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Direct listing outside India as per The Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024.

“Direct listing outside of India” refers to a public Indian company’s process of offering existing shareholders’ equity shares by listing on an international exchange provided that such listing has always been subject to approval of the government. Even section 469[1] when read with 23(3)[2]  of The Companies Act gives the central government the power to make provisions regarding stock exchange in permissible foreign jurisdiction subject to conditions prescribed by it. “The concept of Direct listing of Public companies outside India would mean inviting Non-nationals to invest as a shareholder in the company since, India has a $4 trillion stock market capitalization and world’s highest number of domestic companies. Hence, India offers an appealing investment prospect for the global investor community.”[3]

Prior until this, Indian companies could only list on international exchanges through the use of depository receipts, which entails issuing shares to a custodian bank, which subsequently issues depository receipts to overseas investors. In 2013 through the Companies (Amendment) Act, 2020, section 23(3)[4] was introduced for the first time which was an enabling provision for direct listing on  Foreign Stock exchange. Such provision though could only be enabled by a notification from the central government. The recent Notification on 24 January, 2024 by the Ministry of Corporate Affairs introduced the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024 (Companies Listing Rules)[5].

In this article, we shall discuss about the permissible jurisdiction, application of the rules, eligibility criteria and mandatory conditions to issue equity shares on a stock exchange in a permissible jurisdiction. Along with the MCA notification, the central government also introduced Schedule XI of The Foreign Exchange Management (Non-debt Instruments) Rules[6], 2019. Schedule XI consists of measures for direct listing in terms of voting rights, pricing, eligibility, obligations of the companies, etc.

 Background

Initially there were only two ways for companies to access global markets, either Depository receipts or IPO’s. Initial Public Offerings (IPOs) represent a pivotal moment for private companies seeking to transition into publicly traded entities. This process involves offering shares of the company to the public for the first time. It’s a significant milestone in a company’s growth trajectory, marking its entrance into the broader financial markets. The IPO process typically involves several key steps. First, the company engages investment banks to underwrite the offering. These banks assist in determining the offering price, drafting the prospectus, and marketing the shares to potential investors. During the IPO, a portion of the company’s ownership is sold to public investors, which provides the company with capital for expansion, acquisitions, or other strategic initiatives.

While IPOs have long been the traditional route for companies to go public, direct listings have emerged as an alternative method. Direct listings offer companies a way to bypass some of the complexities and costs associated with the traditional IPO process. In an IPO, new shares are created and sold to the public through underwriters, whereas in a direct listing, existing shares held by insiders and early investors are sold directly to the public without the involvement of underwriters. This means that direct listings do not raise capital for the company directly, unlike IPOs.

One significant difference between IPOs and direct listings lies in the pricing mechanism. In an IPO, investment banks work to set an initial offering price based on their analysis of market demand and company fundamentals. In contrast, direct listings rely on a more transparent pricing mechanism, where the opening price is determined by supply and demand dynamics in the open market.

On December 4, 2018, the Expert Committee published its findings, highlighting a number of benefits for Indian businesses thinking of direct listing[7]. First of all, it emphasises how Indian-incorporated businesses may be able to access international finance markets. This can drastically lower the cost of capital, which is often greater in India than in more developed nations because of inflation and smaller domestic investment pools. In addition to reducing expenses, a simplified worldwide listing system might provide significant advantages in terms of value, quantity, quality, and branding.

Second, Indian firms may find a wider range of investors by listing directly on overseas stock markets. More investors are drawn in and the cost of capital is lowered by this diversity. A firm that is listed in the US, for example, can access a variety of investment funds that have restrictions on investments made by companies that are listed in the US. Additionally, it makes funding available to Indian startups and emerging-growth companies from foreign investors who would be more interested in their stocks.

Thirdly, corporations that list overseas are frequently valued higher. When compared to local markets, overseas exchanges with advanced asset management infrastructure provide more accurate values. Accurate valuation is improved by having access to specialised investor classes, such as high-tech investors. Additionally, foreign listings broaden analyst coverage and make it easier to compare a company’s performance to those of its peers, leading to more accurate valuations.

Finally, Indian firms are going to benefit strategically from direct listing on overseas markets. In addition to improving brand knowledge and exposure, it reinforces foreign employee remuneration methods and offers a currency for pursuing international expansion goals.

Overview of the recent MCA notification

Public companies in India are now permitted to list and issue securities in IFSC on the India International Exchange and NSE International Exchange, thanks to a number of modifications and new regulations. In contrast, Rule 3[8] of the Companies (Listing of Equity Shares in Permissible Jurisdiction) Rules, 2024 states that the provisions written down apply to both listed and unlisted public companies as long as they comply with the guidelines established by the Securities and Exchange Board of India. Rule 5[9] lists out certain companies that are ineligible for issuing equity shares . A company that falls under section 8, a corporation that is limited by guarantee and has a share capital, a company with negative net worth, a company that has taken unsolicited deposits from the public, a company that has filed for winding up, or has failed to file an annual report or financial statement. Rule 4[10] provides that any unlisted public company that complies with the direct listing scheme, SEBI regulations, Indian Accounting Standards and does not come under the scope of Rule 5 and has no partly paid up shares may issue equity shares for direct listing on a stock market. A prospectus in electronic form (LEAP-1)[11] must be filed by such an unlisted public business.

According to the Ministry of Finance, this government initiative marks a significant milestone as it will redefine the structure of the Indian capital market. It will also provide Indian companies and small startups with access to international capital markets in addition to domestic exchanges, offering them alternative avenues for funding. “This is anticipated to result in enhanced valuation of Indian companies aligned with global standards of size and performance, bolster foreign investment inflows, unlock avenues for growth, and broaden the investor base. Publicly listed Indian companies will gain the flexibility to tap into both the domestic market, raising capital in INR, and the international market at IFSC, accessing funds in foreign currency from global investors. This endeavour is poised to particularly aid Indian companies seeking to expand globally and pursue opportunities in other markets. Furthermore, it is expected to invigorate the capital market ecosystem at GIFT IFSC by introducing new investment prospects for investors, diversifying financial products, and bolstering liquidity.”[12]

Conclusion

The recent MCA notification, under The Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024, permits Indian public companies to list shares internationally, notably on the India International Exchange and NSE International Exchange within IFSC. Eligibility criteria include compliance with SEBI regulations, Indian Accounting Standards, and absence from Rule 5 restrictions. This initiative is set to reshape India’s capital market, offering domestic and international funding options for companies and startups. It aims to boost valuations, attract foreign investments, and expand opportunities for growth globally, particularly benefiting Indian firms eyeing international expansion.

[1] Section 469, The Companies Act, 2013.

[2] Section 23(2), The Companies Act, 2013.

[3] Direct listing of Indian Companies on IFSC exchanges, Working Group Report, 2023.

[4] Section 23(2), The Companies Act, 2013.

[5] The Companies (listing of equity shares in permissible jurisdiction)2024.

[6] Schedule XI, The foreign Exchange Management (Non-debt instruments) Rules, 2019.

[7] Direct listing of Indian Companies on IFSC exchanges, Working Group Report, 2023.

[8] Rule 3, The Companies (listing of equity shares in permissible jurisdiction) 2024.

[9] Rule 5, The Companies (listing of equity shares in permissible jurisdiction) 2024.

[10] Rule 4, The Companies (listing of equity shares in permissible jurisdiction) 2024.

[11] https://www.mca.gov.in/MinistryV2/companyformsdownload.html.

[12] Ministry of Finance, Press release, 2024.

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BY: PRACHETA DWIVEDI | Prachetadwivedi@gmail.com

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