How To Invest In Foreign Stocks From India In 2022 – Forbes Adviser INDIA

Foreign investment by Indian residents is regulated by the Indian Foreign Exchange Regulations. On August 22, 2022, the Government and the Reserve Bank of India released a new framework that provides greater clarity, covers broader economic activity and includes the revised reporting requirements.

Foreign investment by a person residing in India can be in the form of Overseas Direct Investment (ODI) or Overseas Portfolio Investment (OPI). Here is a detailed guide on the pros and cons of foreign investment, exchange control rules and tax filing requirements for Overseas Portfolio Investment (OPI) in the case of Indian residents or individuals.

Modes of Overseas Investments for Indian Residents under the Overseas Portfolio Investments

The foreign investment by an Indian resident must fall within the general ceiling of the Liberalized Remittance Scheme (LRS). Under LRS, an Indian resident can use up to $250,000 per fiscal year (April to March) cumulatively for permitted investments (OPI and ODI route) and other purposes such as private visits outside India, gifts or donations, maintenance of relatives abroad, medical treatment abroad, education abroad, etc.

The definition of Overseas Portfolio Investment or OPI is clearly set out in the new framework, which was not the case in the previous regulations. Indian residents can make foreign investments within the general LRS limit.

Investment in shares of listed foreign entities

Resident Indians may invest in shares of foreign companies listed on foreign stock exchanges with less than 10% interest and may not control the foreign entity being invested in.

For example, a resident of India who buys shares of Amazon, Apple, Microsoft, Tesla etc. by opening a demat account with a foreign entity generally falls under this category. The investments would fall below the general limit of LRS, as discussed above, and there is also no reporting obligation under the new framework (ie semi-annual submission of Form OPI not required).

Resident Indian can open a foreign trading account with an Indian broker who is affiliated with international brokers such as ICICI Direct, HDFC Securities, Kotak Securities and Axis Securities etc. or directly open an account with a foreign broker who has a presence in India such as Charles Schwab, Ameritrade , Interactive Brokers, etc.

Invest in international mutual funds

Indian residents who do not wish to invest directly in equities of foreign entities can also invest in international investment funds that have exposure to international markets, which in turn invest in foreign equities.

There are several international exchange-traded funds (ETFs) available that provide access to Nasdaq and other leading global indices. The investments would fall below the general limit of LRS and there is also no reporting obligation under the new framework (ie no semi-annual submission of Form OPI required).

Investment in listed debt instruments

Indian residents who want to invest in an international market with a steady stream of income can invest in listed foreign government bonds, listed corporate bonds of foreign entities, etc.

As with investments in foreign equities and listed debt instruments, the investments in listed debt instruments would fall within the LRS limit and there is also no reporting obligation under the new framework (ie semi-annual filing of Form OPI not required).

Acquisition of Foreign Securities by Inheritance

Residents of India can acquire shares of a foreign entity or other foreign securities through an inheritance from a person residing in India or from a person residing outside India. Acquisition of foreign securities through inheritance does not count towards the LRS limit.

The limit of LRS does not apply as there is no remittance outside India and no reporting obligation under the new framework (i.e. semi-annual submission of Form OPI not required).

Acquisition of foreign securities by gift

Indian residents can also freely acquire shares of a foreign entity or other foreign securities through a gift from another Indian resident who is a family member. In accordance with the provisions of the Foreign Contribution (Regulation) Act, 2010, a resident individual may acquire foreign securities through a gift from a person resident outside India.

The acquisition of foreign securities by gift is not counted towards the LRS limit as there are no remittances outside of India and no reporting is required under the new framework.

Entity Investments in IFSC (GIFT City in Gujarat)

Investment made by an Indian resident in entities located in the International Financial Services Center or IFSC”, i.e. the GIFT City is considered a foreign investment. An Indian resident is permitted to invest in equity of entities incorporated in IFSC within the general limit of LRS, and may also invest (including contributions from sponsors) in the units of any mutual fund or vehicle established in an IFS.

Indian residents are also allowed to invest in foreign stocks through the IFSC-based international stock exchange. Some of the entities that already exist in IFSC in GIFT city Gujarat, which provide a platform for overseas investment are India International Exchange (IFSC) Limited (India INX) and NSE International Exchange (NSE IFSC).

