Direct listing of shares of Indian companies, overseas through IFSC GIFT City

Introduction: Indian companies are increasingly considering overseas listings as a strategic move to achieve diverse business objectives. Key among these is the potential to raise substantial funds from a global investor base. This article explores the implications of Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024, and Foreign Exchange Management (Non-debt Instruments) Rules, 2024, focusing on the direct listing of Indian companies overseas through IFSC GIFT City.

Overseas listings open up access to larger capital markets, allowing Indian companies to secure substantial investments for strategic developments such as expansion, research and development, and technology upgrades. Additionally, being listed on international stock exchanges enhances the company’s visibility and credibility on a global scale, attracting a diverse investor base and potentially increasing valuation.

Indian companies have a range of options for raising funds from overseas, each with its advantages and limitations, such as Foreign Direct Investment (FDI), American Depositary Receipts (ADRs), and External Commercial Borrowings (ECBs).

Further, as an initiative to ease the process of raising funds and overseas listing, and in order to boost the inflow of foreign investment in India, the Ministry of Corporate Affairs (the ‘MCA’) on 24 January 2024, notified Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024. This notification comes post-amendment in section 23 of the Companies Act 2013, regarding the issuance of securities by the public companies, for the purpose of listing on permitted stock exchanges in permissible foreign jurisdictions.

The Ministry of Finance (Department of Economic Affairs) has also amended the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 on 24 January 2024, and called such amendments as Foreign Exchange Management (Non-debt Instruments) Rules, 2024.

Important regulations under the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024

Let’s discuss the important regulations notified under the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024.

1. Scope and applicability of Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024

The provisions of these rules are applicable to the following companies, which issue their securities for the purposes of listing on permitted stock exchanges in permissible jurisdictions:

a. unlisted public companies

b. listed public companies, so far as they are in accordance with regulations framed or directions issued in this regard by the Securities and Exchange Board or the Authority

For the purpose of these rules, the International Financial Services Centre in India (IFSC – GIFT City) shall be construed as the permissible jurisdiction, and the India International Exchange (IFSC) Limited and NSE IFSC Limited, subsidiaries of BSE Limited and NSE of India respectively, construed as the permitted stock exchange.

2. Ineligibility criteria for Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024

The below-mentioned companies are ineligible for issuance of their securities for the purposes of listing on the permitted stock exchanges in the permissible jurisdictions. Company which:

a. has been registered under section 8 or declared as Nidhi under section 406 of the Act, or

b. is a company limited by guarantee and also having share capital, or

c. has any outstanding deposits accepted from the public as per Chapter V of the Act and rules made thereunder, or

d. has a negative net worth (as defined under section 2(57) of the Companies Act, 2013)

3. Clarifications regarding listing on permitted stock exchanges in permissible jurisdictions:

a. Eligible companies which has no partly paid-up shares, may issue equity shares (which include an offer for sale of equity shares by existing shareholders of the unlisted public company) for the purposes of listing on a stock exchange in a permissible jurisdiction.

b. An unlisted public company, which also intends to get its equity shares listed with any recognized stock exchange (as recognized by Central Government from time-to-time), shall comply with rules and conditions as may be specified by the Securities and Exchange Board of India.

c. An unlisted public company shall be required to file the prospectus in e-Form LEAP-1, along with the fees within a period of seven days after the same has been finalized and filed in the permitted exchange.

d. The company shall comply with Indian Accounting Standards or any other accounting standard in the preparation of financial statements, which the company may be required to comply for the preparation of the financial statements, to be filed before the securities regulator concerned, or with the stock exchange concerned, as the case may be.

Important regulations under the Foreign Exchange Management (Non-debt Instruments) Rules, 2024

Let’s discuss the important regulations notified under the Foreign Exchange Management (Non-debt Instruments) Rules, 2024.

1. Introduction of new terms in the Foreign Exchange Management (Non-debt Instruments) Rules, 2024:

The below-mentioned terms has been inserted in the Foreign Exchange Management (Non-debt Instruments) Rules, 2024:

2. Rules about how permissible holders can invest in equity shares of public companies incorporated in India and listed on international exchanges have been added as Chapter X. The specific rules for these investments are outlined in this chapter are as follows:

a.  A permissible holder (e., a person who is allowed by the regulations) can buy or sell shares of an Indian company that is either already listed or is going to be listed on an international stock exchange.

b. The mode of payment, and other terms and conditions for transferring the money earned from selling these shares will be decided by the Reserve Bank of India.

3. Moreover, a new chapter, Chapter XI, has been added. It’s called “Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme.” This chapter explains the requirements that companies must meet to issue and list shares on international exchanges. It also discusses the voting rights associated with these shares, specifying that permissible holders are the ones who can exercise these rights.

A. Conditions for issue and listing of equity shares on International Exchanges by public Indian companies

 A public Indian company is allowed to issue new equity shares or offer existing shares to its current shareholders, but certain following conditions must be met:

a. The shares can be issued or offered only if they will be listed on a specific international exchange.

b. The company must adhere to the rules outlined in paragraph 2 and 3 of Schedule I, which include avoiding certain prohibited activities and staying within sectoral caps.

c. The equity shares being issued or offered internationally must exist in a dematerialized form and hold the same status as shares listed on a recognized stock exchange in India.

