NSE or BSE, which has a better model for buying US stocks

Last week saw a flurry of announcements from the National Stock Exchange (NSE) and BSE-owned entities in GIFT City, Gujarat regarding the availability of international shares for Indian residents.

NSE owns NSE-IFSC while BSE owns India-INX, both of which operate at GIFT City IFSC. However, the two have chosen radically different models by allowing resident Indians to invest in foreign stocks. NSE has created unsecured certificates of deposit in GIFT City, while India INX, owned by BSE, merely acts as an intermediary platform (rather than an exchange). India INX investors transfer money directly from India to the US or other foreign countries without ever touching the IFSC itself.

What are the two models?

The NSE IFSC has created unsecured certificates of deposit for eight large US companies within the IFSC and has announced its intention to create such certificates for 50 of the largest US futures companies. An unsecured certificate of deposit is created by a market maker who purchases the underlying stocks in the United States and issues the certificate against them. Therefore, custody of the receipts is held in GIFT City and Indian investors transfer money to GIFT City to exchange them.

This can provide some level of regulatory comfort for Indians who are unfamiliar with foreign brokers or foreign regulators. On the other hand, there are costs and fees involved such as the costs required to create the receipts in question, to open and maintain demat accounts in the IFSC, and the spreads that market makers will make. Additionally, there is a limited universe available, only 50 stocks of major US companies.

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India INX, owned by BSE, has a link with Interactive Brokers, an American broker. Its clients have access to the full universe of stocks and ETFs listed in the US and other markets, rather than the top 50.

According to India INX, it will not collect any fees from customers who approach it directly and it has negotiated favorable currency transfer rates for its customers. It has also linked up with 75 brokers to allow access to their clients. This mode is similar to what fintechs such as Stockal, Vested Finance, Globalise and Winesta are pursuing. India INX, in this case, is just acting as an intermediary and not as an exchange.

Although both models allow for “split investing”, meaning you can buy less than one share of a company, the models are different. NSE Certificates of Deposit trade in certain specific ratios, which reduces the ticket size for each share.

For example, for an Apple stock, the ticket size would drop from $166.23 to $6.64 (at the time of writing) given the 1:25 ratio. Also in the ESB model, fractional buying is possible without any ratio. For example, you can buy fractional shares even for a few dollars. NRIs can trade in both the NSE and BSE models and they may not be subject to the LRS (Liberalized Funds Transfer System) restrictions that govern Indian residents on derivatives and intraday trading.

What is better?

It depends on the needs of each investor. In the NSE model, your money does not directly leave Indian shores and your transactions take place in the city of GIFT. The city of GIFT is legally considered a separate jurisdiction, but is ultimately subject to the Indian Constitution and Parliament. The receipts are issued against shares held in the United States, but that, in a sense, happens at the end. If you don’t want to invest in products other than major US stocks, the NSE model may be sufficient for you.

The BSE model is more suitable for someone who wants the full range of the US stock market, including exchange-traded funds (ETFs). In the BSE model, you also have access to the liquidity of the underlying market (say the US stock market) and you don’t have to rely on market makers. However, you end up transferring money out of India and run the risk of problems in the destination country where you are investing.

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