The NSE international exchange has appointed a ‘market maker’ for the process of providing inventory.
By Ruchit Purohit
Indian investors can now invest in top US stocks by market cap very easily through the NSE International Exchange (NSE IFSC) and at significantly lower cost. Trading in American Depository Receipts of eight US stocks kicked off on Thursday at the exchange and over time 50 stocks will eventually be available for trade.
So far, domestic brokers had to tie up with international brokers and trades were executed through them and held in their accounts on behalf of their clients. With the launch of ADRs, Indians can hold shares in their own demat accounts. Investing in global stocks has gained traction amid the bull run in the last 12 months in equity markets.
The IFSC authority will control the entire process of trading, clearing and settlement, and holding of US stocks will be under the regulatory structure. Further, the offering will be in the form of unsponsored depository receipts and will be facilitated under the regulatory sandbox.
The process
The NSE international exchange has appointed a ‘market maker’ for the process of providing inventory and HDFC Bank has been appointed the custodian for the entire process. The market maker will buy shares from the international market and it will then be deposited in HDFC Bank. Further, shares will get converted to unsponsored depository receipts by the custodian. “HDFC Bank will convert the shares into depository receipts. For example, it will buy 10 shares of Apple and convert them into DR. Let’s say, if one Apple share is worth $3,300, it will create nearly 3000 depository receipts and the cost of one DR will come down to nearly $10,” said market sources. The market maker will also provide two-way price quotes for facilitating buying and selling of shares initially to ensure sufficient liquidity.
Currency impact
Currently, the forex conversion rate is higher, which also makes the impact cost comparatively higher. However, in the GIFT city, all deals will be carried out in dollar terms, and both dollar and share prices will be replicated real-time as it is in the international markets, said people in the know. Additionally, the custodian, HDFC Bank, will ensure one FX conversion rate and the one-time upfront cost will also be significantly reduced. Usually, the one-time upfront cost ranges somewhere between 500 and 1,000 in most cases, and GIFT city will bring it down to as low as Rs 50.
Retail investors can transact on the NSE IFSC platform under the Liberalised Remittance Scheme (LRS) limits, prescribed by the RBI. Under the LRS framework, it permits resident individuals to remit up to $2,50,000 per financial year for any permitted current or capital account transaction.
Fractionalisation of shares
Fractionalisation of shares will be permitted, and it will happen while converting shares into DR at the market maker and custodian level. The underlying asset will be a fraction of the actual security, and one can own even 1/10th of the entire security, which is currently not permitted in the Indian equity markets. “Through the fractionalization process, one can buy a 1/10th portion of an Apple share, and if the price of Apple is $3000, an investor will get one DR for $10 in the IFSC,” said market sources. Further, the DR will be credited in the account of the investor itself and the entire process of converting shares into DR will be in a regulated environment.
Hemang Jani, head — equity strategy, broking and distribution, Motilal Oswal Financial Services, said: “It is an additional investment opportunity to Indian investors with easy investment process and at low cost. Investors will get the option to trade in fractional quantity/ value when compared to the underlying shares traded in US markets.”
Participation by investors
The international exchange expects a large number of domestic brokerages to open their brokerage houses at the GIFT City. While 36 brokers have already opened, a lot more will open provide services to investors. “We have seen good response and interest so far from large domestic retail brokerages. More will come and offer these services to their clients in addition to their existing services,” sources told FE. However, mutual funds are unlikely to get engaged in the product initially amid a lack of excess liquidity at the beginning.
For trading, retail investors will be required to open new demat accounts with NSE IFSC-registered MPs and brokers as existing accounts will not be allowed for trading in the GIFT City as these are dollar- denominated assets. Later, on successful account opening, investors need to transfer funds from their local bank account to NSE IFSC registered broker’s bank account and once the fund reflects in the broker’s account, investors will be able to trade.
Corporate benefits
Similar to the Indian markets, all monetary corporate benefits will be given to investors in the international exchange too. Dividends and other monetary benefits will be credited to the investor’s account in dollar terms. However, benefits like voting rights will not be given because of complications involved.
Stocks & Settlement
The exchange has initially selected the top 50 US stocks based on market capitalisation, including Google, Apple, and Microsoft. Initially, on March 3, trading happened in only 8 stocks and the rest 42 stocks will be rolled out in next 2-3 days. “The interest from most of the millennials lies in top stocks and our idea is to roll out more technology or FMCG stocks. Once we have a sufficient number of investors, we can expand the list of stocks to 100 or 500 too,” said the person cited above.
The settlement of the stocks will be T+3 days initially because if the stock isn’t available in the inventory of the market maker, it will then be purchased from the market and then converted into DR. However, once the process becomes stabilised, the exchange will roll out T+2, but not lower than that as the US markets follow the same.
