We all know that there are companies in the world who are progressing way better than the Indian companies. However due to lack of trustworthy and proper mode of investment one cannot invest into them. The initial option for risk free investment into the Global companies was an FOF Fund. Such funds invest the money pooled into the securities and stocks of foreign countries. It provides the domestic population with an opportunity to invest into valuable stocks with a less risk model.
However, looking at the increasing number of DEMAT accounts and interest of shareholders into global markets, the government has been taking various measures. The major decision which just came in was the establishment of IFSC in GIFT City of Gujarat. The department will handle the foreign stock market exchanges. Previously people used to trade in the global markets but there was a lack of volatility as fewer buyers and sellers were available. Hence squaring off the position also tok time. This was performed through banks who had the depository receipts on the basis of collaboration with foreign exchanges. Now with the establishment of IFSC in GIFT the scenario is going to take a major hit for the individual investors.
IFSC And Foreign Stock Exchange
The move has been put into work mode. The Government wants to provide international exchange facilities to the resident individuals. Thus BSE and NSE have been given reins to progress with international trading. BSE INX and NSE INX will now directly deal with foreign companies and provide the stocks to the DEMAT accounts of the traders and investors. This would be done in the form of depository receipts. However the mode will cut down the hassle of lots of things. The government has provided a smooth way with less costs incurred on the brokerage side for the domestic people.
The move indicates that it will enable the exchange of global companies listed in various exchanges such as the USA, Japan, Canada, Australia, Europe etc. The entire index would cover more than 80% of the companies listed in exchanges across the globe. The initial phase would include only fewer countries who lead the stock exchange world. However moving further the progress would be continued.
Right now the procedure of proving the financial details about various international companies has begun. Soon the trading phase would be kept into action.
How Would This Process Work ?
The investors and traders would have nothing new to do in this procedure. The way trading was done previously they need to apply the same methods. The bids need to be placed towards the BSE and NSE INXs and they would execute the order. The orders would not come in the form of stock holdings into DEMAT accounts. The changes are in this part. The orders will be executed but in place of stocks, depository receipts would be displayed into the DEMAT account of people.
Similarly while selling the depository receipts would be sold and this is how the entire procedure would be carried out. The trading settlement period and other such details are yet not placed forward. All of this would be carried out under the LRS Framework. The amount of transactions allowed per person is capped at 250000$.
It is obvious that all the transactions pertaining to the trading would be taxed. The government has put further two schemes wherein Resident Individuals and Foreign investors would be taxed differently. The resident individuals would be applied with STCG and LTCG. The STCG rate is kept as before based on the tax structure. However the LTCG above 1 Lakh Rs is taxable at 10%. But if the period of holding is more than 3 years then the tax allowed would be 20% with indexation reliefs.
On the other hand the NRI would be paying 10% of tax for LTCG without any indexation reliefs. Also for the STCG gains they will be paying 30% of tax based on the income or else the tax rate given into the slabs.
Previous Mode of Investment and Importance of Investment into Global Stocks
Currently the most used move is to get an account open into the foreign exchanges. This way one can execute trades into that exchange. However the procedure is quite lengthy and a lot of steps need to be followed under the LRS system. Another mode is getting Depository receipts from Banks for the transactions carried out through the Both these ways attract higher brokerage charges.
The recent introduction into foreign investment is through FOF funds. These are mutual funds that would invest into foreign companies. It is a safe mode of investment but there is no control on the stock picking or any other mode. One just needs to keep investing through SIPs or one time investment. Hence the new move would expand the horizons for trading into the foreign companies across the globe.
The current markets indicate that there are high potential companies percent into the other exchanges. This can be a great strategy to get more liquidity flow into the markets through Indian Exchanges. This would not only improve liquidity and cause more income for the exchanges and government but also prove as a tool to perform investment into high potential and dividend paying companies.