Pretty much the title say if I have a broker which is allowing me to place options trade on us exchanges and if I place long only options positions to open the trade so this will require me pay full upfront margin so will this violate LRS law?
@nithin @ShubhS9 any inputs from you would be much appreciated. thanks
No matter how you word it. You cannot trade in derivative market overseas legally.
From the RBI website
The remittance facility under the Scheme is not available for the following:
Remittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweep stakes, proscribed magazines, etc.) or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
Remittance from India for margins or margin calls to overseas exchanges / overseas counterparty.
Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market.
Remittance for trading in foreign exchange abroad.
Capital account remittances, directly or indirectly, to countries identified by the Financial Action Task Force (FATF) as “non- cooperative countries and territories”, from time to time.
Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.
Will it fall under the
point?
If yes I don’t understand how it is different for the margin that we pay for long stock positions?
I think that one cannot trade in overseas securities. That is not allowed.
Foreign portfolio investments are allowed. Margin trading is not allowed.
Correct me if I am wrong but how is the margin debited for stocks buying vs margin debited for long options different?
As per the definition only creating short options position would be illegal right and long/short futures position because in those scenarios only we have the possibility to get margin calls. There is another scenario if someone exercise their call options they would be required to pay the strike price * qty but that can be avoided right?
Hey Rohan, please check out this thread, this has already been explained here:
This is kind of working in the regulatory grey area. What RBI doesn’t want Indians to do with money sent abroad under LRS is not to be in any situation where there is a margin call or additional need for funds for those positions. They also very broadly say not to take exposure to any leveraged products.
Technically, with option buying, you can debate that it is not levered since the maximum money you can lose is the premium, but in reality, it is a levered product. Also, options are American and can devolve into giving or take delivery; you could need to transfer more funds to manage that option’s position.
If you take a legal opinion from any reputed law firm or chartered accountant, they will say it best not to trade any options with the funds sent out using LRS.
How hard it is for HNWI to get RBI approval to invest above LRS limit ?
There is no approval from RBI for this. The maximum anyone can invest outside individually is up to the LRS limit.
What if the initial amount for the trading account is funded by selling RSUs or options in the US stock markets, provided by foreign MNCs for their employees? In this case, person is not sending the amount from India via LRS.
Is it legal in that case? Is LRS the only block for Indians from trading in foreign derivatives or are there any other Acts that prohibit it?
As I mentioned, this is a grey area. Nothing explicitly says that you can’t do it, but in spirit I don’t think you can buy options as well since they are technically a leveraged product.
Under the Liberalised Remittance Scheme, Authorised Dealers may freely allow remittances by resident individuals up to USD 2,50,000 per Financial Year (April-March) for any permitted current or capital account transaction or a combination of both.
if Individual want more than 2,50,000 remittance he/she needs RBI approval for that.
No, what u can and cannot do with that money is also given by RBI.
