Buy FAANGs in India

Starting small is a good way to ease domestic investors into overseas trading

The launch of trading in US-based stocks for domestic investors at the National Stock Exchange’s International Exchange (NSE IFSC) today could improve access to hard-currency assets for the average Indian investor. While the funds deployed at the NSE IFSC, a wholly-owned subsidiary of the NSE that operates in the Gujarat International Finance Tec-City (GIFT) city, count towards the Liberalised Remittance Scheme (LRS), the process of deployment and trading may involve less red tape, and be more cost-effective than opening an account with an overseas broker. Investors at the NSE IFSC will have to open a demat account, specifically at the IFSC, and the receipts will be considered foreign assets.

The launch starts with eight household names — Meta (Facebook), Amazon, Apple, Netflix, and Google’s parent Alphabet (called FAANGs), apart from Tesla, Microsoft, and Walmart. These are all listed on US exchanges and it is a tech-heavy list (apart from Walmart). However, the list of 50 companies that will soon be available includes firms like Coca-Cola and Nike, which give broader coverage of the US economy. The trading hours coincide with those of the NYSE and Nasdaq.

Starting small is a good way to ease into overseas trading. But the success of the NSE IFSC will depend on scaling up quickly, with minimum red tape. That requires regulators, stakeholders, and tax authorities to be on the same page. For several years, savvy investors have been availing themselves of the LRS to invest abroad by opening accounts with global brokerages. The logic is, at the least, overseas investment provides a hedge against rupee weakness.

It is also a standard tenet of portfolio theory that investing across sectors, and across different nations, hedges sector-specific risks as well as nation-specific risks. To take a “live” example, investors in Russian giant Gazprom stand to lose owing to sanctions, but investors in other oil and gas producers spread across the world will gain because oil producers outside Russia will benefit from higher prices. By that logic, the listing of assets denominated in the euro, yen, pound, won, and Singapore dollar would be attractive, and give investors a chance to diversify risks. Units of index funds and ETFs would obviously be useful, and traders would also love derivative products based on underlying global indices and hard-currency debt.

The NSE IFSC offers depository receipts (DRs), where the underlying asset is the share of a specific company, similar to the ADR/GDR. But the tax treatment of this is not absolutely clear. Tax authorities need to clarify what will count as a long-term capital gain, versus short-term capital gain in trading such receipts. The Reserve Bank of India would also have to work out modalities to exempt investors who keep cash for indefinite periods in their NSE IFSC accounts to use as margin, from the regulations that limit the time period that cash can be held idle outside India.

The NSE IFSC should be a convenient platform if it is competitive in terms of costs versus the large global discount brokers. It should allow small-value trades and investors would be entitled to benefits like dividends payable and stock splits. Since DRs are a new instrument, the NSE IFSC would have to do its due diligence to ensure that these instruments are backed by shares, and explain how these instruments work, to average investors. Once retail investors are familiar with the concepts of global trading and once the NSE IFSC expands its coverage, it could really take off.