It is as if the spillover effect is reigning in, in the markets. This week, the markets saw a plunge of 8.7%, which in absolute terms is a staggering 500 points dip of Nifty Futures in the last five days. Thanks to the combined effect of two major factors. First, the blessing of the Sebi, in the form of proposed banning of further issuing of participatory notes to non-registered FIIs. Second, the participatory notes-driven shares, which demonstrated unwarranted linear trend, accentuated the need of a much-needed correction of most indices. To exacerbate things, the open interest is increasing with the fall in prices. And going by the book, this is the strictest indication of further weakening of the markets.
In the current nosedive, investors who burnt their fingers most are the high networth individuals (HNIs). And considering such negative trend, the need for diversification gets the priority. Believes Rajan Krishnan, business head, Principal Asset Management, ?There are large upper-end investors, with large chunk of investments in India, and hence diversification makes sense, considering such market situations. Also, these investors are savvy, who understand the dynamics of overseas investment.?
He elaborates, ?A single country exposure results in a possibility of losing 100%. Because once you invest 100% in a country, your investment gets susceptible to the political and economic factors, along with the regulations of the country. Instead, get exposed to overseas markets, which can provide you reasonable returns.?
This makes sense considering the way overseas markets have been fairing. Moreover, an analysis of the returns of the benchmark index in comparison with most overseas markets from January 1, 2006 till October 18, 2007 gives a clear picture of how the global indices have been relatively consistent and more rewarding than the Sensex (See the chart).
Also, the fact that policy-makers have allowed Indians to remit around $2 lakh per year overseas makes the scene even better. In a family of five, $2 lakh per person takes the amount to a million dollars. And with such money, a very strong portfolio can be built across assets. Hence, why not spread your money. Experts reckon that the time to take global exposure is just about ripe. And, its not just through real estate, the one million dollar opportunity will allow you to look at more lucrative avenues like real estate and art as well.
The fund way
Accentuates Vijay Mantri, CEO, Deutsche Asset Management Company, ?Though the markets here in India are beating estimations, one needs to understand and acknowledge the lucrative element involved in diversification, which should be the core objective of investing overseas.? In fact, considering the perceived imminent correction in the markets, though a chestnut, but following: ?placing eggs in many baskets?, minimises your risks and increases the probability of generating higher returns.
An exposure to overseas markets through a mutual fund will rule out the possibility of being trapped in gut instincts and hearsay, instead money placed in seasoned hands reaps richer benefits. Hence, an exposure to global markets through a fund house is a plausible and prudent way of seeking good returns overseas. However, Mantri points out, ?As an investor you need to gauge whether a mutual fund is re-packaging someone else? expertise (outsourcing) or it is its own fund.? He adds, ?Hence, it is important to know that your fund itself has its own expertise and it is not acting as a re-packaging agent.? Chiefly, you also need to gauge the performance of the fund. More importantly, with an earnest desire to invest and gain good returns, you must sense that the fund house is extending its brand to you.
Mutual funds, focused overseas, invest in ADRs or GDRs issued by foreign companies; initial and follow-on public offerings for listing at recognised stock exchanges overseas and foreign debt securities in the countries with fully convertible currencies. It also comprises money market instruments, repos, government securities; derivatives traded on recognised stock exchanges overseas, short-term deposits with banks overseas; units and securities issued by overseas mutual funds registered with overseas regulators. Repos can only be pure investment avenues, which should not, however, involve any borrowing of funds by mutual funds. Derivatives traded on recognised stock exchanges overseas can only be used for hedging and portfolio balancing with underlying as securities.
Points out, Rajan of Principal Asset Management, ?Investment in mutual funds, focusing overseas, is just like domestic ones, except certain technicalities, like the redemption, which here is T+3, whereas in overseas ones, it may be T+5, considering the exchange rate issue. Also the cut-off time (for NAV) being one exception.?
The real McCoy
Real estate, in any markets has been an enticing investment option. But considering the huge money involved in it, it becomes tad easy to fall in the trap of good deal and lose one? shirt. Advises Anuj Puri, managing director of Jones Lang LaSalle Meghraj, ?It is inadvisable to invest in any kind of project announced by a company or other seller that has no physical representation on Indian soil. An exception would be where one has personally established the legal and market bona fides of the seller. Secondly, one must keep in mind that most foreign property markets have their individual regulatory and permission mechanisms.?
While the RBI now does permit investment of up to $2 lakh per annum, you must ensure whether you are eligible to invest in the country of choice to begin with. Apart from that, all other general guidelines for property investment apply: Also ensure that the actual location of choice has sufficient appreciation potential and is free of litigation, and has a clear title along with the suitability of the neighbourhood. Explains Puri, ?Many foreign property markets are far more transparent than our own. So investors can get ?clean? deals much faster and easier. Finally, residential status in a foreign country has great appreciation value.?
a) The difference
A reflection of this fact is seen in increased investments by Indians in properties overseas. The reason being increasing buying power, higher aspirations, sentimental reasons and the hope of providing a better standard of education to their offspring, and the fact that it is often cheaper to buy a home overseas than in some of our own metros. It is observed that a two-BHK flat at Dubai Marina would cost approximately Rs 35-60 lakh, while more opulent residential configurations would cost Rs 1 crore and above. This is relatively cheaper if one compares with property rates in Mumbai.
