NSE IFSC Solution Vs. Direct Investing In US Stocks: Know The Difference

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In a recent development, NSE IFSC, the NSE’s international exchange, has given Indian investors an option to trade in US stocks. Even though Indian investors can invest in US stocks directly, one of the premier exchanges in the country providing a solution that offers international investing is certainly good news for the investor community in general. 

When you invest in US stocks through the NSE IFSC solution, you do not become a direct shareholder of the company. So, when you are investing in Tesla, Meta, or Apple, you are not directly investing in these shares. Instead, you are buying what is known as Unsponsored Depository Receipts, which have been launched in association with HDFC Bank. Based on these receipts, Indian investors will receive corporate action benefits in terms of a proportional benefit in the underlying stock. However, the investors will have no voting rights. The corporate action benefit will be based on the ratio at which such receipts are issued for an underlying share. For example, the ratio for Apple is 25. So one share of Apple equals 25 NSE IFSC receipts. For Amazon, the ratio is 200; for Tesla, it is 100, and so on. This means that the value of a receipt will be worth a fraction of a share. Such investments will be made under the Liberalized Remittance Scheme (LRS) limits, which means that the total value of investment needs to be capped at $250,000 in a year as mandated by the RBI. 

You do not become a direct stakeholder of the company when you invest in US stocks through the NSE IFSC solution.

The platform has received approval for issuing receipts of 50 US companies (vs. 2,000-plus companies if you go direct). However, for now, eight stocks will be available for trading – Amazon, Tesla, Alphabet, Meta Platforms, Microsoft, Netflix, Apple, and Walmart. While this is a new and innovative structure, these receipts may not always mimic the price movements of the underlying stock. 

In contrast to the NSE IFSC solution, when you are investing directly through a US broker, you become a direct shareholder of the company. Even if you are investing in fractional shares, you are still a shareholder and entitled to voting rights and dividends as a regular investor. Another difference to keep in mind is the settlement period. In the case of NSE IFSC, there is a T+3 settlement. So, depository receipts bought and sold will get credited after three days. In the case of directed investing platforms, it is T+2 days. 

One important consideration when comparing investment options is the cost. When investing through direct investing platforms, there are no brokerage fees. One of the costs you need to keep in mind is the currency conversion fee, because you need to convert your money from rupee to dollars while making your investment. When converting funds from dollars to rupee as part of the withdrawal process, you also need to pay a withdrawal fee.
On the contrary, when investing through the NSE IFSC route, here are the charges/fees you need to be aware of:

●    Two types of custodian fees charged by HDFC:
        ○    Issuance and cancellation fees of US$0.05 per NSE IFSC receipt 
        ○    10 per cent of your dividends
●    Brokerage charged by the IFSC-based broker 
●    Transaction fees charged by CDSL (more clarity on the fee structure is awaited)
●    Exchange fees 
●    Currency conversion fees when you convert rupee to dollar and vice versa

The other important consideration is the taxes involved. The taxation on capital gains is based on whether the gains are short-term capital gains or long-term capital gains. While short-term capital gains are taxed according to an individual’s tax slab, long-term capital gains are taxed at 20 per cent with indexation benefits. However, there is a difference between the threshold period when it comes to NSE IFSC and direct investing in US stocks. For NSE IFSC, the threshold period for long-term capital gains is three years. However, if you invest directly, the threshold period for long-term capital gains is two years. For dividends, the taxation is the same for both options. Dividends are taxed at a flat rate of 25 per cent in the US. However, you can claim credit for it in India. 

US stocks are registered with the Securities and Exchange Commission

Finally, it is important to understand the regulations in place for both options. In the case of the NSE solution, it is registered in the GIFT City, a special economic zone and India’s first International Financial Services Centre (IFSC). The regulator is the International Financial Services Centres Authority (IFSCA). 

On the other hand, US brokers which let you invest in US stocks are registered with the Securities and Exchange Commission (SEC), an independent agency of the US federal government. If the platform you use is based in India, they will likely have a tie-up with a US-based broker. Each account opened with a US broker has an insurance coverage of up to $500,000 provided by the Securities Investor Protection Corporation (SIPC) in the US.