Note on NSE-IFSC & US Stock investing for Indians

Nasdaq
Share

Before NSE-IFSC, could Indians invest in the US Stocks? 

Yes! Over the last two years, few FinTechs in India have partnered with US Stock brokers to provide access to 5000+ US stocks and ETFs to Indian investors. Indian investors can invest in the entire stock or even in fractions of these stocks. Indian Investing abroad is regulated by the Reserve Bank of India under the Liberalised Remittance Scheme (LRS). As an Indian national, you are allowed to remit up to $250,000 a year under this scheme. Investment in US stocks is classified under Foreign Portfolio Investments in the purpose code S0001 i.e. Indian Investment abroad – in equity capital shares. Despite the clear regulation, cost and convenience was the biggest issue in the past. Some of the FinTechs, like INDmoney solved the same by making it easy and free for users to open accounts with the regulated US brokers and at the same time trade at zero brokerage. The remittance via LRS (liberalized remittance scheme) too had high costs. INDmoney, found innovative ways to partner with Indian banks to make the fixed costs zero and exchange mark up minimal. NSE-IFSC will be yet another route for Indian investors to invest in US Stocks. This note outlines details of our understanding of this new route.  

What is NSE-IFSC? 

NSE-IFSC is a subsidiary of NSE India and is a platform that has been set up in the Gift City (The international zone, outside of Indian jurisdiction) for primarily giving access to Indian stocks and derivatives for NRIs and foreigners. The platform is now trying to expand its offering to enable Indians to access US stocks. 

What is Gift City? 

GIFT city is regulated by the International Financial Services Centres Authority (IFSCA : A statutory authority established by Government of India ). Gift City jurisdiction is outside India. Setting up an entity in the Gift City is akin to setting up in any foreign land such as Singapore, Dubai, Netherlands etc. This is a very innovative initiative by the Government of India. It has also decided to offer many Tax Benefits (Exemption of stamp duty, GST along with tax incentives for Alternative Investment Funds, and etc .to attract foreign investors and offshore funds to relocate to India.

In what format is NSE-IFSC providing the US Stocks? 

These US Stocks on NSE-IFSC will be traded as ‘Unsponsored Depositary Receipts’. Which means that the investors will not hold the actual stocks. Also these are NOT sponsored by the actual underlying company i.e not sponsored by Apple, Google etc. NSE-IFSC has partnered with an international market maker and an Indian bank, who will hold the shares in the US while the investors will get these receipts. 

At the moment, we are not aware of how the pricing (Real time price per stock) will work i.e will there be a price difference between these unsponsored depositary receipts versus the actual real time stock price on US Stock exchanges? There are 13 exchanges in the US. An investor via  FinTech platform in real time seeks best buy/ sell price for a stock across these exchanges. At the moment, we do not have clarity on how or will the users indeed get the best prices via NSE-IFSC versus buying directly on US exchanges. There are also risks related to liquidity in this exchange. 

Currently, this platform has not been opened fully to the public at large. It is in the regulatory sandbox (pilot phase). This means that NSE IFSC will be testing this with a limited number of users. This may be opened up after several months, once IFSCA gives the final approval on the product. In the pilot phase there are 8 US Stocks and finally there will be 50 US Stocks. 

Besides the NSE-IFSC route, there are various Indian FinTech platforms that have partnered with regulated US brokers and hence enable Indian users to invest in 5000+ US stocks and ETF that are listed across US Stock exchanges. Most of these platforms offer buying and selling at Zero brokerage. 

Pricing and costs for investing in US Stocks on NSE-IFSC: 

While the project is still in the sandbox, investors need to read the details carefully and watch out for the following costs : 

  • The exchange, NSE-IFSC is proposing to charge 12 cents for every $100 or 0.12% for every transaction. Which means for every buy you pay 0.12% and for every sell you pay 0.12%. (Source: Livemint)
  • There is a custodian fee of about $0.05 per depository receipt. For example an apple share has 25 depositary receipts, therefore for buying 1 apple share of $160, the charge will be $1.25.
  • The licensed brokers that are going to facilitate the transactions may also levy a brokerage, AMC (Annual maintenance charges) and various other transaction fees. 
  • Issuance fee by the partner bank of NSE-IFSC
  • Exchange transaction charge by NSE IFSC
  • Demat account charges/ Annual maintenance charges levied by depository participants. 
  • Processing fee/ service fee for corporate actions. 
  • Foreign exchange remittance charges by the investor’s savings bank a/c in India. 

On INDmoney, there are Zero charges and Zero brokerages for all the services including the ones mentioned above. Furthermore, the foreign exchange remittance charges by the partner bank are zero with the most competitive USD-INR exchange rate. 

Can investors invest in fractions in US Stocks on NSE-IFSC?

