How to Choose a Foreign Broker for US Stock Investments from India

Investing in US stocks from India has become easier than ever, with many apps enabling trades at the tap of a finger. However, understanding the entities behind these platforms and the protections available is crucial before committing funds.

A recent case involving Borderless (formerly Stockal) highlighted potential risks. Several investors reported unauthorized transactions on accounts holding US securities, with losses estimated between ₹80 crore and ₹100 crore. While Borderless attributed the issue to phishing or social engineering attacks and found no platform breach during their investigation, the case remains under review. This situation raises a vital question for investors using overseas investment apps: who actually holds their shares, and where should they seek help if issues arise?

Identifying the Broker Behind the App

Most foreign investment apps rely on a foreign broker to maintain the actual accounts. In the Borderless instance, disputes emerged between the Indian platform and its US partner broker over responsibility for the alleged unauthorized transactions. Ronit Kar, CEO of ViewTrade International IFSC in GIFT City, advises investors to identify the carrying broker or custodian behind any investment platform. ViewTrade, which provides brokerage and custody services but does not interact directly with retail clients, supports various platforms operating in India’s International Financial Services Centre.

Kar recommends checking how long a platform has operated, reviewing who manages it, and consulting user feedback on forums such as Reddit and X. Promotional material alone can be misleading. Understanding who the regulated broker and custodian are, alongside reading the platform’s official disclosures, is critical for informed decision-making.

Content creator Amit Upadhyaya, who has reviewed numerous such apps, points out that investors should determine whether the Indian app controls the customer relationship or merely refers clients to a foreign broker. In the latter case, investors have limited influence if the broker delays account opening or modifies terms. He recalls one app where onboarding took five days due to such issues.

Deepesh Raghaw, a SEBI-registered investment advisor, favors platforms that oversee the entire process end to end, such as Interactive Brokers. Pranay Kapoor, a tech professional and YouTuber with extensive experience using these apps, prefers to avoid intermediary layers altogether. He holds most of his US portfolio with Interactive Brokers, citing direct control and lower brokerage fees as key advantages.

Understanding Regulatory Boundaries

The involvement of multiple entities matters because of regulatory jurisdiction. The Securities and Exchange Board of India (SEBI) does not regulate foreign investments directly. According to Raghaw, if issues arise with investments outside SEBI’s purview, investors have limited recourse through Indian regulators and bear the burden of proof in disputes.

Even when an Indian intermediary is SEBI-registered, as with Borderless, the regulatory protection does not automatically extend to the foreign partner’s actions. Kar highlights GIFT City’s International Financial Services Centre as an alternative where Indian authorities can track transactions and trade records more effectively. Resident investors can access investments through IFSC, subject to eligibility and tax regulations.

Insurance and Security Considerations

Many investors assume insurance safeguards their holdings, but coverages have limitations. US brokers often have protection from the Securities Investor Protection Corporation (SIPC), which insures up to $500,000 per customer, including $250,000 in cash. However, this insurance applies only if the broker becomes insolvent, not in cases of unauthorized account access.

Kar advises checking whether the platform has independent security certifications such as ISO/IEC 27001 for information security management or SOC 2 audits that confirm data protection measures. ViewTrade confirms it holds both certifications.

Cost Factors: Brokerage and Currency Conversion

While brokerage fees are often compared, currency conversion costs can significantly impact overall expenses when investing internationally. Upadhyaya estimates conversion charges at 1-2% per transaction, which can outweigh low brokerage fees. Investors should inquire about the effective currency conversion rates charged by the platform.

Tax Documentation and Compliance

Indian residents must disclose foreign assets in Schedule FA of their income tax returns. Kar recommends asking brokers if they provide relevant documentation such as Schedule FA statements, profit-and-loss reports, and dividend withholding tax summaries. These documents assist in tax filing but do not replace professional tax advice.

Experiences with filing vary. Upadhyaya finds the process manageable for detail-oriented investors, whereas Kapoor considers it complex and warns that automated reports can contain errors, underscoring the need for review by a qualified accountant.

Investment Size and Diversification

Once a platform is selected, managing the amount invested is critical. Raghaw refers to position sizing as an often overlooked but essential aspect of investing. He suggests limiting exposure to around 10-15% of one’s portfolio on any single platform to mitigate risk in case of platform failure or disputes.

Upadhyaya notes that no broker is perfect and recommends holding accounts with multiple brokers. Beginners might start with $50 to $100 using user-friendly Indian apps and transition to direct brokers as holdings grow to thousands of dollars to reduce costs.

Switching Brokers and Asset Safety

Moving investments between brokers is common as portfolios expand. Kar explains that if a broker ceases operations, shares remain with the US Depository Trust & Clearing Corporation and can be transferred to another broker upon client instruction. In the event of broker insolvency, securities are generally returned or transferred via a regulated process.

Quick Checklist for Investors

• Identify the carrying broker and clarify if the app is a referral service.
• Confirm where the account is held and who has access to records.
• Understand the scope and limits of insurance coverage.
• Calculate the actual cost of currency conversion beyond brokerage fees.
• Ensure the broker provides necessary tax documentation for Schedule FA.
• Invest amounts that would not jeopardize your finances if the platform fails.

Investors venturing into foreign stock markets through Indian platforms should conduct thorough research and weigh the regulatory, security, and cost aspects carefully. Being informed and cautious can help protect investments and improve the overall experience of international investing.

Disclaimer: The views expressed belong to the respective analysts and brokerages and do not represent an endorsement by Business Standard. Readers should exercise discretion.