, Europe, Australia and Japan, at a significant cost advantage for the investor. However, the conditions and mode of issuance have yet to be established.
Benefits of investing through GIFT IFSC
Unlike existing means for direct investment, DRs are held in investors’ own bank accounts, thus providing full visibility of assets.
The NSE IFSC has partnered with some preferred banks to reduce conversion costs down to INR 50 with an upper limit of INR 150, depending on the volume of transactions and to maintain the spread between bid and ask at a maximum of 0.5% of the spot rate.
Other investment avenues
Alternative investment funds: Residents with a minimum net worth of $ 1 million in the previous fiscal year and looking for a variety of options can invest in Alternative Investment Funds (AIFs) at GIFT City.
AIFs invest funds collected from resident individuals only in foreign companies or investment programs. Currently there are 13 AIFs in GIFT City and around 25-30 AIFs are expected to be launched within three to four months.
Ingot deposit receipts: Resident individuals with a net worth of at least $ 250,000 are eligible to trade on the bullion exchange with respect to bullion deposit receipts. Although resident investors are currently not allowed to import the underlying bullion, they should benefit from the appreciation (or depreciation, as the case may be) in the value of the underlying bullion, without paying cash. to make expenses, waste and other costs conventionally incurred in the purchase of jewelry.
Once the bullion exchange is fully operational and gaining traction, India can be expected to be a price fixer on gold and other precious metals, offering competitive prices to investors.
Products in development
GIFT IFSC is still in its infancy; While the building blocks are in place, with several leading banks and brokers having established a base within the IFSC, operational guidelines have yet to be issued to integrate investors and corporate issuers.
Once the operational aspects start to take shape, Indian investors can participate in a large basket of international securities in GIFT City, including the following:
Sovereign Debt Instruments: GIFT IFSC has enabled, among other debt securities, debt securities issued by statutory and supranational institutions and sovereign guaranteed debt securities to be listed on its stock exchanges, exposing Indian investors to a multitude of safe and secure instruments. virtually risk-free.
REIT: REITs are a global investment category with a cumulative market capitalization of approximately $ 2 trillion. Since REITs only entered Indian markets in 2019 and is still a developing asset class in India, the opportunity to acquire stakes in well established REITs from around the world and take advantage of the markets. flourishing international real estate is an added value for Indian investors.
INVITES: With countries hit by the dreaded Covid-19 pandemic, it is the infrastructure sector that will be a key driver for economies. This is a compelling argument for retail investors to be part of the story of the growth of highly regulated InvITs.
After-sales service: Not so long ago, the IFSCA issued regulatory guidelines for the listing of Special Purpose Acquisition Companies (SPACs). This move comes at an opportune time, as PSPCs globally have grown in importance and are well regarded for well-established sponsorship teams, the unique structure, and limited inconvenience due to the inherent right of redemption.
Start-up: At the same time, the IFSCA has approved the listing of equities and convertible instruments by start-ups, providing an enabling environment for retail investors to take advantage of the unprecedented growth potential, deeply rooted in start-ups around the world. whole.
Other perspectives: Although the current regulations do not allow remittances under the Liberalized Transfer System (LRS) for trading in derivatives, it is expected that the scope of the LRS will be extended to trading in derivatives. in GIFT IFSC.
How does investing through GIFT IFSC work?
The Reserve Bank of India (RBI), on February 16, 2021, authorized individual residents of India to make remittances under the LRS, to the IFSC, for the purpose of investing in securities issued by non-resident entities. Under the LRS route, resident individuals can contribute up to $ 250,000 per fiscal year, without any prior approval from RBI.
- Although it is mandatory to open a demat account in an IFSC GIFT-based deposit for trade, a dollar-based offshore bank account in IFSC is not mandatory.
- Funds can be transferred from the investor’s local bank account to the NSE IFSC registered broker’s bank account at GIFT City.
- Alternatively, non-interest bearing foreign currency accounts can be kept in the IFSC.
- However, any funds not used in the account for a period of up to 15 days from the date of their receipt in the account will be immediately repatriated to the investor’s domestic INR account in India.
GIFT IFSC has not gained much popularity among the Indian masses. Not all product offerings have been made operational and foreign companies have yet to list their securities on the IFSC. However, the capital market ecosystem in GIFT IFSC is changing rapidly.
The breadth of IFSCA-approved initiatives to establish connectivity between international platforms and create a larger pool of liquidity for investors could potentially help GIFT IFSC provide investors with unfettered access to global markets. Indian retail investors, looking for a secure way to advance their global investment goals, might consider investing through both exchanges in GIFT IFSC.