Sandeep Singh
Posted online: Monday , October 15, 2007
Earlier this year, when Tata Steel was looking to acquire Corus, many Indian investors were more than just bystanders to a defining moment in Indian business. Several among them were buying and selling shares of not just Tata Steel, but also shares of Corus listed on the London Stock Exchange and the New York Stock Exchange (NYSE), something they couldn’t have done barely a couple of months back.
That new-found range in choice came from the progressive easing of rules relating to overseas investment. First, the Reserve Bank of India increased the limit Indians could remit abroad, from $25,000 to $50,000 to $1,00,000 and, last month, to $2,00,000. Then, it eased norms for where all Indians could invest. Financial services providers have been working on putting the cross-border transaction linkages, and it is gradually coming together, more in some asset classes than in others.
StocksLast week, ICICIdirect, started giving its subscribers the option to transact on the three leading US stock exchanges, namely NYSE, Nasdaq and the American Stock Exchange. Reliance Money has had this option since January, not just on US exchanges, but also on several other stock exchanges through its partner, CMC Capital Markets.
To start, ICICIdirect subscribers, for instance, have to fill up a registration form and a tax exemption form (so that your capital gains are taxed only in India and not is the US too), and pay a one-time fee of Rs 999. Within three days, ICICIdirect will open an account for you with its foreign partner, Penson Financial Services, on the ICICIdirect platform itself.
In order to buy shares, you need to first transfer dollars into your overseas account with Penson. This transfer, which can be done through ICICI or any other bank, normally takes one to three days, with the bank levying a nominal charge for converting your rupees into dollars and remitting it. For every transaction, ICICIdirect will charge a brokerage of 0.75 per cent of the transaction value or $9, whichever is higher. Reliance Money, as in the domestic market, is dirt-cheap. Says Sudip Bandyopadhyay, director and chief executive officer, Reliance Money “Through CMC Capital Markets, we are charging just 0.05 per cent of transaction value.”
Besides a transaction platform, Indian brokerages also give investors financial information on companies. This is, however, purely of information nature, not advisory. Says Anil Kaul, head-retail, ICICIdirect: “In developed markets, there are rules on who can give advice and who can’t.”
The RBI’s rules let you invest in financial securities provided you take delivery in them. So, for instance, in shares, ICICIdirect lets you buy and sell stocks, American Depository Shares (ADS), index options for hedging, and exchange-traded funds (ETFs). Your universe of stocks has suddenly expanded manifold. Indicatively, there are 3,612 listed securities on the NYSE, several of them from companies whose products and services you might have used and admired.
The US dominates with 3,128 companies. Other geographies are also represented, with companies from other geographies having ADS listings. From India, there are 11 companies who have ADS listed on the NYSE, including one that is not listed in India, namely BPO major WNS Holdings. Says Kaul: “This product will grow as people will look to diversify their equity exposure. But it will also require educating investors.”
Besides product knowledge, two such issues are taxation and currency movement. Overseas share and mutual fund transactions are taxed at a higher rate than those done in India. Long-term capital gains tax is 20 per cent with indexation benefits, short-term capital gains tax at the marginal rate. The other variable is currency. If the rupee appreciates against the dollar, you get fewer rupees when you bring back your dollar.
Mutual FundsIn mutual funds, educating investors is the second step. At the moment, mutual funds and distributors are busy educating themselves on how they can sell the idea of foreign mutual funds to Indian investors. On a parallel track, mutual funds registered in India with Sebi have been launching overseas funds, but these are investments made in rupees, and are hence outside the $200,000 limit. Also, the range in this is rather limited and the themes very broad, centred primarily around geographies.
What will form part of the $2,00,000 limit are funds floated abroad. In the US alone, there are about 8,000 schemes, which can either be inviting or intimidating. Says Amar Pandit, financial planner, “If you are not savvy, choosing a scheme can be a tough task.”Even if you are able to choose a scheme, investing in it is an arduous process. Overseas mutual funds — for instance, Vanguard — can’t come to India and offer their overseas schemes because they need to be registered with Sebi. A chief executive officer of a fund house told us that a proposal to this effect has been lying with Sebi for two-and-a-half years.
Mutual funds in India and distributors can go ahead, but they are still working things out. So, for instance, Fidelity Mutual Fund in India can offer schemes of its US parent. Or, a distributor like Bajaj Capital can tie up with a foreign distributor. Says Rajiv Deep Bajaj, managing director, Bajaj Capital: “We are still studying the modalities.” Adds Kaul: “Regulations allow it. We need to see if there is enough demand.” For now, the only way you can invest in foreign funds is if you do the spadework yourself. That means contacting a fund house abroad, opening an account with it and remitting money to it to buy units.
Real estateReal estate too is a work-in-progress. Several European and Southeast Asian countries allow non-residents to buy property, which doesn’t come cheap. Even if you have the purchasing power, your choices are limited. There are some real estate advisory firms who facilitate land purchase abroad, but for earmarked parcels only.
One such firm is UK Land Investment, which is facilitating the purchase of ex-agricultural land in New Addington, Bromley, Kent. Says Subash Bhat, director (legal and commercial), UK Land Investment India: “You have to comply with KYC norms. If your purchase price exceeds the per year remittance limit of $2,00,000, you can even make deferred payments.”
On your part, there are many rules to conform to. The payment is remitted from your bank account in India to a bank account in UK. At the time of transfer, the bank will ask you to fill up FEMA Form A2, provide your PAN card, and give a certificate from a CA verifying the source of your funds. You might even have to make a personal visit to get the land registered and complete the paperwork.
What’s needed is one-stop shops, who have a range of properties to offer and the wherewithal to carry out the transaction for you. Sandalwood Residential Property Consultants, a division of Jones Lang Lasalle Meghraj, is eyeing a mid-2008 start. Says Raminder Grover, chief executive officer, Sandalwood: “We have been getting inquiries for Malaysia, Dubai and the UK. We will provide residential property consultancy across the globe. We will help identify properties and facilitate processes, including legalities.”
CommoditiesOne of the conditions laid down by the RBI for overseas investing is that trades have to lead to delivery, which makes commodity investing unfeasible. In time, as markets open up further and more players enter the fray, even these norms will be relaxed and access will increase. The day is not far when you won’t just be able to buy and sell Corus shares, but also take a position on steel prices.
STOCK MARKETWhat now?On August 21, when the sub-prime tremors intensified, the BSE Sensex fell to 13,989, and experts forecast a period of lull. Fifty days on, 18,000 has been scaled, and new all-time highs touched. On its Friday closing of 18,419, the Sensex is up 32 per cent since its August low, as an abundance of liquidity has followed favourable currency movement and strong fundamentals into India.The burning question: is irrational exuberance setting in or is this the India story at work? Even at 18,500, the Sensex PE, based on projected 2007-08 earnings, works out to about 22. That’s not ridiculous, but fair value.The movement is more in the frontline companies. In the BSE-500, of the 85 companies that have a market cap of above Rs 10,000 crore, 53 touched their highs since October 1. By contrast, of the 92 companies with a market cap of less than Rs 1,000 crore, only seven hit their highs during this period. Metals, real estate, oil and gas, and capital goods gained big, pharma and IT crawled. While the growth can’t be denied, what might be of concern is the speed of this rise. But if you are in it for long haul, fits and starts shouldn’t bother you.
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