When the Tatas were fighting the Brazilian CSN for buying the UK steel giant Corus, in a remote corner of West Bengal, Sanjiv Biswas knew that no matter who eventually took over the company, buying shares of Corus would not be a wrong move. And, in a few easy steps, that's exactly what he did. He remitted money from his bank account in India to his broker in London and bought 850 shares of Corus at 663 pence a share at the London Stock Exchange (LSE). The next morning, he sold them all at 706 pence a share and netted an overnight profit of over six per cent. Not bad for less than a day's work, or, more specifically, for a few double-clicks on his computer.
With the Reserve Bank of India (RBI) easing the norms for Indians investing abroad, Biswas is a part of a growing tribe of people making money through offshore transactions. Resident Indians were first permitted to invest abroad in 2004, when a Budget announcement allowed remittances of up to $25,000 a calendar year. However, regulatory clearances came through only last year. Now, there is clarity on how you can go about buying shares of Coca-Cola or arbitraging in the pound sterling. In April this year, the RBI raised the amount individual Indians can remit abroad every financial year for any permitted current or capital account transaction to $1,00,000.
This has thrown open many asset categories to investment. You can buy equity directly at any foreign stock market, or buy mutual funds, insurance policies, commodities, foreign currency and even real estate. The advantage of making these investments, especially for high net worth individuals, is that they can cover geographical and currency risks. If you feel that an impending eventuality, such as an election, is making the Indian market volatile, then you can avoid the risk that comes with investing in it by putting your money in the Nasdaq or LSE or Hong Kong Stock Exchange. Similarly, you can invest in the Euro or the pound sterling or the dollar if the rupee is threatened by global or macroeconomic factors. However, you need to be very aware of these markets and track them carefully if you invest in them.
Mumbai-based Vishal Shah started trading on the London Metal Exchange (LME) as he was familiar with the market and it offered an easy way of diversifying his portfolio. Vishal and his wife Bhavi have been running a silver jewellery store in Mumbai for the last seven years. "I first tried hedging on silver through the platform provided by the Multi-commodity Exchange of India, but that was very difficult and I could not understand that," says Vishal. "Then, Reliance Money brought me access to the LME through a platform called CMC, a London-based company. It was really easy to understand and use and that's how I started hedging on silver in the international market. I can see the price movement on a second-by-second basis."
Shah uses his understanding and experience of the domestic silver market to invest in the metal internationally. He pays 1 per cent margin and hedges on the price.
How do you begin? Procedurally, it is rather easy for you to get started. All you need is a bank account with a branch that allows foreign remittances and an account with a provider like Reliance Money or Man Financial, or a large bank which provides options for global investments.
Indian service providers have tie-ups with international equity, commodity and currency brokers, who allow you to use their platform for trading. You remit the money to your account with them by filling up Form A2 and the money is wire transferred in a day or two. Once it's there, you can use it to invest in stocks, commodities, indices, derivatives or currency. Popular areas of investment currently are equity, indices, currency and commodity derivatives. When you want to sell and book your profits or losses, all it takes is double clicking on that option in the platform. You can then choose to have your money transferred back electronically to your bank account.
Who should invest in offshore products? The easy answer is: high net worth individuals and people who have an investible surplus after putting money in insurance, mutual funds, real estate and equity in India. They can then look at global products and derisk their investments from geographical and currency concerns. However, these products and markets should be understood in depth before funds are committed. Studies and news on global markets and products are not easily available and one should look at these investments only if one has the time and interest to analyse and understand them.
The other group of investors for whom offshore investments are ideal are those who have specific commodity or equity interests. Like Shah, who has taken a step forward from his silver jewellery business by investing in silver at the LME. Employees, especially highly-paid IT employees, can look at investing in their parent companies and add to their kitty of stock options.
You don't necessarily have to be rich to trade overseas though. You can start off by investing small sums of money and then make bigger buys. Biswas started off with a $500 investment.
Where you can come unstuck. Even though the number of Indians investing abroad has shot up in the recent past, several procedural grey areas remain. Taxation methods and systems vary from country to country and you should check whether you are liable to pay taxes in your country of investment.
The procedure for remitting money is not very smooth, says Sudip Bandyopadhyay, CEO, Reliance Money. "For one, banks have know your customer (KYC) norms and may not allow you to remit money as soon as you open an account," he says. "You should have an existing relationship with them. Also, procedures vary from branch to branch. A bank employee in a remote branch will not know how to go about helping you remit."
Real estate investments are especially vulnerable to scams. Says the head of a leading global real estate company, "A lot of investments made by Indians in the UK are on land in 'no development zones'. So, you may buy a piece of the English countryside and then realise too late that you do not have the necessary permissions to build your dream mansion on it. You can at best stroll in your meadow."
Adding to the confusion of remittances is the fact that the RBI has now disallowed transactions that are in the nature of remittances for margins or margin calls to overseas exchanges or overseas counter-parties. Since most service providers offer exciting margins on transactions, this could take the sheen off the investments a little.
If the stories of multi-million dollar lottery winners have been inspiring you, there is bad news. The RBI's scheme cannot be used for purchasing lotteries, sweepstakes or tickets proscribed by international magazines. You also cannot make remittances to Bhutan, Nepal, Mauritius or Pakistan under this scheme. As far as the issue of filing of tax statements in India is concerned, the statements from your broker and bank are sufficient.
All said, it is a big world out there and it is time we tapped it. While risks are inherent, Biswas says he is more comfortable with the way global markets are run. "These markets deal in trillions of dollars, and no one individual or group of funds can manipulate them. If I move with the trend, I will only benefit from investing abroad," he says. The world is now our oyster, and the pearl hunt has begun. Indeed!
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