Importantly, if required, the company needs to obtain prior approval from the government.

B. Definition of Permissible Holder

A permissible holder refers to someone who owns equity shares of a company listed on an international exchange, and this includes their beneficial owner. However, there’s a condition: if this holder is a citizen of a country sharing a land border with India or is an entity from such a country, they need the approval of the Central Government to hold equity shares in a public Indian company.

Further, it’s important to note that a permissible holder is not someone residing in India. The public Indian company, in its offer document in the relevant jurisdiction, must disclose the information of the permissible holder (the permissible holder, along with their beneficial owner, is responsible for ensuring compliance).

Additionally, a permissible holder is allowed to buy or sell equity shares of an Indian company listed on an international exchange, as long as it stays within the specified limit for foreign portfolio investment under these rules.

C. Eligibility:

I . Conditions for Public Indian Companies, or existing shareholders offering equity shares.

A public Indian company can either issue new equity shares on an International Exchange or allow existing shareholders to offer their shares on the same exchange and to be eligible for this, the company needs to meet several conditions as mentioned below:

a. Ensuring that neither the public Indian company nor any of its promoters, promoter group, directors, or selling shareholders (nor the holder offering equity shares, in case existing shareholders offering equity shares) are prohibited by the relevant regulatory authority from accessing the capital market.

b. Confirm that none of the promoters or directors of the public Indian company is associated with any other Indian company (listed or otherwise, in case of existing shareholders offering equity shares), which is restricted by the regulatory authority from accessing the capital market.

c. Verifying that the public Indian company or any of its promoters or directors (or the holder offering equity shares, in case of existing shareholders offering equity shares) is not classified as a willful defaulter.

d. Ensuring that the public Indian company is not currently under scrutiny or investigation as per the regulations outlined in the Companies Act, 2013

e. Confirming that none of the promoters or directors (or the holder offering equity shares, in case of existing shareholders offering equity shares) is identified as a fugitive economic offender.

II. Conditions for Listed Indian Companies, or existing shareholders offering equity shares.

Listed Indian companies can also issue or offer equity shares, or existing shareholders offer equity shares on International Exchanges, subject to compliance with conditions and requirements notified by the Securities and Exchange Board of India from time to time.

III. Conditions for Public unlisted Indian Companies, or existing shareholders offering equity shares.

Public unlisted Indian companies can also issue or offer equity shares, or existing shareholders offer equity shares on International Exchanges, subject to compliance with conditions and requirements notified by the Ministry of Corporate Affairs from time to time.

D. Obligations of companies:

Companies in India, especially public Indian companies, have certain responsibilities when it comes to issuing equity shares internationally.

A public Indian company must make sure it follows all the existing laws related to issuing equity shares, this includes the rules mentioned in Foreign Exchange Management (Non-debt Instruments) Rules, 2024 and the regulations outlined in:

a. the Securities Contracts (Regulation) Act, 1956

b. regulations outlined in the Securities and Exchange Board of India Act, 1992,

c. the Depositories Act, 1996,

d. the Foreign Exchange Management Act, 1999,

e. the Prevention of Money-laundering Act, 2002, and

f. the Companies Act, 2013, along with their respective rules and regulations.

The public Indian company is also obligated to ensure that the total equity shares to be issued or offered in a specific jurisdiction, combined with the equity shares already held in India by individuals residing outside the country, do not surpass the limit set for foreign holding as per the rules outlined in Schedule I to these regulations.

E. Voting Rights Obligations on Public Indian Companies:

Public Indian companies with their equity shares listed on international exchanges have a specific requirement regarding voting rights, these companies need to make sure that the right to vote on these equity shares is utilized either directly by the permissible holder or indirectly through their custodian (the custodian can only act based on voting instructions provided by the permissible holder)

F. Pricing Guidelines for equity shares:

When a listed company issues equity shares or existing shareholders offer them on a recognized stock exchange in India, the price of these shares must be at least equal to the price set for a similar issuance to domestic investors under the applicable laws.

In the case of a public unlisted Indian company making its initial listing on an International Exchange, the price of issuing or transferring equity shares is determined through a book-building process, as allowed by the International Exchange. Importantly, this price should not be less than the fair market value specified in the rules or regulations under the Foreign Exchange Management Act, 1999.

However, any subsequent issuance or transfer of shares, particularly for listing additional shares after the initial listing, will adhere to the pricing norms set by the International Exchange and the permissible jurisdiction.

Conclusion

The introduction of Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024 and the Foreign Exchange Management (Non-debt Instruments) Rules, 2024 mark a significant step by the Government of India to facilitate overseas listings for Indian companies.

This strategic move offers a host of benefits, including expanded access to global capital markets, increased visibility on an international scale, and the potential for enhanced valuation. The rules outline comprehensive conditions and criteria for eligibility, providing clarity on issues such as ineligibility, voting rights obligations, and pricing guidelines.

The initiatives are poised to reshape the Indian capital market, providing companies, especially startups with alternative avenues to access global funds. Moreover, the regulatory changes are expected to boost foreign investment, foster growth opportunities, and contribute to the development of a robust capital market ecosystem at the International Financial Services Centre in India (IFSC – GIFT City).