- Posted by: admin
- Category: Beginners Guide
As an innumerable number of portfolio managers and financial analysts suggest, diversification is the most and probably the only crucial factor of successful investment returns for an investor. Diversification can be achieved by spreading out the funds for investment across asset classes, thematically, geographically, across various economies, benefiting from the varying texture of the political and social environment, etc.
Diversification not only helps in minimizing the risk profile of an investor but also improves the consistency of the returns throughout the investment horizon.
For this very reason, a lot many Indian investors are now looking for a way to improve the quality of their portfolios by improving their risk-return trade-off. One of the most efficient ways for that is to diversify across economies, that is, by investing in the various international markets, thereby hedging ourselves against political and social risks pertaining to the domestic economy.
Now, many investors in India aren’t even aware if any such thing as “investment in the international markets” exists or not. Well, let us here, at FinnovationZ help you out of the darkness and make you step into the light.
YES. An Indian individual investor can definitely invest internationally in foreign companies listen under foreign markets. Indian Investors interested in investing in shares and assets located outside India can make use of the Liberalised Remittance Scheme (LRS) which allows Indians to invest in shares listed outside India. The Liberalised Remittance Scheme was introduced by RBI in the year 2004 and several amendments have been made to this scheme since 2004.
But the main question here is, HOW? An answer to that question is exactly what this ‘How To’ guide from Finnovationz aims to deliver. This 5-step guide here sets to provide you the help you need at every stage throughout the whole process until you have everything you need to make any trade you wish in the foreign markets. Apart from answering the most frequently asked queries related to ‘international investment’ and examples, this guide also provides a detail of documents an investor would require to submit at every stage in the process.
Step 1: Select an Indian Broker
Q.1: On what basis exactly should I choose my broker?
First things first, an investor looking forward to investing in the stocks of a foreign market, would be required to open up a domestic (for Indian markets) trading account with an Indian brokerage house who has tie-ups with a brokerage house operating in the foreign market under consideration. These Indian brokerage houses would act as an intermediary between the investor and the foreign brokerage house.
Q.2: Who are these brokers?
Many Indian brokerage houses like ICICI Direct, Reliance Money, India Infoline, Kotak Securities, Religare etc. have tied up with foreign brokerage houses in various countries to facilitate investments and trading in international markets
Mrs. Jain is a citizen of India and she wants to invest in the shares of Google, a company that trades on a US Stock Exchange. Mrs. Jain selects an Indian brokerage house (say ‘ABC’) which has tie-ups with a brokerage house in the USA (say ‘XYZ’)
Step 2: Open up an Overseas Trading Account
Q.1: What is an Overseas Trading Account and what does it do?
Also known as International Trading Account, this account functions exactly like a domestic trading account, except that this account enables the investor to trade in the international markets. An overseas trading account would enable an investor to invest in whichever foreign market he or she so desires.
Q.2: How do I get an Overseas Trading Account?
Any broker you choose based on the criterion mentioned in the first step, upon your request, would open up an Overseas Trading Account for you. The investor would be asked to provide a certain set of documents and complete the KYC formalities as applicable in the market he/she chooses to invest.
Q.3: What documents do I need to open up an overseas trading account?
*All the required documents have been discussed later in the guide.*
Point to remember:
While opening an overseas trading account, the investor would be required to mention the countries in which he/she would like to invest and then their application would be sent to the brokerage house of those countries for registration.
Mrs. Jain, after selecting ABC as her Indian brokerage house, now asks them to open up an Overseas Trading Account for her since she wants to invest in Google that trades on a US stock exchange. Mrs. Jain would need to specifically mention the country she wants to invest in, in her application, which in her case is America. She can also mention more than one country if she thinks she might want to invest in countries other than America in the future.
Step 3: Open up an Offshore Bank Account
Q.1: Why do I need a bank account in a foreign country
In order to buy shares from a foreign market, an investor would need a bank account in that particular country where that foreign market operates. He/she cannot use a domestic bank account to fund the trades in the international markets.
Q.2: How do I get an offshore bank account
It is relatively simple to open an offshore account The basics of opening an offshore bank account are similar to opening a bank account in your home country. Often all it takes is filling out the paperwork, supplying some basic identifying documents and providing additional information to show that you are not planning to use the account for illegal activity.
