Motivated by the recent meteoric rise of the stock market prices globally, particularly in the USA, an Indian resident may want to purchase foreign stocks and add such investments to one’s wealth portfolio.
According to Bloomberg, in the last three years, the US S&P 500 has been the top asset class globally with returns of 31.5 percent in 2019, 16.3 percent in 2020 and 30.0 percent in 2021 (YTD annualized). In the last few years, many Indian HNIs have been investing in foreign stocks as it provides a diversification opportunity based on their risk tolerance and preferences. Some investors also want to own the stock of global technology giants such as Apple and Amazon or futuristic companies such as Tesla for bragging rights.
The Liberalised Remittance Scheme (LRS) under the legal framework provided by the Foreign Exchange Management Act, 1999 (FEMA), allows resident individuals to remit funds abroad without approval by the RBI. LRS permits resident individuals, including minors, to freely remit up to $2,50,000 per person per financial year for permitted current or capital account transactions. An investment over and above the prescribed limit requires an RBI approval.
LRS provides an opportunity for Indian investors to diversify their portfolio by investment in both listed and unlisted overseas equity shares or debt instruments, investments in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes, etc.
Seven important considerations when making investments through the LRS Route.
1. Overall limit of USD 2,50,000 per person per financial year – This limit resets every 1st April (beginning of the financial year). In case of larger investments, the LRS limit of the other family members can be used. LRS also allows consolidated remittance by family members subject to fulfillment of terms and conditions such as Family members must be co-owners/co-partners in the overseas bank account/investment. To put this into perspective, a family of four with two minor children can use a combined limit of USD 1 million per financial year.
2. Limit covers both current and capital account transactions – This means that it covers expenses as well as investments, thus in case of a particular financial year, if foreign currency expenses(Example: Overseas travel to the extent of USD 50,000) are already utilized by the individual, only the balance of USD 2,00,000 shall be available for any further investments. It is advised that one should track all foreign remittances made in a financial year to ensure that the LRS limit is not crossed, as certain routine foreign expenses may reduce the available LRS limit, such as credit card spends for international payments, ATM withdrawals during visits abroad, medical expenses, education, donations, gifts, etc.
3. Remittances can be made every year to plan for a larger investment in the foreseeable future – It would be prudent to start utilizing LRS limit beforehand in each financial year by remitting funds and parking the funds in a liquid international portfolio in advance, which can later be liquidated and utilized for larger investments as and when it materialises. Such remittances every year would also protect against fluctuation of foreign exchange rates.
4. Repatriation of overseas investment back to India shall not increase the LRS limit – There is no requirement to repatriate income/ sale of foreign investments back to India. Thus, it may be better to either reinvest the income/sale of foreign investments in any other foreign investment opportunity or utilize such proceeds for any foreign expenditure.
5. Possible to plan monthly systematic investment plan (SIP) – This is possible by making 12 monthly investments in foreign stocks/investments that do not exceed USD 2,50,000 in the year, as there is no restriction on the frequency of transaction, thus periodic investments can be easily planned to avoid bullet payments.
6. FEMA, KYC and Anti-money laundering rules – are the regulations which need to be followed while making compliance with authorized dealers i.e. banks to avoid any penal consequences. The individual is also required to furnish Form A-2 to the authorized dealer as well as Income Tax forms (Form 15CA and/or 15CB) as applicable to each transaction while making the outward remittances. In the case of remitter being a minor, Form A2 must be countersigned by the minor’s natural guardian.
Although, the authorized dealer as guided by the nature of transaction declared by the remitter in Form A2 will certify that the remittance is in conformity with the instructions issued by the Reserve Bank, the ultimate responsibility is of the remitter to ensure compliance to the extant FEMA rules/regulations.
7. Certain foreign investments prohibited by RBI – Certain current account as well as capital account transactions are prohibited by RBI such as purchase of Foreign Currency Convertible Bonds (FCCBs) issued by Indian Companies in the overseas market, trading in foreign exchange abroad, capital account remittances directly or indirectly to countries identified by the Financial Action Task Force (FATF) as “non-co-operative countries and territories”.
The author, Harsh Bhuta, is Partner at Bhuta Shah & Co LLP. The views expressed are personal