Investing in US stocks via GIFT City

Investing in the US stock market lets investors tap into global companies (Google, NVIDIA, Apple, etc.) and diversify portfolios beyond domestic investments. Indian investors particularly benefit from the returns of their US holdings and the appreciation of the US dollar against the rupee (~13% in the last five years).  

For Indians there have been two ways of investing in US stocks. The first way is through Indian brokers partnering with US brokers to offer access to US stocks. The second way is through India based mutual funds investing in US stocks. 

However, most Indian mutual fund houses have stopped accepting new investments. This is due to the Reserve Bank of India’s (RBI) prescribed limits on foreign investment, which cap individual fund houses at $1 billion and the mutual fund industry at $7 billion.

A third option is now emerging via exchanges in GIFT City.

Investing in US stocks via GIFT City 

GIFT City, located in Gujarat, is India’s offshore financial hub established along the lines of international offshore destinations like Dubai, Singapore, etc. The Foreign Exchange Management Act (FEMA) treats GIFT City as an international territory for financial transactions. All the financial activities in GIFT City related to banking, capital markets, insurance, and pension are regulated by a single unified regulator called the International Financial Service Centre (IFSCA).

There are two ways to invest in US stocks via GIFT City – India INX’s Global Access and NSE-IX US stocks UDRs.

India INX is the Bombay Stock Exchange (BSE) subsidiary in GIFT City. The Global Access platform allows one to trade in 80+ international stock exchanges including the US stock exchange. Trading in US stocks via India INX’s Global Access is the same as the partnership route where Indian brokers or exchanges have partnered with US based brokers to open accounts for Indians to trade in US stocks. 

In contrast to India INX Global Access, NSE-IX has launched US stocks which are traded on the NSE-IX exchange itself in the form of UDRs. Currently, there are 50 US stocks available on NSE-IX under this model.

In this article, we will be focusing on this new way to access US stocks via NSE IX in GIFT City through their Unsponsored Depository Receipts (UDRs). The unique structure of UDRs lets Indian and NRI investors access US stocks in a fractionalised form without the need of a US broker. We will cover the details of the investment process in these UDRs, including the costs, liquidity, and safety aspects.

NSE-IX US stocks UDRs

Unsponsored Depository Receipts (UDRs) are share look-alikes (“receipts”) of a US company issued on a foreign exchange without the involvement of the company in any form (“unsponsored”). Further, they have been made available in demat form (“depository”) much like Indian company shares. For example, if Apple UDRs are being issued, Apple is not involved in the issue of these depository receipts. A custodian having a broking account in the US holds the actual Apple shares on the investor’s behalf while the investor holds and trades in the UDRs on NSE-IX. 

GIFT City UDRs are held through a dual-custodian structure. In India, HDFC Bank’s GIFT City branch is the primary custodian. It holds legal title to the underlying U.S. shares on behalf of Indian/NRI investors. On the U.S. side, Deutsche Bank AG, New York, serves as the sub-custodian, safekeeping the actual shares based on instructions from HDFC Bank. Deutsche Bank maintains these shares on Depository Trust and Clearing Corporation (DTCC) of the US on behalf of UDR holders. 

The UDRs are fractionalised for ease of trading. For example, 1 Apple UDR on NSE-IX corresponds to 1/25th of 1 Apple share in the US. If the price of 1 Apple share in the US is $100, then the price of 1 Apple UDR on NSE-IX will be close to $4, thus making it easier for small investors to buy the stock. For UDRs purchased by the investor, the custodian (HDFC Bank) instructs the US custodian (Deutsche Bank) to purchase and maintain corresponding Apple stock and hold it in an account with the DTCC. HDFC Bank will create corresponding depository receipts and credit it to the investor’s GIFT City demat account after the purchase.  

The NSE-IX’s platform for trading in UDRs is open from 7:00 pm till 1:30 am the next day. The opening and closing times of NSE-IX overlap with the normal trading hours of the NASDAQ.

Eligibility for Investment in UDRs 

Both resident Indians and NRIs (and even foreign nationals), except those living in the US and Canada, are eligible to invest in these UDRs. Resident Indians can invest within the LRS limit of $250,000 per year. NRIs can invest in UDRs without any limits. 

Minimum Investment Amount for UDRs

The minimum investment amount depends on the stock the investor is purchasing. For example, if an investor wants to purchase 1 UDR of Apple, the UDR ratio for Apple is 25, and Apple’s stock is trading in the US markets at $125, then the investor has to pay $5 to get 1 UDR of Apple.  

Process of Investing in UDRs

You cannot use your broker account opened outside the Gift city. One can start investing after opening a demat account with an NSE-IX registered broker. The account opening and the KYC process is similar for both resident Indians and NRIs except that the video KYC option is not available for NRIs. Both resident Indians and NRIs need to fill the FATCA-W-8 BEN form which verifies the individual is not a US resident for tax purposes. This form lets the foreign investors claim tax treaty benefits and reduces their US tax liability. 