When picking a bank, look for relationships your domestic bank may already have with foreign banks. One option is a correspondent bank, a financial institution that provides services on behalf of another — equal or unequal — financial institution. If the country doesn’t have a relationship with your bank, then after researching different banks, look at fee schedules, requirements for transfers, amount of time for a deposit to be credited to your account, etc.
Q.3: What documents do I need to open up an offshore bank account?
*All the required documents have been discussed later in the guide.*
Mrs. Jain now has the needed Overseas Trading Account which allows her to take up any trade she wants in the US market. BUT, there is still one little complication left. Mrs. Jain can’t use her bank in India to directly fund her trades. She needs a bank account in America which would allow her fund the investment she wants to make in Google. So now she selects a well-known bank, as per her preferences, in America and opens up a bank account there. Now Mrs. Jain has all the required setup she needs to invest in the US stock market, an Indian Brokerage House, an Overseas Trading Account and an Offshore Bank Account.
Step 4: Transfer Funds
Q.1: Where do I transfer funds?
As mentioned in the answer to Question 1 in Step 3, you cannot use a domestic bank account to fund the trades in the international markets. So what are you required to do? You are required to transfer the funds from your domestic bank account to your offshore bank account, and then from there to your Overseas Trading Account.
Q.2: How do I transfer funds?
Transferring funds from a domestic bank to an offshore bank isn’t the same as transferring funds domestically. To remit funds to the offshore bank account, you will be required to visit your domestic bank branch, duly fill Form A2 and submit it there along with your PAN card copy. A number of funds would automatically get transferred from your domestic bank account to your offshore bank account and then, to your overseas trading account.
It takes around 24 to 48 hours to remit money from your bank account to your trading account with the foreign broker.
Q.3: Can I get my funds back to my domestic account after the transfer?
Yes, you definitely can. You can transfer your money electronically back to your domestic bank account. It takes around 48 to 72 hours to remit money from your overseas trading account to your domestic bank account.
Points to remember:
- The foreign brokers accept funds originating from your bank account only and will reject any third party fund transfer. Also, they do not accept bankers’ drafts, cheques or cash deposits either.
- You may remit funds in one of the many global currencies from your bank account to your trading account but you need to decide the base currency in which you want to settle your transactions. So, if you set USD as the base currency in your account, then all stock exchanges which accept payments in USD will settle your transactions in USD automatically.
- For your trades on other exchanges, which do not accept payments in USD, the foreign broker will convert your base currency, USD in this case, to the currency of that exchange at the market rate to execute the transaction.
Now that Mrs. Jain has everything to transact in the US stock markets, all she now needs is funds to fund those transactions. Mrs. Jain has money in her Indian Bank Account but neither in her American Bank Account nor in her trading account in the US. So now she transfers funds from her Indian bank account to her trading account in the US (via her American bank account) by filling up Form A2 and submitting it with her Indian bank account.
Step 5: Select shares & Invest!
Q.1: How do I access my trading platform?
Once your account is opened and funds are transferred, you will be provided a client Login ID and password to have an immediate access to the foreign broker’s trading platform to buy and sell shares of the listed foreign companies. All dealings like trading, delivery of shares/funds etc. will be done directly with the foreign broker without any involvement of your domestic stockbroker.
Points to remember:
- The maximum limit on investing abroad was earlier $200,000 per annum. However, with the Indian rupee weakening against most of the currencies, this limit has been reduced from $200,000 p.a. to $75,000 p.a. (Refer: RBI Circular No. 24 dated 14th Aug).
- This limit of $75,000 per annum can be used to remit funds outside India for the purchase of an asset without any prior approval of RBI.
Here in the last step, Mrs. Jain is all set and ready to buy and sell shares of Google (or whichever American company that is listed on US stock markets). After she transfers her funds from Indian bank account to her trading account in the US, she gets her login credentials to access the platform where she can make any trade in the US that she wants.
An investor would need a certain set of documents for different purposes as detailed below:
- To open up a trading account with an Indian Brokerage House.
Required documents: Identity Proof (PAN Card), Address Proof, Income Proof, Bank proof and Passport size photographs.
- To open up an overseas trading account.
Required Documents: Identity Proof (Passport or PAN Card), Address Proof, Bank Proof and Passport size photographs
- To open up an offshore bank account
Required Documents: *Varies from bank to bank*
- To transfer funds to the overseas trading account
Required Documents: Form A2 and PAN Card
Note: The Indian stock broker will also help the investor in getting their account opened and completing the formalities of Know Your Customer (KYC) applicable for the countries the investor wishes to invest in.