The investments in entities established in IFSC are below the general limit of LRS and there is no reporting obligation under the new framework (ie semi-annual filing of Form OPI not required).

Acquisition of sweat shares issued by foreign entities

Foreign entities often issue sweat stock to the employees or directors at a discount or for consideration other than cash, for providing their know-how or making available rights such as intellectual property rights or value additions, regardless of name.

Residents may acquire sweat shares of such foreign entities, whether listed or not, up to 10% of equity.

There is no limit to the amount transferred for the acquisition of sweat stock shares, although such transfers will be settled against the individual’s LRS limit.

For example, a resident can transfer $300,000 for payment of sweat stocks, but after that for that fiscal year, he cannot make any other transfers under the LRS since the limit would be exhausted.

Acquisition of shares or interests under an employee stock ownership plan (ESOP) or employee benefits

Foreign entities often issue equity securities under the ESOP/employee benefit plans to those Indian residents who are employed or a director of an office in India or a branch of an overseas entity or of an Indian entity in which the overseas entity directly or indirectly owns shares.

Resident individuals may acquire shares or interests under ESOP or Employee Benefits Scheme offered by such foreign entities, both listed and unlisted, up to 10% of the paid-up capital. There is no limit on the amount of transfers for the acquisition of shares; such transfers will be offset against the individual’s LRS Limit, as discussed above.

In this case, within 60 days of the end of the six-month period in which such OPI is made, the Employer Company must report the sweat shares in Form OPI.

Acquisition of Minimum Qualifying Shares of Foreign Entity

An Indian resident may also acquire minimum qualifying shares issued for holding a management position in a foreign entity up to 10% of the paid-up capital of such non-controlling foreign listed or non-listed entity.

The transfers for the acquisition of such Minimum Classification Shares would be covered by the general limit of LRS and there is no reporting requirement under the new framework (ie semi-annual filing of Form OPI not required).

Reporting requirements for an international investment

Under foreign exchange regulations:

The Indian resident who intends to transfer funds for investments in foreign entities must submit bank specific documents (regarding LRS, which is procedural compliance for money transfers outside India) at the time of transferring funds.

As discussed above, there is no other compliance under the new framework in the hands of Indian residents for making investments under OPI except in cases where OPI is through sweat share acquisition or employee share ownership plan (ESOP) where the employer is obliged to report this in Form OPI.

Under Income Tax Act (IT Act):

Under the IT law, every resident and common resident (RoR) is required to provide details of investments in foreign shares/assets in Schedule FA (i.e. Schedule of Foreign Assets) of their income tax return.

In the case of non-disclosure of foreign investment in the income tax return, the taxing authority may issue notice to the individual for such undisclosed assets and may also treat such income tax return as a deficient return u/s 139(9) of the ICT law.

Also, The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA) imposes a more severe fine of INR 10 lakh for failing to disclose a foreign asset in Schedule FA.

OPI – Tax Collected at Source (TCS) on remittances over INR 7 lakh under LRS

A resident of India who transfers money outside of India under LRS has to pay an additional amount in the form of TCS at a rate of 5% to the authorized dealer bank on any amount over INR 7 lakh. Suppose a person intends to pay INR 20 lakh in the financial year, in that case he has to pay INR 65,000 additionally [(INR 20 lakh INR 7 lakh) * 5%].

Further, in case the resident person does not own a PAN card or an Aadhar card, TCS will be collected at a higher rate of 10%.

Advantages and disadvantages of foreign investment

The main benefits of foreign investment are:

• Take advantage of the recent moderation in valuations of major stock market indices worldwide.
• Investment in global blue chip stocks such as Apple, Microsoft, Tesla, Amazon and others.
• Reduce country and currency risk by investing in different countries and different currencies, resulting in portfolio diversification. We have seen the weakening of several currencies through 2022, including the Indian rupee against the US dollar.

The main disadvantages of the foreign investment are:

• Need for more insight into the relevant market and the companies.
• Better compliance and reporting requirements in India.
• Higher tax burden on capital gains compared to Indian listed shares

It boils down

Over the past few years, portfolio investment outside India by Indian residents has multiplied and therefore the changes have far-reaching consequences.