Investing Beyond Boundaries
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Maximising returns is at the core of any investment decision and investors tend to chase everything possible in this pursuit. While there is no dearth of investment options on the domestic front in terms of various asset classes that are on offer, a geographical spread always adds that much need diversified zing to your portfolio. Different geographies offer different opportunities and this is very amply exemplified by the way Foreign Institutional Investors (FII) have been flocking to emerging markets and particularly India. In fact a bulk of the rise in the Indian markets has been fuelled by the billions of dollars that are being invested here by foreigners. And, why do you think they do so? Emerging markets and particularly India have been offering superior returns than what they would have otherwise earned by investing in their parent markets. The times are a-changing, and, while foreigners continue to look towards India and other emerging markets for superior investment returns, domestic investors too can look towards other geographies to enhance their returns by parking funds in more profitable markets. One simple way to do so is by investing in schemes of mutual funds specifically designed with a mandate to invest in global securities. But for those who would want to do it themselves, there is a way out provided by the Reserve Bank of India (RBI), which allows individuals resident in India to invest up to USD 200000 (Rs 90 lakh) in assets outside India. Here is a simple guide for those looking at diversifying the geographical spread of their portfolio along with some very necessary do’s and don’ts associated with it.
Why should one look at investing abroad?
As pointed out earlier, one of the most important benefits of investing abroad is to geographically diversify your portfolio. This helps in reducing the portfolio risk more effectively. Portfolio diversification is much more than just diversifying across asset classes like equity, bonds, real estate, mutual funds and insurance. If one looks at the current investing pattern of Indians, all investments are presently concentrated in India, which essentially means there is a lack of geographical diversification. Another advantage of investing in different geographies is that it allows you to diversify your currency risk.
The Regulatory Route to Investing Abroad
The route to investing in foreign assets, including financial assets like shares, bonds, mutual funds, etc, was opened up in the early part of this decade itself. Later in 2004 the RBI as a step towards further simplification and liberalisation of the foreign exchange facilities available to resident individuals came up with a Liberalised Remittance Scheme. Accordingly resident individuals are now allowed to remit up to USD 200000 per financial year for any permitted capital and current account transactions or a combination of both. In simple terms, one can remit up to USD 200000 for the purpose of entering into any transaction outside India for the purpose of acquiring immovable property or shares or bonds or, for that matter, any other asset outside India.
Resident individuals can open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions permitted by the RBI through this scheme. As mentioned earlier, this includes buying and selling of foreign securities (shares and bonds) or immovable property. However, ‘outside India’ will not include Bhutan, Nepal, Mauritius and Pakistan as remittances to these countries have been specifically prohibited by the RBI.
Though this facility as provided by the RBI does not include remittances allowed for private travel, business travel, studies, medical treatment, etc, it does include any remittances for gifts and donations. Also, according to the scheme of the RBI, there is no compulsion to repatriate the interest/dividend earned or accrued on these investments. The amounts so earned can be retained and re-invested abroad.[PAGE BREAK]
As an investor if I want to trade in securities in a foreign country, what do I need to do?
The first step is essentially go to a global bank in India like the HSBC or Deutsche Bank and open an overseas account within their own banking set-up. All transactions are then carried out through this account. So you would open an account in Singapore or somewhere else, wire the money out and then there would be an advisor sitting outside India who would be from the same company, but probably from a different division who may be advising the investor about investments. This is done purely on an execution only basis whereby the client says that he wants to open an account and the bank would send out all the required forms and get them filled up from the client. Most of these are done through the local branch of the global bank.
How much time does it take?
