Overseas Investing: The Various Forms Of Investor Protection

As an Indian resident, you can invest in overseas securities in two ways.

• You can directly approach registered brokers in foreign jurisdictions, or
• You can use online investment platforms that have tie-ups with international brokers. 

As online platforms provide the ease required for the investing process, you are not at fault for choosing them. 

But are the ease of technology and global access the only points you should look for in an online platform? Not quite. An investment platform should not only offer these but also provide the necessary regulatory protection you deserve as an investor.

In this piece, we tell you some of the important checkpoints you should remember in order to secure your investments. They are:

• The Investment Platform’s Location
• Recourse to a Regulator
• Accountability of the Technology Platform
• Client Protection and Grievance Redressal Mechanism

We discuss these factors in detail along with models that companies currently use in India.

The Investment Platform’s Location

An overseas company offering an online investment platform in India needs to have a place of business in India. The Foreign Exchange Management Act (FEMA) prohibits a ‘person resident outside India’ from carrying out any trading, commercial or industrial activity without establishing a place of business in India.

Following are the types of Place of Business:

• Company (being a subsidiary)
• Branch Office
• Liaison Office
• Project Office

Registering and establishing an entity under any of the above categories depends on the nature of the activity being carried out. 

An entity like a branch or liaison office requires prior approval of the Reserve Bank of India if it wishes to undertake activities beyond the scope of its permitted activities.

The word ‘business’ in the term ‘Place of Business’ does not have a specific definition under FEMA. An activity could be considered as a ‘business activity’ in India if it is not on a one-off basis and is ongoing in nature.

In simple words, a company offering an investment platform to Indian residents cannot be located solely outside India’s jurisdiction. Investors cannot seek redressal under FEMA on using such platforms that haven’t legally established themselves in India. Only a place of business in the form of a subsidiary or branch in India can undertake activities like marketing and promotion of the platform.

Thus one should avoid using a platform that doesn’t have a presence in India

Recourse to a Regulator

What is the first question that should come to your mind while investing through an online platform? 

Confused?

No worries. That’s what we are here for. The first question needs to be what recourse do you have under the regulatory regime of the jurisdiction where you are planning to invest.

A website offers you access to investing in US stocks and also identifies itself as an investment advisor registered in the US. Such organisations can turn out to be a double-edged sword.

• A company registered as an Investment Advisor in the US or any other geography cannot render investment advice in India without a license/registration with SEBI as an investment adviser. Remember? We discussed the importance of an IA registration in our other blog –“Opinion: Are overseas Investment Advisers legal?”So, if a company offers bespoke investment advice to investors in India, even in relation to foreign securities, they would fall within the ambit of the IA Regulations, given the definition of securities under the SCRA and Companies Act, 2013.Therefore, this US-based / overseas investment advisor is not qualified to provide advice as per Indian laws. Representations on such platforms are observed to be misleading.
• The ‘Registered as an Overseas Investment Advisor’ only acts as a clickbait to get prospective investors to the platform. Once they are on board, investors face disclaimers like:“Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission”.Such disclaimers demonstrate the lack of accountability of the firm providing the service.Also, note that in the developed markets (say UK, Europe), you wouldn’t find US-based investment advisers providing access to US stocks. So why should you in India?

Accountability of the technology platform

Another model you may come across while hunting for an overseas investment platform in India are technology-only platforms. 

What do we mean by a technology-only platform? 

Technology-only platforms are companies that offer you to use their platform as a medium to invest overseas but are unregulated and thus, do not have any license with an Indian or overseas regulator. They tie-up with a foreign broker registered in the jurisdiction where you would like to invest. 

When the self-directed execution takes place through an unregulated technology platform, there is neither protection nor a complaint redressal mechanism for the investor. Remember, we talked about the risks of using a technology-only platform to invest overseas.

Client Protections and Complaint Redressal Mechanism

Client Protections mean the safeguards that have been envisaged under the law by the regulator of any jurisdiction, to ensure that investor’s interests are protected while availing the services of a regulated firm in the financial sector. 

Just like SEBI protects the interests of Indian investors receiving financial services of various intermediaries in India, regulators across the globe such as the Financial Conduct Authority in the United Kingdom and the Securities and Exchange Commission in the United States of America, protect investor interests when you avail the services of firms regulated by them. 

However, not all regulators may provide an Ombudsman service. It is best to check if there is an Ombudsman service and the process to raise it should be clear. 

Looking at the license held by your service provider is important to ensure your protection. So in case you are dissatisfied with the services rendered by the firm, you can take the legal recourse available. 

In the business of online investment platforms, this is best addressed when you can approach the regulator to resolve an issue efficiently and effectively, rather than move to a court of that jurisdiction which costs both time and money. This gets even more challenging when your service provider is based overseas.

When the entity offering you the investment platform is directly regulated by the foreign regulator they will not only be legally obligated to resolve your complaint in a time-bound manner but will also ensure that you are satisfied with the way they handle your complaint. And if you remain dissatisfied with the resolution you can approach the ombudsman appointed by the regulator for the same.

Read more about how Winvesta protects its clients.

All content provided by Winvesta India Technologies Ltd. is for informational and educational purposes only and is not meant to represent trade or investment recommendations. Remember capital is at risk. Terms & Conditions apply.