What is NSE IFSC and how it helps in US stock investment

Investing in international stocks has emerged as a popular way for Indian investors to diversify their investment portfolio. Earlier you had only 2 options to invest in US equities – through a US-registered broker or through international mutual funds that invest in foreign companies. Now you have the third option – to invest in top US stocks on the NSE IFSC (International Financial Service Center) exchange. The NSE IFSC exchange operates out of GIFT City (Gujarat International Finance Tec City), Gandhinagar, and from March 3, 2022, Indian retail investors can trade in US stocks on the exchange.

In this blog, we will discuss what is the NSE IFSC exchange, how you can buy and sell US stocks on the new exchange, and some important things you should keep in mind before you start trading.

What is NSE IFSC Exchange?

NSE IFSC (International Financial Services Centre) is a wholly owned subsidiary of the National Stock Exchange (NSE). This subsidiary of NSE operates an international stock exchange in GIFT City, Gandhinagar, which was set up to help NRIs and foreign investors to trade in Indian equities with ease. Now retail investors in India can also buy US-listed stocks on the NSE IFSC exchange.

NSE IFSC Exchange in GIFT City is an international exchange and hence conducts all trades in foreign currency i.e. US Dollar. Since investments outside India in foreign currency can be made under LRS (Liberalized Remittance Scheme), your investment in US stocks listed in NSE IFSC will also be done under this scheme. As per LRS rules, you are allowed to invest a maximum of USD 2.5 lakh during a financial year. Hence, this would qualify as an upper limit when it comes to investing in US stocks listed in NSE IFSC

How to Buy US Stocks on NSE IFSC Exchange

At present you can buy 8 US shares on the NSE IFSC exchange. These are Alphabet (Google), Amazon, Meta Platforms (Facebook), Netflix, Apple, Walmart, Tesla and Microsoft. This number will be increased to 50 US stocks which will be offered on the exchange in a phased manner. The trading hours on the exchange will be as per NYSE (New York Stock Exchange). So NSE IFSC trading hours will be from 8 PM IST to 2:30 PM IST.

Therefore, to trade or buy these shares, you will need a fresh demat account. Your existing demat account will not be sufficient for trading domestic shares and you will have to open a special demat account. So, you have to do the following:

1. Open trading and demat account with IFSC-registered broker. If your current broker is already registered with NSE IFSC, contact them for any formalities you need to complete before you start trading in US stocks on an international exchange. You can get updated list of IFSC-registered brokers and their contact details Here,
2. Transfer funds from your Indian bank account to an IFSC-registered broker’s account. Since NSE IFSC trades are conducted in US Dollars and not Indian Rupees, currency conversion is mandatory for investing in NSE IFSC US stocks. Once your funds are transferred to the account of an IFSC-registered broker, you can start trading in US stocks listed on the exchange.

Things you should know before trading on NSE IFSC

1. You get Depository Receipts not Shares

You do not get to buy genuine US shares of the company through the NSE IFSC exchange. Instead, depository receipts are issued to you. Depository receipts (DRs) are financial instruments that represent equity stocks listed in a foreign currency. DRs allow investors to hold equity shares of foreign companies without the need to trade them directly on a foreign stock exchange.

NSE IFSC Depository Receipts are issued by GIFT City-based HDFC Bank IDFC Banking Unit (HDFC IBU), which buys and holds genuine US stock on behalf of investors of the NSE IFSC Exchange. HDFC IBU will buy the underlying stock of the American company from an international exchange like NASDAQ or NYSE and hold them on behalf of the investors.

2. You Can Buy US Stocks in Fractions

Unlike direct equity transactions on an international stock exchange, you can buy US shares in fractions using a DR. This increases affordability because the cost of real US stocks runs into the millions and thousands of dollars. Under the extant guidelines, the following are the number of DRs to be issued by HDFC IBU for the 8 US shares currently available on the exchange:

The price of each NSE IFSC Depository Receipt will change in real time based on the value of the equity stock that it represents in foreign currency.

The main advantage of this system is that the underlying US equity stock is held by HDFC IBU on behalf of the investors, therefore, there is no broker risk. This is not the case if you are investing directly in US equities through a US-registered broker. In the latter case, the shares are held by the broker on your behalf which puts your investment at additional risk.

Cost to Consider While Buying US Stocks on NSE IFSC

Before you start trading US stocks on this international exchange, you should keep a few things in mind:

1. NSE IFSC Transaction Charges: Currently the NSE IFSC exchanges charges 12 cents for every US$100 shares traded. So 0.12% of the transaction value is charged by the exchange as transaction fee. However, there is no additional Securities Transaction Tax (STT) or stamp duty for these transactions.
2. Brokerage and Demat Account Charges: Buying or selling US stocks on the NSE IFSC exchange also involves brokerage and demat charges which may vary from broker to broker.
3. Currency Conversion Fees: Since you have to complete your transaction using US Dollars, the bank will charge you a currency conversion fee. This fee may also vary from one bank to another.
4. Taxation of Profit: There is currently some confusion as to whether DRs in US stocks would be taxed in accordance with the same rules as gains from direct international equity investments. If the rules are the same, you have to stay invested for 2 years or more before redemption to qualify for long-term capital gains (LTCG). Currently, short-term capital gains (STCG) on US stocks held for less than 2 years prior to redemption are taxed at the investor’s slab rate. The LTCG rate for these US stocks is 20% with indexation.

ground level

The launch of the NSE IFSC exchange will make it easier for retail investors in India to invest in top US stocks and introduce geographic diversification to their existing investment portfolio. While the list of shares currently available for trading on the new exchange is short, the planned introduction of additional US stocks will certainly help a large number of Indian investors benefit from investing in top US companies.

But, investing directly in individual US stocks comes with unique risks and you will need to research each stock carefully before investing. If an investor lacks the time or knowledge to research each investment, it is better to invest in a mutual fund that invests in foreign equities to diversify the investment portfolio. Currently, many international funds in India offer investors an opportunity to invest not only in US stocks but also in other developed and developing countries/regions such as Japan, China, EU, etc.

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