Government's recent initiative to allow unlisted companies
to list on offshore markets through the depository receipt (DR)
mechanism without the requirement of simultaneous listing in India
is likely to be a major shot in the arm for many sectors, and also
offer exits to private equity players looking to monetize their
investments. Though offshore listing was permitted later last year
by Ministry of Finance, such listings could not happen as SEBI had
not prescribed the disclosures for such listings.
Government has only recently prescribed that SEBI shall not
mandate any disclosures, unless the company lists in India. Once
the air around disclosures to SEBI has been cleared, we can expect
offshore listing of DRs to grow on the back of the reasons set out
First, offshore listing will offer the opportunity to a slew of
young Indian companies to tap the overseas markets, which unlike
domestic markets remain quite vibrant. 2012 saw only 3 mainboard
listings as against 256 in the US.
Second, offshore listing would allow Indian entrepreneurs the
platform to tap investors that have a much better understanding of
the value proposition of the business. For instance, innovative
tech, biotech, internet services are likely to receive a better
valuation on NYSE / NASDAQ as against domestic markets.
Today, markets have become associated with sectors - NYSE /
NASDAQ is known for tech, SGX for real estate and infra, LSE/AIM
for infra and manufacturing. DR's would allow the opportunity
to list on exchanges that are most conducive to the sector.
Third, foreign investors will find it more amenable to invest in
DR's denominated in foreign currency as against INR, which has
depreciated by more than 50% since 2007. Hedging cost is likely to
be an important driver for the growth of DRs. Many private equity
players suffered the wrath of their LPs due to the steep rupee
depreciation, despite the company outperforming the
Fourth, while the offshore listing regime is meant for
fund-raising (it requires that funds must be brought back into
India within 15 days unless utilized offshore for operations
abroad), with a little bit of structuring, the proceeds can also be
used to provide tax free exits to offshore private equity
Since there is no end use prohibition, proceeds of the DR can be
structured to retire existing debt or private equity. With a
growing number of secondary direct funds looking at India, DRs can
be the preferred way to invest in India, retire existing investors
and monetize the investment later on the floor of the exchange.
Fifth, from a tax perspective, investors can finally breathe
easy. There will be no tax on the sale of DRs on the stock
exchange. Hence, investors need not worry about GAAR and substance
in the treaty jurisdiction or risk of indirect transfer
Sixth, listing of DRs is likely to be much cheaper than listing
of shares on foreign exchanges and sometimes the compliance costs
of ADR / GDR may be lower than the compliance costs of domestic
Seventh, offshore listing would give depth to Indian capital
markets as well, and brighten the chances of the company going
public in India after having a successful show on the offshore
Eighth, listing on offshore exchanges like NYSE / NASDAQ / SGX
has its own snob value and is likely to benefit many of the younger
companies in gaining reputation and recognition overseas.
Ninth, an increasing number of acquisitions, especially in the
tech space are happening by way of swaps, or in other words, the
shareholders of the target company receiving consideration in form
of shares of the acquirer company.
This is a common strategy to keep the interests of both the
parties aligned post acquisition. With most targets for tech
companies being offshore, such swap deals are hard to achieve, as
there may be few takers for Indian unlisted shares. To that extent,
DRs being dollar denominated can be used as currency for
However, notwithstanding the enormous benefits that the offshore
listing regime brings, its success remains circumspect as the
scheme has only been allowed for 2 years on a pilot basis. The
specter of what will happen after 2 years (6 months of which have
already elapsed) and the fear of the government requiring
simultaneous listing in India (as was done in 2004) is likely to
keep many issuers away. Having said that, offshore listing regime
unveils a huge opportunity for fund raising, particularly for young
IT / ITES, biotech companies etc. which do not feature on the list
of either private equity or banks. What remains to be seen is the
if the Government allows for DRs with underlying debt instrument as
This article was published in The Economic Times dated
June 10, 2014. The same can be accessed from the
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The committee set up to draft a Code on Resolution of Financial Firms, by the Ministry of Finance, Government of India, on September 28, 2016, released a draft bill – The Financial Resolution and Deposit Insurance Bill, 2016...
In a race to adopt technology innovations, Banks have increased their exposure to cyber incidents/ attacks thereby underlining the urgent need to put in place a robust cyber security and resilience framework.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).