As a significant step towards permitting Indian companies to list their equity shares on foreign exchanges, the Finance Minister, in July 2023, announced the Government's decision to enable direct listing of listed and unlisted companies on International Financial Services Centre ("IFSC") exchanges.1 Subsequently, the committee chaired by International Financial Services Centre Authority ("IFSCA") issued a report on direct listing of Indian companies on IFSC exchanges dated December 20, 2023 (the "Report"). The committee identified crucial factors enabling the direct listing of Indian companies on IFSC exchanges including proposed amendments to be issued by the Central Government in relation to (i) the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 ("NDI Rules"); (ii) the Companies Act, 2013 (the "Companies Act") (to be announced by Ministry of Corporate Affairs ("MCA")); and (iii) regulations to be announced by the Securities Exchange Board of India ("SEBI") for listed companies2. These enactments together provide a legal framework for Indian public companies to issue and list their shares in permitted international stock exchanges, which are currently, the India International Exchange and the NSE International Exchange.

OVERVIEW OF THE REGULATORY FRAMEWORK

Enabling direct listing of shares outside India requires operationalising the framework for such direct listings. While enabling provisions were included in the Companies (Amendment Act), 2020 (by way of Section 23(3) and 23(4)) to allow direct listing of public companies in India on permitted stock exchanges, such provisions were not notified by the MCA. The enabling provisions of the Companies (Amendment) Act, 2020 were, subsequently, brought into force by way of a gazette notification issued by MCA with effect from October 30, 2023.

As per the provision, for direct listing outside India, only certain classes of public companies were allowed to list on certain permitted stock exchanges in permissible jurisdictions, as may be prescribed. Accordingly, Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024 ("LEAP Rules") have been issued by the MCA on January 24, 2024, to prescribe the framework for entities eligible to directly list outside India.3 Simultaneously, the Ministry of Finance also issued the 'Direct Listing of equity shares of companies incorporated in India on International exchanges Scheme' ("Direct Listing Scheme") by way of an amendment to the NDI Rules.4

This article delves into the enactments introduced by various authorities post release of the Report and key takeaways outlined in these enactments, i.e. the LEAP Rules and the Direct Listing Scheme.

DETAILED ANALYSIS

LEAP Rules

The LEAP Rules under the Companies Act operationalise the direct listing of securities on permitted international stock exchanges. The LEAP Rules provide the framework an Indian company, listed or unlisted, should follow for direct listing:

  1. Permissible jurisdiction: In accordance with the LEAP Rules, permissible jurisdiction for listing outside India is IFSC. Within the IFSC, the India International Exchange and the NSE International Exchange are recognized as the permitted stock exchanges for listing. This corresponds with the list of permitted stock exchanges provided in the Direct Listing Scheme as well (discussed later).
  2. Ineligible companies: Certain companies are deemed ineligible for direct listing, as per the stipulations under the LEAP Rules, which includes entities with outstanding deposits from the public and negative net worth companies. Additionally, companies that have defaulted in payment to banks, PFIs, NCD holders, or other security creditors face restrictions on direct listing. However, after a two-year cooling off period post such defaults are rectified, such an Indian company can opt for direct listings. Further, disqualification include companies with winding-up applications or pending proceedings, defaults in f iling annual returns or financial statements under the Companies Act, and those with partly paid-up shares. Needless to mention, private limited companies are not allowed to list under the framework.
  3. Issue of shares: The LEAP Rules provide companies the flexibility to issue shares through both fresh issues and offers for sale ("OFS"). This dual approach allows companies to tailor their capital-raising strategies based on their financial requirements, exit strategies contemplated for investors and prevailing market conditions.
  4. Compliances: The compliances post direct listing outside India under the LEAP Rules are minimal. It currently requires filing of a prospectus in e-Form LEAP-1 within seven days from the date of filing of prospectus with the permitted exchange.
  5. Preparation of financial statements: The IFSCA (Issuance and Listing of Securities) Regulations, 2021 ("IFSCA Listing Rules") provide that the Indian issuer shall prepare their statement of accounts in accordance with Indian Accounting Standards ("Ind AS") for the preparation of the offer document. Post listing, Indian companies are required to prepare financial statements in accordance with Ind AS.

Direct Listing Scheme

The Direct Listing Scheme is made under the NDI Rules to operationalise the direct listing of equity shares outside India. It may be noted that the term 'direct listing' under the NDI Rules refers to listing of equity shares of an Indian company directly on a foreign exchange, rather than through depository receipts route. The Direct Listing Scheme provides the framework an Indian company, listed or unlisted, should follow from the perspective of exchange control regulations:

