As an investor, we want to maximize our returns, and at the same time, we don’t want to lose our money. Also, the investment avenues should provide an opportunity for diversification. When all these factors are considered, cross-border investing would be the right choice for many investors looking forward to building their wealth in innovative ways.

All these wealth protection and appreciation features have been packed in investments in the US, European and Australian markets. Besides, an Indian has every reason to invest in international markets, also known as cross-border investing.

In cross-border investing, an investor acquires a lasting interest (10 percent or more of voting rights) in an enterprise operating in an economy abroad. In other words, cross-border investing refers to an investment in an enterprise incorporated under the laws of another country. An investor can make these investments either as an individual by buying shares and debentures or as a company through mergers and acquisitions, incorporating a new company, or taking over an existing company.

A few essential things an individual going for cross-border investing should be aware of are his investment goals, the size of the investment corpus, and the taxation laws of the prospective economy. This write-up will give a brief explanation of all these factors.

Cross-border investing has a lower penetration among Indian investors and possesses tremendous potential for growth in the coming years. India’s Gross Domestic Product (GDP) is only 3 percent of the global GDP. Many listed international companies, such as Google, Amazon, and Netflix, are giving higher returns in markets. Indian markets have mutual funds and Exchange Traded Funds (ETFs) that invest in the international markets.

While we can invest directly in the US equity market, only a few investment avenues are available in Japan and European markets. For instance, an individual can invest up to $25,000 with a yearly installment of less than $7,000. In addition, trustworthy banking platforms like HDFC Bank and Kotak Mahindra Bank have tied up with US-based stock brokers. So, you can open a dollar-denominated account and invest in international markets.

Like every coin has two sides, cross-border investing has pros and cons.

Pros

On the flip side, there are greater chances for equity appreciation and currency depreciation. The US market has given more returns than Sensex and Nifty in the last decade, when the Indian rupee had depreciated by 3 to 4 percent for the previous few years. The advantage is that if you had invested in international stocks when one US dollar stood at ₹78 and sold when one US dollar was at ₹80, you would have benefitted from rupee depreciation.

Also, one of the prominent advantages of cross-border investing is that one can invest in the most advanced technology stocks unavailable in the Indian markets. The NASDAQ ETF is just an example. So, cross-border investing is a great way to diversify your investments and get the benefit of US dollar-to-rupee conversion.

Cons

The first disadvantage of cross-border investing is the equity risk. In most cases, the price of the equity may lose its value, and you may lose money.

Another disadvantage is the currency risk. Like stocks, the value of international currencies fluctuates according to various macroeconomic and market conditions. So if the Indian rupee appreciates in the global currency market, the value of your cross-border investment depreciates.

Taxation

Now look at the taxation and see if cross-border investing is the right choice for you. Around 25 percent of Tax Deducted at Source (TDS) is charged in India for the dividends you earn in international markets, particularly US. However, you can reclaim the tax as per your tax slab.

The taxation is different for individual stock investments. For example, if you sell your equity investments after 24 months, a Long-Term Capital Gain (LTCG) of 20 percent is levied on the investment. But if you unload your investment before 24 months, the sale is taxed per your income tax slab.

If an investor holds a mutual fund that invests more than 65 percent of the Assets Under Management (AUM) in international stocks, they need to keep it for more than three years to meet the LTCG criterion. On the other hand, if it has been sold before three years, it comes under short-term capital gains and is taxed per the investor’s income tax slab.

A Few More Points to Remember

Apart from all the factors and considerations mentioned above, you may take note of a few more essential points before embarking on cross-border investment.

Economic Conditions: The economic conditions of the country you choose to make investment matter. You must check whether the economy is flexible for new business models or willing to adapt to new innovations. A rigid economy hampers the growth of your investments.

Political Scenarios: The attitude of a country’s citizens – the attitude towards foreign companies, products, and citizens – is an essential factor. For instance, citizens of nations ruled by foreign powers are wary of anything foreign and inclined to ward off any foreign investment in their country. Instead, they want to promote local products and services.

Regulations: The business laws vary from country to country. The countries with lesser legal formalities for businesses are favorable for investors.

Society and Culture: Every Country has different social and cultural elements. These elements influence people’s reactions to a new product or business. A proper understanding of these factors gives the idea of whether the investment will work or not.

The Market Potential: The market potential can be evaluated in terms of expected revenues, accessibility, competition, and industrial dynamics in the prospective market. A large market with a rapid rate of growth, lesser competition, and stability justifies an extensive capital infusion in that market.

The Strength of the Company: Finally, a company’s resources and capabilities should be thoroughly audited before cross-border investing. The company should possess clear competitive advantages such as in-depth market knowledge, the latest technology, innovative products, and reliable partners. Otherwise, the company may face colossal failure in international and domestic markets.

Justin Raj

Alpha Research Team