I have a piece with Shivaang Maheshwari in today's Financial Express on the amendments paving the way for direct listing of Indian companies at the exchanges on the GIFT city. The move could help capital raising by Indian companies and help foreign investors to deal in shares of India based companies without going through complex investment procedures and without converting their hard currency.
On January 24, 2024, the Central
Government notified the Companies (Listing of equity shares in permissible
jurisdictions) Rules, 2024 (LEAP Rules) and amended the Foreign Exchange
Management (Non-debt Instruments) Rules, 2019 (NDI Rules) paving the way
for certain public companies incorporated in India to list their equity shares
directly on international exchanges situated in GIFT International Financial
Services Centre (IFSC). These notifications are based on the
recommendations of the Working Group which was tasked with suggesting a regulatory
framework that facilitated direct listing of public Indian companies on international
exchanges in IFSC.
Until now, Indian companies could
only issue and list their securities in the overseas market through depository receipts
such as American Depository Receipts (ADR) or Global Depository Receipts
(GDR). Under this process, a company intending to raise capital from
foreign jurisdictions would issue securities to the depositories incorporated
in that particular jurisdiction and such depository in turn would issue
depository receipts in the name of the company to the investors. Presently,
only a handful of companies have opted for this route, given the stringent and
tedious regulatory framework along with the time and costs associated with issuance
of depository receipts. Moreover, unlike equity shareholders, the holders of
the depository receipts are not entitled to vote unless they convert them into
underlying shares. Fraudulent issuance of a company’s GDR and its manipulation
are other risks associated with depository receipts.
Thus, with a view to address these
challenges, the recent notifications have introduced a regulatory framework that
allows both listed and unlisted public Indian companies to issue and list their
equity shares (including by way of offer for sale) on permitted stock exchanges
in permitted jurisdiction viz., India International Exchange and NSE
International Exchange set up by BSE and NSE respectively in GIFT IFSC. The
significance of this framework is crucial for India as it not only presents a
roadmap for direct listings of public Indian companies but also aims to enhance
the appeal of GIFT IFSC as a distinguished global financial hub. In the pursuit
of global competitiveness, it is imperative for Indian companies to secure
capital at the most favorable cost of capital. Foreign investors, known for their
inclination towards securities listed in their home country, often assign
disproportionate weightage to such assets in their portfolios. This inherent
home bias placed Indian companies at a distinct disadvantage when courting
foreign investments. Opting for foreign listings in the IFSC emerges as a
strategic solution to mitigate this bias, effectively reducing the cost of
capital for companies as investments in these companies can now be made in hard
currency. Notably, companies are not obligated to undergo domestic listings
concurrently, granting them the flexibility to establish a presence solely on
an international exchange in IFSC.
The opportunities expected to be generated
by the revised regulatory framework are immense. Companies incorporated in
India can unlock several advantages by accessing capital markets outside their
home country. One significant benefit is that Indian companies can now attract funds
from international investors which often have the capacity to provide huge
capital funds, keeping in mind the valuation of these companies based on global
standards. Listing in IFSC is also likely to open up a broader investor base
for companies as a diverse pool of investors would be interested in acquiring
and trading their shares thus ultimately increasing the demand for the
company's shares. For instance, a company listed on international
exchanges in IFSC gains access to numerous investment funds also situated in
IFSC. This opportunity wouldn't have been possible otherwise, as these
international funds might not have considered investing in Indian companies,
given the necessity to register as a portfolio investor with SEBI and dealing
with conversion of the dollar or euro into the rupee. However, foreign investors however
may prefer investing in only well-established and
thriving companies.
Foreign listings are also likely to
lead to better valuation as companies listed on international stock exchanges
benefit from sophisticated asset management infrastructure, resulting in more
accurate valuations of their securities. Companies will now have the option to
access both markets, i.e., domestic market for raising capital in INR and the
international market at IFSC for raising capital in foreign currency from the
global investors.
Startups would now gain access to funds from foreign investors instead of the
traditional ways of crowdfunding and seed funding. Overall, exploring capital markets beyond
India's borders offers a range of advantages that can significantly contribute
to a company's growth and success on the global stage.
However, the framework provides that in order to secure listing on
international exchanges, the public Indian company, as well as its promoters,
promoter group, directors, and selling shareholders, must not be debarred from
accessing the capital market. Additionally, it is also a prerequisite that none
of the promoters or directors of the public Indian company is a promoter or
director in any other Indian company that is debarred from accessing the
capital market. Further, any company which is under inspection or investigation
under the provisions of the Companies Act, 2013 or whose promoters or directors
are wilful defaulter or fugitive economic offenders are also not allowed to
list their equity shares on international exchanges. While these stringent
conditions are implemented to ensure that only financially sound and reliable
companies secure listings in IFSC, the ineligibility on account of pending
inspection/investigation may be revisited.
Further, only permissible holders, i.e., persons who are not
residents of India are authorized to buy or sell equity shares of public Indian
companies that are listed on international exchanges. Thus, an Indian resident
cannot hold such shares, however a non-resident Indian can hold such shares. It
is also pertinent to note that permissible holders belonging to countries that
share a land border with India will require approval from the Central
Government to engage in transactions in IFSC. This provision is likely to cause
friction, but necessary friction, given the nature of some of our neighbours.
It remains to be seen whether a framework
could be adopted which paves the way for presently foreign listed Indian
companies to move from global exchanges to exchanges situated in GIFT IFSC.
With respect to direct overseas listing of Indian public companies already
listed in India, SEBI is expected to clarify the mechanism by issuing detailed
operational guidelines in furtherance of the framework. These notifications are
not only aimed at benefitting Indian companies in fund raising but also marks a
significant step in realizing the Central
Government's vision of promoting GIFT IFSC as a global financial hub.
Nonetheless, prudent implementation and development of a well-defined framework
addressing potential loopholes are imperative for ensuring the long-term
effectiveness and sustainability of direct listing.
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