  1. Listed company: An entity which has either equity or debt instruments listed on recognised stock exchanges in India is defined as a listed company. Pending notification of the rules applicable to listed companies (to be notified by SEBI) such entities currently cannot initiate the process for direct listing outside India. However, in the light of the definition of 'listed companies', we need to see if a separate framework for equity listed and debt listed companies are prescribed.
  2. Mode of payment and remittance of proceeds: The mode of payment and remittance of proceeds in direct listing cases is a crucial element yet to be conclusively specified. The Reserve Bank of India ("RBI") is expected to delineate the particulars in this regard soon.
  3. FDI restricted sectors or sectoral caps: Direct listing comes with the imperative to adhere to Foreign Direct Investment ("FDI") restrictions in various sectors. Companies need to comply with sectoral caps and conditions, especially in sectors operating under the government approval route. However, since the majority of sectors under the NDI Rules are under the automatic route, the FDI related restrictions should not pose a challenge for a majority of Indian companies. Clearly, companies operating in FDI restricted route cannot opt for direct listing.
  4. Form of issuance: The form of issuance for direct listing specifying that instruments must be in demat form and rank pari passu. The Direct Listing Scheme states that the public Indian companies are required 04 of 05 to ensure compliance with Depositories Act, 1996. The stakeholders contemplating direct listing must delve into the intricacies of depository services in IFSC to gain a comprehensive understanding of its implementation and practical challenges. Presently, the India International Depository IFSC Limited is providing depository services in IFSC.
  5. Permissible holder of shares: The definition of permissible holder (which includes a beneficial owner) excludes (i) citizens (or entities incorporated in jurisdictions) who share land border with India (for both legal and beneficial owners) unless they have obtained prior central government approval. This is akin to the restrictions set out in Press Note No. 3 of 2020 issued by the central government on review of FDI policy for curbing opportunistic takeovers/acquisitions of Indian companies; (ii) persons resident in India, i.e. including high net worth individuals, retail investors as well as Indian mutual funds. The permitted international exchanges may specify additional eligibility conditions under their regulations in this regard.
  6. Compliance with Foreign Portfolio Investment Limits: The permissible holder is obligated to adhere to the limit specified for foreign portfolio investment under the Direct Listing Scheme.
  7. Eligibility requirements: The eligibility criteria set forth in the Direct Listing Scheme mirror standard conditions akin to SEBI (Issue of Capital and Disclosure Requirements), 2018 ("ICDR"), i.e., no debarment, no wilful defaulter, no fugitive economic offender and not under inspection or investigation under Companies Act.
  8. Arrangement with depositories: The Direct Listing Scheme requires the issuer to enter into necessary arrangement with Indian and foreign depositories. The exact intent behind this provision remains unclear, prompting the need for further clarification and support at an operational level.
  9. Voting: The Direct Listing Scheme outlines the voting process, allowing shareholders to cast votes either directly or through custodians pursuant to voting instructions. Custodians are bound to seek instructions on specific items from permissible holders before casting votes. However, the process surrounding the appointment of custodians and the enabling framework for custodians in the IFSC may require additional support and clarity at an operational level.
  10. Pricing:
    1. For initial listing: The price cannot be less than fair market value. This fair market value acts as a floor price. Subject to this minimum threshold, the pricing is as per the book building method, in accordance with the specifications laid out by the permitted international stock exchanges.
    2. For subsequent issues/transfers: For subsequent issues or transfers, the pricing aligns with the specifications set by the exchange. The underlying intent is to benchmark the pricing based on the prevailing market price.

Notably, the IFSCA Listing Rules in effect since July 2021, have consistently allowed both listed and unlisted Indian companies to explore listing opportunities on IFSC exchanges. The recent introduction of the LEAP Rules and the Direct Listing Scheme discussed herein mark a significant step towards a more cohesive regulatory framework. As these changes unfold, it is anticipated that further amendments may be made to the IFSCA Listing Rules to align various aspects, as indicated by the press release inviting comments on IFSC regulations.

CONCLUSION

The interplay between domestic laws and those of the IFSC plays a pivotal role in shaping our understanding of the securities market framework for listing of Indian companies on the IFSC exchanges. Notably, post-listing scenarios for unlisted public companies on stock exchanges regulated by IFSC, which fall outside the ambit of 'recognized stock exchanges' defined by the Securities Contracts (Regulation) Act, 1956, may continue to be treated as unlisted companies under the Companies Act. The regulatory framework under the LEAP Rules and IFSCA Listing Rules, intriguingly, remains silent on minimum public shareholding requirements. Moreover, prohibition on resident Indians trading or investing under the Direct Listing Scheme, creates a weakened incentive structure for companies raising funds basis the strength of their brand recall, particularly in India. Public companies operating in sectors barred from receiving FDI too would find themselves unable to issue equity shares under the Direct Listing Scheme, which from a policy perspective is the correct approach.

However, amidst these challenges, there are incentives for permissible holders, as transactions on permitted stock exchanges occur in foreign currency, mitigating currency risk. Additionally, extended trading hours on these exchanges cater to investors based out of varying time zones from other significant jurisdictions. It is noteworthy that there is no mandatory requirement for unlisted public companies intending to list on permissible international exchanges to simultaneously list on domestic exchanges in India. The flexibility provided herein for companies to opt for dual listing, facilitating a strategic approach to accessing global capital markets.

In essence, the regulatory landscape within IFSC poses both challenges and opportunities for unlisted public companies navigating the intricate path of international listings. Lastly, while the notification of the LEAP Rules and Direct Listing Scheme is a welcome development, the operational guidelines to be announced by SEBI is awaited, along with clarity on certain aspects from RBI, as discussed in this article.

Footnotes

1 Press release, Ministry of Finance, accessible at: https://pib.gov.in/ PressReleaseIframePage.aspx?PRID=1943686. (July 28, 2023)

2 SEBI is in the process of issuing the operational guidelines for listed public Indian companies. Press Release, Ministry of Finance, accessible at: https:// shorturl.at/blmLR (January 24, 2024)

3 Notification no. G.S.R. 61(E) issued by MCA vide notification dated January 24, 2024.

4 Notification no. S.O.332(E) issued by Ministry of Finance vide notification dated January 24, 2024.

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