The entire end to end process of opening an account for the purpose of buying securities abroad should not take more than 15 days. Apart from the formalities involved in opening a bank account another important aspect is to have an account with an intermediary which is similar to your trading account on the domestic front. The procedure of opening this account is fairly the same as one would follow in opening a domestic trading account. You would need to have a domestic entity, most probably a broking house, which would act as an intermediary. For instance India Infoline (IIFL) acts as an introducing broker for Interactive Brokers LLC, who, in turn, provides a trading platform for transacting in overseas investment products to investors. Interactive Brokers is an automated global electronic broker specialising in routing orders and executing trades as a member of more than 80 electronic exchanges across the world.
Different geographies, different accounts?
The account which one opens for the purpose is typically a multi-currency account. It would be on you as a client to identify your base currency. According to Amit Shah, Executive Director at IIFL Private Wealth Management, “Most of the clients use the USD as the base currency as that is where most of the transactions are settled through. Once you have the USD as the base currency you can start trading in all the US exchanges seamlessly. If one wants to deal in any other exchange, let’s say the Singapore Stock Exchange, one would have to convert whatever amount you need to invest there into Singapore dollars, which may take a day’s time and once the conversion is done you can start dealing in the Singapore stock exchange.”
How are securities held in these accounts?
Securities are normally held in the custody of the entity with whom the account is opened outside India. The biggest worry for investors in India is the fact that since money is wired outside the country what happens if something goes wrong in terms of the securities that are bought from that money. Here is where a proper selection of entities for this purpose comes into focus. For instance, look at IIFL Private Wealth Management, which deals with Interactive Brokers. Interactive Brokers has Citibank as the custodian and banker. “Citibank is a US-based and regulated entity and it has all the legal protection that is available in the US from time to time. They have a value protection for the securities and they also have a value protection for the cash in the account. The client always gets a benefit out of this. If the client has wired USD 200000 and if the broker goes bankrupt, the client would be fully protected by insurance against any loss,” says Shah.
What about taxability?
As in case of any ordinary resident, tax is imposed on your global income too. While calculating capital gains unlike securities listed on recognised stock exchanges in India and units of mutual funds, which are classified as liable to short-term capital gains if held for a period of less than 12 months, those held in foreign companies will continue to be classified as long-term capital assets even if sold within 12 months of their acquisition. Resident Indian investors can claim an exemption if they bring their capital gains back into India and invest them, within six months, in Specified Bonds under Section 54-EC subject to the limit of Rs 50 lakh a year.[PAGE BREAK]
Under Section 10(34), dividends declared and paid by a company in India would not be taxable in the hands of the Individual as Dividend Distribution Tax has already been paid. An Indian who receives dividend from a foreign company on his overseas investment would, however, not be covered by the exemption provided in Section 10(34). Any dividend or interest income earned by a resident individual on an overseas investment will be taxable as ‘income from other sources’. The income from other sources is taxable at the applicable slab rates prescribed for individuals and ranges from 10.3 per cent to 30.9 per cent.
In case of countries with which India has entered into Double Taxation Avoidance Agreements (currently numbering around 101 for both comprehensive and limited agreements), relief is provided to the Indian resident either by way of exemption method in which case the particular income is taxed in one of the two countries or by way of Tax Credit method in which case, credit is available for the tax charged thereon in the country of source against the tax charged on such income in the country of residence. Even in cases where India has not entered into Double Taxation Avoidance Agreements with another country, credit is available to the resident provided he can prove that he has paid any tax in that country. In such cases, to the extent of tax so paid in such foreign country, or the tax leviable in India under the Income Tax Act on such income, whichever is less shall be allowed as deduction under Section 91 while calculating his tax liabilities in India on such income.
Conclusion
Though the benefits of geographical diversification are quite apparent, the products that are on offer have not really picked up in India. In fact, leading stock brokers are yet to offer this facility to their retail clients. If you look at the current scenario of the markets, a lot is being talked about a pickup in the US markets going forward. In fact, the bent of fund managers towards developed markets for superior returns throws light on the opportunity that is likely to emerge there. If you are really inclined to benefit from the expected upturn of the developed markets, you had better start with the formalities of opening an account to trade in overseas securities right away.