Resident Indians

For resident Indians, the demat account opening process is online. The documents required for account opening are: 

• Aadhar Card or any other official valid document like a passport or a driving license 
• PAN Card 
• Bank statement/salary slips/IT returns for income proof 

The broker opening the demat account conducts a video in-person verification. After this, the details are filled online and signed digitally using Aadhar e-signature. Post verification, the demat account is opened.

Money transfers to the broker to purchase these UDRs come under the Liberalised Remittance Scheme (LRS) for resident Indians. They have to pay tax collected at source (TCS) at 20% for amounts remitted over Rs . 10 lakhs to purchase UDRs.  

NRIs 

The demat account opening process for NRIs is not completely online. The essential documents required are: 

• PAN Card
• Passport
• Foreign identity proof, like an Emirates ID in the UAE or a Social Security Number in the US
• Proof of foreign address, such as which can be bank statement/utility bill/lease agreement
• Passport-size photograph

The documents are either verified and collected in-person physically by the IFSCA registered broker or they can be notarised by IFSCA recognised authorities in the country of residence of NRI like embassy, banks, consulate etc and sent to the broker. There is no option for video verification currently. 

NRIs don’t need an Indian or even a GIFT City bank account to invest in these UDRs. They can transact using their foreign bank accounts themselves.

NRIs also do not have to pay any TCS for remitting money from their foreign bank account/ NRE account to purchase UDRs. 

Cancelling the UDRs 

NSE-IX also offers the option of cancelling your UDRs and transferring the underlying shares to your US broking account. The cancellation request requires your US broker’s details to process this request. The UDRs held together must represent a whole number of underlying shares. For example, if you hold 112 UDRs of Apple and the UDR ratio is 1:25, then you will be able to redeem only 100 UDRs for 4 Apple shares. The remaining 12 UDRs will not be cancelled. 

The cancellation request has to be made to the UDR custodian, i.e., HDFC Bank’s GIFT City branch or to the registrar, i.e., Central Depository Services Limited’s  (CDSL) IFSC unit. You need to fill in the cancellation form, attach the necessary documents, and pay the cancellation fees. The cancellation fee is 5 cents per receipt. 

Taxation on Investments in US stocks Vs. GIFT City UDRs 

The US government does not tax non-US residents on capital gains from selling US stocks. GIFT City does not have any tax on capital gains arising from selling UDRs. Investors will have to pay taxes as per the tax laws in their country of residence. 

Resident Indians will have to pay long-term capital gains tax (LTCG) at 12.5% when they sell their UDRs after 2 years. If sold earlier, short-term capital gains tax (STCG) is levied according to the investor’s taxation slab.

The US government levies a withholding tax of 25% on dividends earned from holding the UDRs. HDFC IFSC levies an additional 10% service charge after deducting withholding tax. For example, if you receive $10 as the dividend for the UDR, $2.5 will be deducted as withholding tax. A 10% service charge will be levied on $7.5, so you will receive $6.75 as a dividend at the end.

The Indian government taxes the earnings from the dividends based on the taxation slab of the individual. The Double Taxation Avoidance Agreement (DTAA) between India and the US can be used to offset US government’s taxation against Indian tax liability. 

Investing directly in US stocks vs. GIFT City UDRs: A Comparison

Advantages of investing in UDRs

GIFT City is regulated by IFSCA under the Indian government’s laws. GIFT City UDRs are held in individual demat accounts while direct investments made via a US broker are held in the broker’s pool account. The latter subjects the investor’s holdings to the risk of the broker going out of business. While there is a SIPC insurance of $500,000 per investor available in case the US broker goes under, the process of recovery could take months and in some cases years. This could make UDRs a better option than direct investment because here the UDRs are held in the investor’s demat account with a depository, which is a separate entity insulated from the broker’s business activities. 

The UDR route might also be cheaper with some brokers currently offering zero brokerage. 

The UDRs also offer a viable option for NRIs who don’t have access to US markets directly like those living in countries like Kuwait, Malaysia etc. NRIs looking for a single platform for their India and US investments might also find GIFT City UDRs useful.

Limitations of UDRs 

GIFT City UDRs have limitations as they are relatively new instruments. Presently, only the top 50 US stocks are available through GIFT City UDRs. Low liquidity in some of the UDRs can result in poor execution of trades and wider bid-ask spreads. 

Conclusion

Trading in UDRs has grown since their launch in March 2022. The trading volume has increased 9x in the last 2 years, rising from 110,451 contracts in FY 2022–23 to 996,623 contracts in FY 2024–25. Similarly, the trading value has grown 7x, increasing from $0.73 million in FY 2022–23 to $5.27 million in FY 2024–25. The increase in volume and value shows the increasing popularity of UDRs among investors and is definitely something to watch out for.

Disclaimer: This blog is for informational purposes only and should not be considered financial or tax advice. Please consult with a qualified professional for personalized guidance.