NSE-IFSC with its partner has created units of receipts as a ratio to a particular stock. For example : 100 NSE-IFSC receipts is equal to 1 Tesla share which is at an approximate price per share of $838 closing on 4th March 2022. Which means that each receipt for Tesla will be priced at $8.38. Similarly, Google share has been broken up into 200 receipts. Which means each receipt will be priced at approximately $13 at the closing price of Google on 4th March 2022. At this stage we do not understand how the decimal values will work as the same can create a lot of upward and downward swing. 

On FinTech platforms like INDmoney, one can invest as low as $1 in these shares directly on US exchanges, via regulated US brokers. The investor gets the fractions till the eighth decimal value. 

What is the Process for Indians to buy US stocks traded via NSE IFSC? 

  • Once NSE-IFSC opens to the public at large (after coming out of the pilot phase), users will need to open a new demat account with a broker who is licensed by IFSC to operate in the IFSC Gift City region. The users cannot use their Indian Demat account. The users will need to complete their KYC’s and also US W-8BEN/ W-8BENE form with NSE IFSC. These are forms that per US regulations/ IRS regulations, categorize a user to be taxed appropriately as a foreigner. What this means is that the filing of this form will ensure that Indian investors are taxed only in India and not in US. Indian FinTechs, such as INDmoney that already enable US Stocks trading via direct US brokers provide Free account opening and also Nil cost for filing these forms.
  • Once the Indian investor has opened up the account at NSE-IFSC via a licensed broker, the investor will need to remit money to the licensed broker account in Gift City via RBI’s LRS route (Liberalised Remittance Scheme). The INR will be converted to USD at the user’s bank account in India and then remitted to the broker account in Gift City. Every Indian bank has their own mark ups and fixed costs on exchange rate/ conversion to USD. Investors will need to understand this cost nuance before remitting this money to the brokers wallet in the Gift City.  Also note that investors will not be able to transfer the amount via the normal payment rails i.e NetBanking/ UPI/ NEFT/ RTGS. Finally, the users will need to also fill and agree to an A2 form. Form A2 is a FEMA declaration cum application for the purchase of foreign exchange for remittance purposes. The remitter needs to fill up the details on the amount of remittance, beneficiary detail and the NRI repatriation purpose code to indicate the reason for repatriation. Many banks in India do not have a digital process for the same as yet. FinTech’s such as INDmoney have digitized this process by partnering with certain banks who have made this process digital with NIL fixed fee and the best exchange rates. 
  • Once the NSE-IFSC account is funded, investors can invest in the few curated US stocks/ depositary receipts. 

How does Trading & Settlement work? 

On NSE-IFSC, there is a T+3 settlement lag after buying. This means that the Depository receipt once bought will get credited after 3 days to your demat account. On the other hand, on INDmoney the stocks get credited into your broker account immediately after buying. In US, there is no concept of demat account. 

On NSE-IFSC, funds from stocks sold will get credited after 3 days. Stocks once bought can be sold intraday, but if held overnight can be sold only after 3 days. Funds from stocks sold can be used for new purchases only after 3 days. On the other hand, on INDmoney platform, you have the ability to use the money the very same day to purchase another share or the next day too. No wait time even though the settlement cycle is the T+2 days. 

What about security? 

In the NSE-IFSC route, the depositary receipts will be held in the demat a/c that clearly creates a sense of security. In the direct route of via apps like INDmoney and buying via the US Broker, your shares purchased are insured by the SIPC ( Securities Investor Protection Corporation www.sipc.org) upto $500k. This means in case of any eventuality or default by the US Broker, you have insurance of over Rs 3.5 cr by the SIPC including ~Rs 2cr of cash lying in your account. 

How does taxation work for gains on transactions on NSE-IFSC? 

For the purpose of the taxation, the gains on transactions from these unsponsored depositary receipts on NSE-IFSC will attract both Long Term capital gains as well as short terms capital gains. 

Long term capital gains: The receipts must be held for a period of 36 months. The gains are taxed at 20% with indexation. 

Short term capital gains: Any holding period below 36 months will attract Short term capital gains taxed. The same will be taxed at the income slab rate. 

On the other hand, via INDmoney, the taxation are treated under foreign securities and hence the period of holding for Long term Capital gains is only 24 months and not 36 months. 

What is INDmoney’s position on NSE-IFSC?

At INDmoney our aim is to provide and facilitate the most low cost, transparent, convenient & secure services to Indian investors. There are multiple routes for users to invest in US markets. Our aim is to make all choices available to our customers on our platform. We already have (i) Direct investing via US Broker & (ii) Mutual Funds via BSE StAR MF already available on INDmoney. In the future, we hope to make investing via NSE-IFSC available to the investors. 

We also feel that Gift city is a very innovative concept by the Government of India. There are multiple use cases and plays possible for FinTech’s such as INDmoney to partner with IFSCA and to create a massive impact in the global audiences. We hope to pursue the same in the future.

Share: