Are you a fan of Warren Buffet, the legendary American icon of smart investing? Have you always dreamt of having your own pied a terre in Manhattan to avoid hotel bills on your increasingly frequent visits there? Perhaps you think steel entrepreneur Lakshmi Mittal’s acquisitions are going to pay off for investors in Arcelor Mittal.
You can now put your money where your heart is, courtesy the Reserve Bank of India (RBI). While it has received very little investor attention, on 20 December, the bank formally signed off on its proposal to let any resident of India spend up to $50,000 , or about Rs22 lakh, each year on buying shares, mutual funds or any other asset outside the country.
So, a family of four with money to spare could, in one swoop, invest $200,000, or nearly Rs1 crore each year. That means you can now own say all of two Class A shares of Buffet’s investment vehicle Berkshire Hathaway (they trade for a very pricey $109,200 each) or about 3,300 shares of Arcelor Mittal, which is trading at €46.89 per share on the Paris stock exchange.
And what about that pied-a- terre? Well, New York’s Halstead Property is listing a one-bedroom, one-bathroom condominium on Manhattan’s West 66th Street, for $199,000, allowing you to simply walk over to the Lincoln Center for your evening entertainment or saunter across to Central Park. There is just one small catch. That kind of money in New York’s still red-hot real estate market only gets you the rights to live in that apartment, which is in the 31st-storey Phillips Club, for just 45 days a year. Essentially it is a time-sharing deal, though it might just about be enough for your trips.
But guess what? There is actually a smart—and legal—way to double up and go for larger investments. Because the bank says you can do this every financial year, which ends on 31 March, a savvy investor could essentially invest $100,000 over a two-day period by starting off the last day of the year and send the remaining on 1 April. If you are talkin about a family of four,that’s $400,000, and you’re suddenly talking real money.
Before you start reaching out for your cheque book (see below for how to go about it) here are some sobering thoughts. Over the past three years, anyone who invested in an index fund that mimicked the Sensex, which represents a list of 30 key companies picked by the Bombay Stock Exchange, would have seen their money grow at 36% annually. In comparison, the same money would have grown under 10% in the US broader market or in the 20% range in a broad portfolio of European stocks. Even India’s real estate, whether you might think it is a bubble waiting to burst or not, has yielded spectacular returns for many investors compared to the scenario abroad.
Still, diversification might seem like a smart idea especially if you are starting to worry a little about whether local gains are sustainable. Here is an interesting thought. If you believe in the fundamentals of India’s growth story but simply worry about its share or real estate markets, then this might be a chance to have your cake and eat it too by putting money into retailer Wal-Mart Stores, phone giant Vodafone Group or Starbucks Coffee that are all trying to woo consumers here.
What next? Unfortunately, there is going to be little guidance for now. Strictured a couple of years ago by RBI for trying to sell such services without listing all the pros and cons, banks and other financial services companies in India are now being cautious.
“Subject to RBI approval, we plan to conduct seminars and workshops for educating investors,” says Vidur Varma, country investment director for the global consumer group of Citibank. Over at ICICI Bank, talks are under way with the Texas-based Penson Financial Group, a provider of technology platform for trading on global stock exchanges, and plans are being drawn up to offer equity and equity-linked products. “Traditionally, we have held a home-grown portfolio only. Diversifying in international markets will certainly be a risk mitigation tool for investors,” says Anup Bagchi, a senior general manager at the bank.
Meanwhile the liberalized norms are drawing a lot of interest especially from overseas sellers of such products and services. “Ever since the limit was doubled to $50,000, I’ve been getting calls from international fund houses every week,” says a banker with a foreign bank operating in India who didn’t want to be named because his institution hadn’t firmed up its own plans. In time, it is likely that overseas mutual funds, including exchange traded funds and gold funds, will be available to investors here under the scheme.
Others are also gearing up. Just last month, Reliance Money, the stock brokerage arm of Reliance Capital, said that it has tied up with UK-based CMC Markets to develop online equity, derivatives and foreign exchange products to investors. CMC Markets is a major player in offering an international trading platform across various international exchanges.
While each of these new offerings await formal clearance by RBI, that doesn’t mean there are no avenues, as of now. An individual investor doesn’t need any RBI approvals. There are some boutique firms and brokerage houses that have been offering international trading in shares and commodities. It hasn’t been an easy sell though, especially in real estate. Consider Jayant Pai of Parag Parikh Financial Services who was recently approached by an Australian real estate fund that wanted to target those who are interested in investing in commercial property Down Under. “The offer wasn’t lucrative as the rental yield (income from rents) was just 5-6%,” he notes.
Among the firms already offering such services are Mumbai-based Geojit Securities (which has a joint venture with Dubai-based Barjeel Group), New Delhi-based Indiawebtrade, which has a tie-up with Pinnacle Capital in US, and Kotak Commodity Services, which has a tie-up with Man Financial. Through these, investors here can trade in global equities.
One “relatively risk-free way is to take advantage of the difference in the price of the gold futures in local and international” markets, says Mohan Natarajan, director of Kotak Commodity Services. “Whenever there is a price arbitrage, one can expect to earn 8-10% return, without taking into account the currency fluctuations.” Kotak says that around 100 investors trade with them in such commodity based futures every week. Seasoned commodity traders are of the opinion that the amount allowed is still too small to interest serious individual traders.
There are also relatively safer options such as bank deposits. RBI allows individuals to open foreign currency accounts with a bank abroad or here. In fact, when the bank first opened this window in February 2004 with a limit of $25,000, many banks started offering fixed, three to six-month deposits in several foreign currencies.
Alarmed by advertisements for such deposits that didn’t disclose all the necessary caveats, RBI demanded all products be first approved and also carry a laundry list of caveats.
One interesting twist in the new rules is that RBI no longer restricts what companies you can invest in. The February 2004 rules insisted that shares of only those companies that had at least 10% stake in a publicly traded Indian company could be purchased. However, under the new rule, any company listed on a recognized stock exchange abroad is fair game.
Stock market experts point to a few risk factors that you need to keep in mind before investing overseas. While India may be okay with your shopping plans, make sure you keep in mind that some foreign countries have their own restrictions on who can buy shares and how they can go about it. Also remember that because you are investing in another currency, what happens with the rupee against that currency will impact—both good and bad—your own returns from the investment.
Finally there is the tax impact. Typically long-term capital gains are only free if you invest in local shares and mutual funds. The definition of what is long-term also various between Indian and overseas investments, and any short-term gains are likely to be added on to income in terms of calculating taxes. In short, before you take the plunge, make sure you talk to your banker or brokerage house but also run it by your accountant. You could, of course, always spend the $50,000 on a great family vacation abroad and be done with it.
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