Direct Overseas Listing for Indian Companies: Navigating Opportunities & Challenges
The Ministry of Corporate Affairs (“MCA”) has released a notification to allow Indian firms to list on overseas markets, subject to certain criteria. MCA has now departed from the present practice of employing American Depository Receipts (“ADRs”) and Global Depository Receipts (“GDRs”) for international listings. The notification is based on Section 5 of the Companies (Amendment) Act of 2020 amended Section 23 of the Companies Act, 2013, introduced Sections 23(3) and 23(4), enabling a specific category of publicly traded Indian companies to issue a distinct class of securities with the aim of obtaining listings on approved stock exchanges in eligible foreign jurisdictions. However, it is vital to remember that the exact guidelines for Indian companies’ direct foreign listing have not yet been established. This initiative is likely to give new options for Indian enterprises to directly access international financial markets, thereby increasing their worldwide footprint and competitiveness.
Background Behind Notification
The current status quo regarding listing foreign companies on Indian exchanges involves the issuance of Indian Depository Receipts (“IDRs”), while Indian companies have the option to list on foreign exchanges through ADRs or GDRs. IDRs were introduced to facilitate capital raising for foreign investors in the Indian market and provide domestic investors with access to securities of multinational companies listed abroad. The rationale behind GDRs was to enhance the global presence of Indian companies and attract foreign investment. Section 2(44) of the Companies Act, 2013 defines GDRs as depository receipts created by a foreign depository outside India and authorized by the issuing company. IDRs, on the other hand, are defined in Section 2(48) as depository receipts created by a domestic depository in India and authorized by a foreign company. Currently, direct listing of foreign entities on Indian exchanges is not allowed. They can only raise funds through IDRs or other similar instruments created by domestic depositories.
Strict compliance requirements are in place, including eligibility criteria outlined in the Companies (Registration of Foreign Companies) Rules, 2014, as well as SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and RBI directives. In addition to these criteria, a foreign company can only issue IDRs if it is listed in its home country, has a track record of compliance with local securities market regulations, and has not been prohibited from issuing securities by any regulatory body. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 introduced a condition that the underlying equity shares against which IDRs are issued must be listed in the company’s home country before listing IDRs on Indian stock exchanges. As it stands, unlisted foreign companies and Indian companies seeking to list overseas must first be listed on their respective home exchanges. Due to uncertainties regarding aspects like repatriation and taxation, the IDR mechanism has seen limited adoption, with more Indian companies opting for the GDR route. While these restrictions pertain to equity listing, Indian entities are allowed to list their debt securities on international exchanges through instruments known as ‘Masala Bonds’.
Benefits for Indian Companies
The amendment to allow Indian companies to directly list overseas marks a significant shift in the regulatory landscape. It acknowledges the need for a more flexible approach in order to foster economic growth and competitiveness in the global market. One of the primary benefits of this amendment is the potential for Indian companies to access larger pools of capital. By tapping into foreign markets, these companies can attract a broader range of investors, which in turn can lead to higher valuations and increased financial stability. This is particularly important for startups and emerging-growth companies, which often face challenges in securing adequate funding. Additionally, the amendment acknowledges the need for accurate valuations. By listing on foreign exchanges, companies can benefit from the expertise of specialized investors who are better equipped to assess the true value of their securities. This can lead to more precise benchmarking and a clearer understanding of their market position compared to their peers. Diversification of the investor base is another crucial advantage.
By expanding the pool of potential investors, companies can reduce their reliance on a single market and potentially lower their cost of capital. This can provide greater financial flexibility and resilience, particularly in times of economic uncertainty. Furthermore, the amendment recognizes the strategic advantages of listing on foreign exchanges. It opens up opportunities for companies to implement international employee compensation strategies and increase their brand visibility on a global scale. This can be instrumental in driving international expansion efforts. However, it’s important to note that while this amendment offers numerous benefits, it’s not without potential challenges. Companies will need to navigate complex regulatory environments in foreign jurisdictions, which may vary significantly from those in India. They will also need to ensure compliance with international standards and practices, which can be demanding. Overall, this amendment reflects a progressive approach towards fostering a more competitive and dynamic business environment in India. It aligns with global trends towards greater cross-border investment and market participation, ultimately positioning Indian companies on a stronger footing in the global economy.
Policy Implications
While the introduction of the new regime for Indian corporations holds great promise, there are several institutional inconsistencies and hurdles that must be addressed to fully unlock its potential. A critical aspect is the need for significant reforms within the Indian regulatory and legal framework to facilitate seamless cross-border operations for corporations. One immediate concern is the dual compliance burden imposed on companies operating in two distinct jurisdictions. This entails adherence to both the regulatory requirements of the foreign stock exchange and the Indian regulatory landscape, including aspects like beneficial ownership and foreign currency holdings. This dual compliance scenario is likely to result in considerably heightened costs, especially considering the potential for additional requirements from SEBI due to its extended jurisdiction.
Furthermore, the RBI’s Liberalised Remittance Scheme places constraints on investments made by Indian residents in foreign assets. These restrictions, if not reconsidered, could hinder Indian investors from participating in Indian companies and put them at a disadvantage compared to foreign investors. Additionally, the RBI needs to address concerns regarding the marketability of rupee-denominated equity shares on exchanges that operate in different currencies. The transfer of equity shares may also trigger capital gains tax liability, as they are currently considered assets located in India. This means that an Indian company could face tax liability even when its foreign-listed equity is transferred between two foreign residents.
Despite recommendations from expert committees, there is still no clarity on any potential exemptions from this tax liability. Lastly, some apprehensions permitting cross-border listings may lead to a drain of quality listings from the Indian market, potentially exacerbating the existing polarization in the Indian equity market. Policy-makers may need to consider incentives for companies that choose to list in India to mitigate this concern. In conclusion, while the new regime offers substantial advantages, it is imperative to proactively address these institutional challenges to ensure its effective implementation and maximize the benefits for Indian corporations venturing into the global market.
Conclusion
The recent notification from the MCA represents a significant shift in policy, allowing Indian firms to directly list on overseas markets. This move acknowledges the evolving global economic landscape and the need for Indian companies to access international financial markets more flexibly. By enabling direct listings abroad, Indian enterprises can tap into larger pools of capital, attracting a broader spectrum of investors and potentially leading to higher valuations and enhanced financial stability. This is particularly advantageous for startups and emerging-growth companies, which often face challenges in securing adequate funding. Moreover, the amendment recognizes the importance of accurate valuations, as specialized investors in foreign exchanges can provide a more precise assessment of a company’s true value. Diversification of the investor base is another key advantage, reducing reliance on a single market and potentially lowering the cost of capital. Additionally, the amendment acknowledges the strategic benefits of listing on foreign exchanges, offering opportunities for international employee compensation strategies and increased brand visibility on a global scale, crucial for driving international expansion efforts.
However, while this amendment offers numerous benefits, several institutional challenges and hurdles must be addressed to fully realize its potential. The dual compliance burden, constraints on investments by Indian residents in foreign assets, and potential capital gains tax liability for equity transfers are among the key concerns. Additionally, there is a need to proactively consider incentives for companies listing in India to prevent a potential drain of quality listings from the Indian market. In conclusion, the new regime signifies a progressive step towards fostering a more competitive and dynamic business environment in India. It aligns with global trends towards greater cross-border investment and market participation, ultimately positioning Indian companies on a stronger footing in the global economy. However, addressing the identified challenges will be crucial in ensuring the effective implementation of this policy change and maximizing its benefits for Indian corporations venturing into the global market.
This article is written by Mr Aayush Akar & Mr Aditya Gautam, students of NLU Odisha.
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