NSE IFSC recently announced trading in 50 popular US stocks like Apple, Amazon, and Tesla in the form of unsponsored depository receipts for Indian investors. This has created a lot of buzz among investors who’ve been looking for easy ways to get exposure to these stocks. While the stock exchanges in GIFT City were primarily set up for easy access to Indian stocks and derivatives for NRIs and foreigners, this is the first product for onshore Indian investors.
Here’s everything you need to know about it.
GIFT City IFSC
GIFT city is a Special Economic Zone or a financial hub with tax incentives created by the Government of India with a more relaxed regulatory regime to attract foreign capital to India and export financial services. Think of an area like Singapore or Dubai within India. GIFT city International Financial Services Center (IFSC) is located near Ahmedabad in Gujarat. Read more. The regulator for GIFT city is the International Financial Services Centres Authority (IFSCA), read more.
Subsidiaries of BSE and NSE, India INX and NSE IFSC respectively, were allowed to set up stock exchanges at GIFT City. These exchanges were essentially set up to allow easier access for international investors looking to trade Indian securities. All trading and settlement happens in US Dollars, which helps avoid the impact of currency fluctuations.
The first products introduced on these exchanges were index and stock derivative contracts. Other than easier onboarding and lesser regulatory requirements for NRIs and foreign nationals compared to trading on onshore Indian exchanges, there are also tax incentives; no income tax on derivative gains, no STT, or Stamp Duty. This is to attract international traders to trade at GIFT over other platforms in Dubai, Singapore, and other countries. While only derivatives trading is allowed today, it is just a matter of time, now that the depositories have also started operations in GIFT, that trading of Indian stocks will also begin.
Can an Indian individual retail investor trade derivatives in GIFT city?
No 🙂 GIFT city is meant only for non-resident Indians and foreigners looking for India exposure. When an Indian investor transfers money to GIFT, it is treated as transferring money out of India using LRS (Liberalized Remittance Scheme). So a maximum of $250,000 per year, and more importantly, any money transferred using LRS can’t be used for trading margin’d products or derivatives. Here is the RBI FAQ—check question 2 and point ii.
While both the exchanges were originally set up for foreigners and NRIs, they also realised that there is an opportunity to build a product for Indian retail investors.
Launch of NSE IFSC receipts on US stocks
Over the last 4 years, technology stocks in the US have been on a tear. Companies like Amazon, Apple, Facebook, Google, and Netflix have given phenomenal returns. Added to the performance, these are also brands that a lot of Indians use on a daily basis. The interest in owning stocks of these companies under the LRS scheme has only gone up with time. While there have been a bunch of startups in India that have partnered with international brokers to make investing in these US stocks much easier, they haven’t really taken off for the following reasons:
- Cost of international remittance: Money has to be transferred to the international broker and this can cost anywhere between Rs 300 to Rs 1000 in terms of fixed cost apart from losing on the currency spread (between 0.5% and 2%). The cost of receiving the money back could be even more! While the cost might not seem much for large investors who can potentially also bargain with the bank on spreads, it is prohibitive for most retail investors wishing to send between say Rs 10,000 to Rs 2 lakh.
- Trust: Most of the Indian platforms today partner with US brokerages, and there is a trust deficit because both the platforms and the overseas broker aren’t under the jurisdiction of Indian regulators. If there’s an issue, it can be a challenge dealing with an international regulator.
Some startups have found ways to remit money at lower costs by partnering with an international bank and maybe even bearing some portion of the remittance cost as cost of acquisition. But this isn’t sustainable and eventually the fixed costs will most likely go up. Also, while the fixed costs are lower, that could potentially be made up by higher currency spreads by the bank.
NSE IFSC has found a way to address these problems. When transferring money to GIFT, the banks on either end of the remittance are Indian banks. While this is still an international transfer, the cost of remittance can be much lower here if the bank on the other side of the remittance is the same Indian bank. NSE IFSC and the product is regulated by IFSCA, a statutory authority established by the Government of India.
The announcement from NSE says that they are launching trading in 50 US stocks through unsponsored depository receipts. Currently, this product is in the regulatory sandbox (test), which means that NSE IFSC will only be able to onboard a fixed number of customers. More customers will be allowed only once IFSCA gives the final approval on the product. Trading is open from 8 PM IST until 2.30 AM IST. Since some of these US stocks are valued between hundreds to thousands of dollars per share, trading in fractionals or owning shares of these companies in multiples of $10 to $20 is also allowed.
What are Unsponsored Depository Receipts?
When a company listed on exchanges in one country wants to attract investors and trading in another country, it is done through Depository Receipts (DRs). If the company offers the DR, it is called sponsored DR and if the company isn’t involved, it is called unsponsored DR. Indian companies like Infy, ICICI Bank, Wipro, and others trade on US stock exchanges through sponsored DRs.
The DRs that will trade on NSE IFSC will be unsponsored, which means that this isn’t the companies themselves issuing the depository receipts. NSE IFSC would have partnered with an international custodian who will hold the shares in the US on behalf of NSE IFSC, and the custodian will then issue DRs to the NSE IFSC depository account in India. These DRs will then start trading on NSE IFSC. Since the exchange is new, NSE IFSC has also partnered with large market makers to ensure that they are providing two-way quotes on the exchange for trading with low impact costs. Market makers before being able to provide sell quotes would have to park the shares with the international custodian.
The above issue also solves for a large risk that comes with Indian startups partnering with International brokerage firms. Almost in all cases, brokers in the US hold client securities in what is called a margin account or in the street name of the broker. So unlike India where stocks once bought get credited to your demat, where there is little to no broker risk, stocks in the margin account do carry a risk in case the broker were to go under. The broker can take down the client securities as well in case of such a scenario. The securities sitting in the US broker margin account also help generate income, which is how most US brokers are now operating at zero brokerage rates. Read this for more on this. In the above depository receipt structure of NSE IFSC, since the securities sit with the custodian and not the brokerage firm, there is no broker risk.
Apart from whatever the brokerage firm facilitating the transaction on NSE IFSC will charge the customer, the exchange itself will charge 12 cents for every $100 or 0.12%. And yes, this is definitely high when you compare this to the 0.00345% charged within India for equity trades. But this structure involves high fixed regulatory costs, especially for filing W8 BEN form or declaring beneficial ownership to tax authorities in the US regularly. Also, since no leveraged trading will be allowed due to the RBI rules around LRS, the trading volumes on the exchange are bound to be much lesser than onshore exchanges, which I guess would also have been a consideration when deciding the transaction charge. I am guessing the transaction charges would go down with an increase in trading volumes.
Trading and Settlement
A T+3 day settlement, which means stocks or DRs once bought will get credited after 3 days (it is 2 days in India) to the demat account. Similarly, funds from stocks sold will get credited after 3 days. Unlike in India, no further transactions will be allowed until the settlement. This means, 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.
No intraday leveraged trading would be allowed, or trades will be allowed only to the extent of funds or stocks held in the account. No naked short trades will be allowed either.
While currently there are only 50 stock DRs offered by NSE IFSC, this list is bound to go up to a lot more over time.
Zerodha and NSE IFSC
We are in the process of getting our membership and hopefully should be live in a few months once we receive the necessary approvals from the Indian exchanges and SEBI. In any case, the regulatory sandbox restrictions apply today in terms of maximum users, and we should hopefully have our platform ready by the time this user restriction is removed from NSE IFSC and the product and process is tested out well.