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Eyeing Foreign Shares

You're allowed to buy foreign shares now, so better start watching those tickers.

By Ashish Gupta

Welcome to the Street

To use a much-quoted phrase: "One can afford to be magnanimous when the riches are overflowing.'' The riches, in this case, are the $70 billion of forex reserves that India finds itself sitting on.

That's perhaps what motivated the Finance Minister Jaswant Singh to allow resident Indians, for the first time since Independence, to use up some dollars to invest in companies listed overseas. The clamps were first imposed by the British, during the Second World War, and had not been lifted since. Preserving precious dollars was such a big deal for all these years.

So, what does it mean?

Well, for one, it's a definite signal in favour of capital account convertibility (CAC). This is good. The announcement was accompanied by another one allowing Indians to sell property and transfer up to $1 million of the proceeds overseas. This means you could sell your house and buy a new one abroad with the money.

The shares announcement, though, would have more interesting ramifications. This is the first time that the resident Indian has been granted access to the hot stuff that trades on Wall Street and Nasdaq. What, then, does it mean to you as an individual investor? Can you, for example, build a portfolio to mirror Warren Buffett's? Alternatively, can you snap up Microsoft shares (which have started paying dividends for the first time ever)?

Not just yet. There's a restricted list of overseas firms -- some 250-300 of them -- that you may invest in. These are firms that have at least a 10 per cent stake in a firm listed on any recognised stock exchange in India. The list, in other words, comprises mainly multinationals that have incorporated subsidiaries in India, and are traded on local bourses. What used to be called FERA companies, mainly -- Hindustan Lever being the most prominent example. You can buy Unilever shares listed overseas.

It's a pity, no doubt, that so many multinationals have delisted from Indian stockmarkets in recent years. And that it's a rare 'growth story' from the US that has a stake in any domestically traded entity. Most of the exciting stories are in America's tech sector, and these are just the firms that aren't on the permitted list.

Would Indian investors be interested? "They might, but do not expect a stampede," says U.R. Bhat, Director, JP Morgan.

Examine the case of overseas debt investment. The Indian government had earlier given access to foreign bonds, through mutual funds that were permitted to invest up to $500 million each in dollar debt. The ceiling has been raised to $1 billion. But the response from Indian investors has been weak, and might remain so. One possible reason is the low return on debt overseas (the yield on 10-year US Treasury bond is just about 4 per cent), which didn't quite make up for the extra safety.

Equity, argue some, is something else altogether. It's almost certainly more rewarding, if not exciting. But given the risks, ever-changing global business dynamics and presumably higher transaction costs, buying shares on Wall Street may not be for the faint-hearted.

Still, there's much good that could come from it. For one, domestic companies cannot take their local investors for granted any longer. People have choice, and increasingly, they will demand more of it. The globalisation rhetoric plays a role too. If Coca-Cola is to swamp the world, goes the logic, might as well earn some money from the phenomenon by investing in the company (which explains the whole brouhaha over its domestic share offloading)

For another, Indian investors will be more open to the idea of tracking these firms on a global basis -- which is good learning, to start with. Watching the global stock indices would also be a good idea. Most Indian investors remain cocooned, and thus completely cut off from the rest of the world's markets -- despite the easy access to global media.

Watching Unilever's performance worldwide won't be easy, but investors have to begin somewhere. At the moment, even investment banks are reluctant to set up divisions to track these global stocks (the foreign firms have their parent organisation's intelligence). Unless a significant number of high net worth investors are keen on these shares, even the other investment advisors may opt out.

Even if they do, you, the investor must not. It always pays to understand the world market.

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