Raising funds from foreign Jurisdictions: Assessing , Fading ‘DR’ Route and ‘Overseas Direct listing’.
Raising funds at right time through the right path constitutes a key factor throughout the journey since the incorporation of companies. Looking at the current Indian scenario, apart from the deluge of IPOs and listing at the existing Indian exchanges, domestic companies tend to cross-list due to several reasons, such as an expanding investor base to gain more capital for investment within the company, a growing customer base, to improve stock liquidity, the increasing visibility of the company on a global level, and they wish to take advantage of higher valuations which are often missing in the domestic market due to age-old valuation practice being followed.
Cross-border listings can be done in two ways, namely, direct listing and indirect listing. Direct listing is when the companies offer their equities directly to the general public through stock exchanges without taking the route of Initial Public Offerings (“IPOs”), i.e., there is no involvement of promoters, underwriters, banks, or financial institutions for the direct listing. Thus, it turns out to be very economical for the companies as they tend to save huge overhead expenses in the form of fees and commissions.
However, currently, Indian companies can only use the Depository Receipts(“DR”) routes —ADR or GDR. They can also list their debt securities on international exchanges which are famously known as masala bonds. For foreign companies wanting to list on Indian exchanges, Indian Depository Receipts (IDRs) are the only route available currently.
Global Depositary Receipts (GDR)
Indian companies cannot directly list their equity shares on the international stock exchange. So in order to overcome this problem, the companies give shares to a foreign bank. These banks will take hold of the stock, and issue receipts to Indian companies in return. The companies raise funds by providing those GDR receipts in the share market of any foreign stock exchanges.
As per S. 2(44) of the Companies Act, 2013 read with Companies (Issue of Global Depository Receipts) Rules, 2014, “Global Depository Receipt” means any instrument in the form of a depository receipt, by whatever name called, created by a foreign depository outside India and authorized by a company making an issue of such depository receipts.
The depository receipts can be issued by way of public offering or private placement or in any other manner prevalent in the concerned jurisdiction and may be listed or traded on the listing or trading platform in the concerned jurisdiction.
GDRs act as negotiable certificates. Therefore, they are usually traded just like shares of a company in any international market. A single GDR can represent different amounts of shares, as per the company’s needs and objectives. GDRs can also be used to raise capital from countries in the form of US Dollars or Euros. When GDRs are traded in Euros, they are known as European Depository Receipts or EDRs.
American Depositary Receipts (GDR)
ADRs are created when a non-U.S. company or an investor who holds the underlying foreign securities delivers them to either a “depositary” bank in the U.S. or a custodian in the foreign company’s home country.
Through ADRs, Indian companies who are willing to raise funds from the U.S. can do so by issuing shares on the American Stock exchange. However, the issuance of ADR is governed by the rules and regulations as laid down by the regulator SEC (Securities and Exchange Commission). The Indian Companies will have to maintain accounts as per the American Standards.
For example, if I were an investor with shares of a European company (purchased on a European stock exchange), and I contacted a U.S. depositary bank (through a custodian in my home country), and I told them I’d like to exchange my foreign shares for ADRs, the bank would give me an ADR certificate that represents my foreign shares. From there, I can trade my ADR shares on a U.S. stock exchange or in the over-the-counter market just like I could trade the stocks of a U.S.-based company.
Dr Reddy’s Lab, Infosys ADR, Wipro ADR, HDFC BANK ADR and ICICI Bank ADR are few among the Indian companies who have listed in the US Stock exchanges through the ADR listing.
Present State & Way Forward in Cross Border Listing
Although it is the available route to raise funds through listing at overseas bourses, it is evident that the existing route of raising capital through GDR/ADR has been fading and least pursued by Indian companies, despite the ongoing unprecedented fund cravings prompted by the startup boom in India at present.
Moreover, the route of ‘listing DRs for raising funds’ has considerably tarnished with numerous allegations of misuse and round-tripping and lack of clarity over taxation thus creating an environment of insecurity among investors and companies for subscribing and issuing alike. SEBI is already investigating many companies for their alleged misuse of GDR routes for illegal purposes.
Despite the fact that indirect listing aids Indian businesses in obtaining funding from abroad, it also imposes additional costs on businesses for underwriters and financial institutions. In order to stop the flow of dirty money, SEBI keeps indirect listing under intense scrutiny because to the opaqueness involved.
In light of these concerns, SEBI constituted a high-level expert committee in 2018 to formulate a report and suggest policy changes to pave the way for cross-border direct listing of equity shares of companies incorporated in India. The 2020 amendment to Section 23 of the Companies Act comes in response to the report submitted by this committee which firmly advocated direct listing.
The amendment was made to Section 23 sub clause 3 which stated:
“(3) Such class of public companies may issue such class of securities for the purposes of listing on permitted stock exchanges in permissible foreign jurisdictions or such other jurisdictions, as may be prescribed.”
While consequent amendments and clarifications in legal and regulatory regime are awaited, this amendment batted strongly for fewer regulations regarding direct overseas listing for Indian companies, and to a large extent for the booming Indian start-up eco system, permission for foreign direct listing would be extremely beneficial as majority of domestic start-ups fails to go public in the Indian stock markets. As an exit strategy, foreign Initial Public Offerings (IPOs) in the liquidation preference would now available to venture capitalists and private equity firms. As of now, even if they have strong development possibilities, start-ups in India are unable to list on the Indian stock exchanges since they do not have enough profitability.
While the amendment allowing listing on overseas stock exchanges marks a departure from the existing regime and is a welcome move indeed, actual implementation of the policy required to bear the burden of the present regulatory inconsistencies would substantially over weigh the availability of the opportunities that foreign listing may potentially provide. Therefore, without an accompanying overhaul of the regulatory framework, requiring amendment to several regulations including Foreign Exchange Management (Non-debt Instruments) Rules, 2019; Companies Act, 2013 including rules thereunder; and SEBI regulations related to listing and disclosures, in addition amendment in taxation laws, the newly added provisions may not be able to realize their actual potential.
Ultimately, permitting Indian companies to list in this manner on overseas stock exchanges gives them access to a choice of jurisdictions, from which capital may be raised, with varying costs of capital and listing conditions. It also offers the benefit of increased visibility and grants access to investor bases with a greater understanding of, and appetite for, niche businesses. Thus, the overseas listing of Indian companies will have a considerable impact on the Indian economy.
Author Bio