In the US, an Indian can buy a flat or refurbished small house for approximately Rs 1.5 crore in the outlying areas of most large cities. In Dubai, Indians cannot actually buy but only hold property on 90-year leases. On this basis, it is possible to obtain four-bedroom luxury apartment or even a decent-sized villa in Dubai within Rs 1.5 crore. Singapore is attractive to Indians for its various employment opportunities; one can buy a luxury villa within the same budget.
The US and the UK are chief attraction for most Indians hoping to buy property overseas. However, when these are out of reach, Dubai is definitely among the most preferred among realistic property investment destinations. According to Trammell Crow Meghraj Property Consultants, ?as many as 35% of HNIs own or seek to own properties abroad for residential or business purposes, or both?. Indians are currently buying property in the USA, Malaysia, Mauritius, Dubai, Singapore, the United Kingdom, Canada, Australia and New Zealand, depending on whether they buy the property as pure investment, for business operations or as a permanent residence or a holiday home.
In addition to this, you can also extend your reach to many Indian real estate developers, who are trying to find a foothold on foreign soil. DLF is considering international acquisitions and investments in development projects abroad. Ansal API has tied up with Malaysia?s UEM Group to form a 60:40 joint venture company, Ansal API-UEM Contracts Pvt Ltd, which can bid for government projects in Malaysia, as also projects worldwide. Parsvnath Developers is looking at greenfield projects in the retail and hospitality sectors in Dubai, Mauritius, and Singapore.
South-based Puravankara Group is doing a project in Sri Lanka – a high-end residential complex, comprising 100 villas, on the road from the airport to Colombo. Hence, investment opportunities are huge in the sector overseas, but thinking twice than plunging once is important, considering the inherent risks involved in overseas markets.
Direct investment
Also, if you are the pushing-the-investment-envelope kind of investor, with extensive reading and understanding of global markets, a direct investment is a good investment option. The RBI liberalised the remittance scheme recently, permitting resident Indian individuals to make investments up to $1 lakh per financial year outside India for any permitted capital and current account transactions. It has also proposed that the acquisition of shares/rated bonds/fixed income securities of an overseas listed company, which owns more than 10% in any listed Indian company, as on January 1 in the year of investment, can be made without any limit.
However, there are tax implications involved in investing in foreign shares.
Here are a few of them:
a) An individual who is a resident of India is chargeable to tax on his worldwide income. In general, without going into exceptions, individuals residing in India over a period of two to three years qualify as resident. Thus, if you are a resident (ordinary resident), all income accrued/ received from overseas is required to be reported to tax in India.
b) While dividends received from shares of Indian companies are tax-free in the hands of shareholders, it is not so as regards dividends declared by foreign companies. Dividends received from abroad are chargeable to tax in India in the hands of the investor at the normal rates of tax, based on the slab rate. The maximum marginal rate of tax for an individual with income over Rs 10 lakh is currently 33.99%. On sale of shares, capital gains arise if there is a profit (sale proceeds minus acquisition price).
c) Overseas shares are classified as short-term assets if these assets are held for not more than 12 months; assets held for more than 12 months would be termed as long-term capital assets. Short-term capital gains are taxed at the normal rates applicable to the investor while long-term capital gains are chargeable to tax at the rate of 20% (excluding surcharge and cess) after claiming the benefits of indexation.
Treaty advantage
You must also note that India has entered into double tax avoidance agreements (DTAAs) or tax treaties with many countries with a view to avoiding tax being paid on the same income in two countries, once on receipt (in the foreign country) and then on repatriation (to India).
However, adds Vishwanth Yadav, a tax consultant, ?There are tax treaties that examine each income stream separately and they also differ from one country to another. Hence, if the specific income is taxable in the foreign country as well as in India, the tax treaty which India has with that country needs to be examined to determine whether double tax can be avoided or whether a tax credit can be claimed in India.?
Apart from this, you also need to look at the demand-supply in an overseas market. You also need to study the policies, culture, legal framework, and the government. It is important that the government is open to investment. For Bahrain, the market offers a complete ?umbrella package? of investment: right from distribution network, land bank, food with the right people and all information pertaining to investments. Emphasises a senior official of a bank, which offers loan for overseas investments, ?A good strategy is to make sure that there are people (Indians), who have already invested and then chalk out one?s investment strategy.?
If you aren?t sure and clear of your strategy you can avail of online trading services provided by domestic players. A case in the point is ICICI Bank?s online trading arm. It recently launched its overseas trading service, which allows investments across 13 US stock exchanges, including Nasdaq and the New York Stock Exchange. ICICIdirect.com has teamed up with Dallas, Texas-based Penson Financial Services for the initiative.
You can trade in US stocks, including ADRs, exchange traded funds, stock options and index options. Mumbai-based ICICI is exploring similar tie-ups in other markets, such as in Europe. Earlier this year, Reliance Money also launched an overseas trading facility aimed at the derivatives market in partnership with the UK-based online trading services provider CMC Markets. Hence, all in all, there are avenues available for overseas investing. The only thing that is required is a clear objective and observing the technicalities involved in overseas investing.
Also, with FII-dominated markets showing signs of weakening, sucking out liquidity, it is not only prudent to follow those who have already traversed the global markets path by being invested overseas, but also lucrative and risk-mitigating.
