Own a slice of Alibaba, Apple sitting in IndiaOct 7 2014,
Have you been envious of investors who made stellar gains on Alibaba shares that listed on the New York Stock Exchange last month? Did you miss on the rally in Applestocks ahead of the iPhone 6 launch? Impressed with the French shampoo L''''''''Oreal or the car from the Japanese manufacturer Toyota that you use and positive about its healthy sales?
You needn''''''''t just go green. You can own these stocks too without stepping on the global soil. International brokers either on their own or through a tie-up with Indian broking firms and even select mutual funds offer Indians an opportunity to benefit from global stocks.
"By opening an overseas trading account investors can buy any of the listed global stocksonline," says Vishal Gulechha, executive vice-president and head - equities at ICICI Securities.
An Indian investor can purchase stocks listed on not just US stock exchanges but those across more than 24 countries. "Among global markets, we have seen active participation by Indian investors in equity markets across the US, the UK, Hong Kong and Japan," says Ankit Shah, who manages sales for Interactive Brokers in India.
But those looking to invest in initial public offerings (IPOs) such as Alibaba would be disappointed. "Customers cannot apply for primary market i.e. IPOs through this account. Investors can buy only when the stock is listed in any of the global exchanges," says Gulechha.
Overall foreign investments by an individual are capped at $125,000 (Rs 75 lakh) per year by the Reserve Bank of India.
To trade in global stocks, the amount to be invested has to be remitted to the foreign broker''''''''s account, in consultation with local firms facilitating the arrangement. "To transfer funds one would require an application cum declaration form under $125,000 scheme, Form A2, FEMA declaration, form authorising the designated bank branch as authorised dealer. Once the funds are transferred, clients can buy and sell stocks on the online platform," says Gulechha.
Form A2 is available with Indian banks and funds are transferred within two-three days.
Depending on the broker you select, minimum deposit levels would have to be adhered to. "To open an account, we ask for a minimum initial deposit of $5,000 (or equivalent) which can be used to trade," says Shah. Upon transfer of funds, you would be geared to purchase the stocks by selecting the exchange (pre-notified to the broker) and the stocks.
Though the stocks purchased by you would be reflected in your account, technically these are held in a pool account held safely by a custodian.
Just like one pays brokerage for buying stocks in India, international broking houses too offer various fee structures. One should select based on the anticipated amount you plan to invest and how active you intend to be. Typically, for retail investors – who would buy and hold instead of churn at short intervals – a flat fee model (brokerage per share) is a better deal.
As per Saxo Bank''''''''s website, a flat rate of $0.02 per share is charged for the US markets and the minimum brokerage per order is $15. Kotak Securities, Religare Securities and India Infoline also provide the facility. International broker Interactive Brokers, which has a physical presence in India charges $0.005 per share, with a minimum order value of $1 per order.
Asked about the recurring fee after the account opening, Shah of Interactive Brokers says, "The monthly minimum activity fee is $10 per month which is waived for the first three months. For accounts having net liquidation (stocks market value) value exceeding $100,000, we waive the $10 minimum activity fee."
If you find the direct way too complicated then an easier way out is the international mutual funds on offer. "These funds are denominated in local currency and are easy to monitor. There is no limit to investing in these funds unlike direct investments capped at $125,000. One can invest into these funds through an exchange or directly into mutual fund offerings," says Anubhav Shrivastav, head product development at Motilal Oswal AMC, which offers a NASDAQ 100 shares ETF.
There have been nine international fund launches in this calendar year alone. These funds either invest in specific countries such as China, Japan, the US or into global businesses such as agriculture, gold mining companies. One need not manage the remittance bit here as just the form filled in India and amount to be invested in Indian currency is to be mentioned.
It isn''''''''t time to make merry yet, once you sell the stocks. The taxation rules need to be taken in your stride. Gains from Indian stocks are exempt from taxes if they are held for more than a year. But profits from investments into foreign shares are not exempt.
"Profits earned on shares sold within 36 months would be taxed as per the marginal rate (individual''''''''s tax bracket)," says Vaibhav Sankla, director at tax consultancy firm H&R Block (India). "Gains on foreign stocks sold after 36 months would be taxed at 20% (plus surcharge and cess)," he says. But before calculating 20% tax, one can index (adjusting for inflation) the purchase price.
Apart from indexation, one can even claim exemption on the long-term gains in two ways. "Those who do not own more than one house (when selling stocks) can invest the share sale amount in another residential house and claim exemption. The entire amount, without any cap can be invested in the property within two years after selling the stocks or one year prior," says Sankla.
Another way to save taxes is by investing in capital gain bonds of NHAI, REC or the likes within six months of selling the foreign stocks. However, here the maximum one can invest is Rs 50 lakh. Also, the 6% interest one earns is taxable.
"The fund which invests in foreign stocks will be considered as non-equity oriented fund. Thus it would be taxed similar to foreign stocks," he clarifies.
As far as taxing the gains in the country you invest in goes, the rules are different for each country. "Investor needs to check the local tax laws of the country of the investee company," suggests Sankla.
Investing in global shares brings with it its own set of challenges. Your gains could be wiped out due to the depreciation of Indian currency.
"Apart from the currency exposure, the risk in global equities is the same as investing in equities anywhere. As these are different geographies, investors are not familiar with those economies or companies within overseas portfolios," says Shrivastav of Motilal Oswal AMC.
Weigh your options well and take pride in investing, if not visiting, global places.
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