Gaurav Mashruwala

Year 1997 was disastrous for the Far Eastern economies. The East Asian financial crisis had left many poorer. Those who had their entire assets in their countries found themselves on the brink of bankruptcy. Their investment across all classes was in a single region and currency. When the currency of their country depleted in value, so did their assets.

This is still true of India, as most Indians have their entire wealth in Indian rupees invested in India. What if a crisis impacting the entire country happens here? That’s why diversification helps. Any dictionary of economic terms will define diversification as: “Investing in a variety of securities, so that a failure in or an economic slump affecting one of them will not be disastrous.”

In February 2004, the Reserve Bank of India notified the Liberalised Remittance Scheme, which allowed resident Indians to invest up to $25,000 per year outside India; this limit has since been enhanced to $200,000 per person per year. Despite this, and despite knowing the benefits of diversification, few Indians have started investing abroad. One of the main reasons for this is the difficulty in operation and lack of knowledge. Today, if an individual wants to invest abroad, he has two choices.

Either he contacts a local distributor who offers global investment products through his tie-up with an international distributor, or he can open a bank account in a foreign country, remit funds in that account and then invest globally. In either case, the investor will have to adhere to local procedures. There are also tax issues even with countries where India has a double tax avoidance treaty in place.

Above all, since all investments are going to be in financial instruments domiciled outside India, none of the Indian regulators will have any control, leaving resident Indian investors in the clutches of foreigners. Is there a way out? To begin with, Indian banks should be allowed to open accounts for resident Indians in currencies other than rupees. The investor can then have two accounts—one a rupee account and the other in foreign currency.

Banks should also be allowed to transfer up to $200,000 (or the prevailing limit) from the rupee account to the foreign currency account. Mutual funds should be allowed to sell rupee denominated-funds and other foreign currency-denominated funds. Similarly, insurance companies should be allowed to sell their global insurance products.

Our stock brokers must be encouraged to offer broking services on global stock exchanges. Imagine if your broker can at some point in time offer trades on the New York Stock Exchange, Nasdaq, London Stock Exchange and other global stock exchanges, apart from the NSE and BSE. Further, Indian intermediaries should be allowed to offer more global products. For all these services, resident investors can make and receive payments through their foreign currency accounts.

This will benefit all. Because the transactions will happen in India, the government will be able to tax the income so generated. Further, offering global products will require enhancing knowledge about its features. This will push intermediaries to educate themselves and create a pool of local talent. It will ensure ease of operations for resident investors. Domestic regulators can monitor transactions, even if they have no power over the overseas financial institutions and products.

By Gaurav Mashruwala, Certified Financial Planner