During the economic reforms of 1990s, drastic changes were made to the economy by adoption of the principles of liberalization, privatization and globalization. Accordingly, as a part of this reform initiative Indian companies were allowed to raise funds from foreign stock exchanges indirectly through depository receipts mechanism without an obligation to list their shares on the Indian stock markets. Later, in 2005, restrictions were put on the Indian companies from raising funds from foreign exchanges without accomplishing listing in the Indian markets. However, due to mediocre performance of the Indian capital markets, Indian companies faced difficulties in raising enough money from the capital market. Hence, to combat this situation, Indian companies started setting up offshore companies to gain entry to the foreign stock markets. In this background, the government decided to reform the legislation again and allow companies to issue depository receipts through depository receipts mechanism. In addition to this, the government made further changes to the exiting legislation and allowed the Indian companies to list their debt securities through the issue of masala bonds so that they can gain more access to the foreign markets for their fund requirements at better rates.
THE FIRST STEP
Many people raised concerns for not allowing the Indian companies to directly list in foreign jurisdiction stock markets. To address this issue of direct listing of equity shares of companies incorporated in India on foreign stock exchanges and for companies incorporated outside India to list their shares on Indian stock exchanges, a committee was constituted under the Securities and Exchange Board of India (SEBI) namely the "Expert Committee for listing of equity shares of companies incorporated in India on foreign stock exchanges and of companies incorporated outside India on Indian stock exchanges"1 on June 12, 2018 (Committee).The Committee mainly focused on the need for allowing direct listing of shares from the perspective of the Indian economy and the Indian companies. It suggested that allowing direct listing would increase the competitiveness of Indian companies vis-à-vis their global competitors as it would help them get similar benefits in terms of capital and the cost of capital which are enjoyed by their international counterparts.
Further, regarding the dire need to bring these changes, the Companies (Amendment) Bill, 2020 was introduced in Lok Sabha on March 17, 2020, which was passed on September 19, 2020. Later, Rajya Sabha, on September 22, 2020, passed the much-needed changes for direct listing of Indian companies. 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."
PERMISSIBLE JURISDICTIONS FOR LISTING
Regarding the permissible jurisdictions outside India, the Committee recommended to have a proper framework and suggested to include jurisdictions which have treaty obligations to share information and cooperate with Indian authorities in the event of any investigation. It recommended that permissible jurisdiction should be defined to mean a jurisdiction:
- That is a member of the Board of International Organization of Securities Commissions (IOSCO), and whose securities market regulator is either a signatory to the IOSCO's multilateral memorandum of understanding or is a signatory to a bilateral memorandum of understanding with SEBI for information sharing arrangements; and
- That is a member of the Financial Action Task Force (FATF); and
- That is not identified in the public statement of the FATF as: (i) a jurisdiction having strategic anti-money laundering or combating the financing of terrorism deficiencies to which countermeasures apply; or (ii) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies;
- Notified by Central Government in consultation with SEBI and/or other regulatory authorities, following an overall review and evaluation of such jurisdiction's capital markets regulations.
The criteria prescribed are similar to the criteria for determining jurisdictions where listing of masala bonds under the relevant Reserve Bank of India (RBI) circular can take place. Accordingly, the initial list of recommended permissible jurisdictions along with the specified stock exchanges includes following places: United States of America (NASDAQ and NYSE), China (Shanghai Stock Exchange and Shenzhen Stock Exchange), Japan (Tokyo Stock Exchange and Osaka Securities Exchange), South Korea (Korea Exchange Inc.), United Kingdom (London Stock Exchange), Hong Kong (Hong Kong Stock Exchange), France (Euronext Paris), Germany (Frankfurt Stock Exchange), Canada (Toronto Stock Exchange) and Switzerland (SIX Swiss Exchange).
BENEFITS OF GETTING LISTED IN FOREIGN JURISDICTION
There are numerous benefits of direct listing for the Indian economy and the Indian companies. This step will improve the ease of doing business in India by making available much required capital for running the business from foreign jurisdictions.
- Increased competitiveness for domestic companies – Domestic companies especially in the technology and internet sectors face competition from foreign multinational companies both in India and globally. Allowing foreign listing of domestic companies will increase their competitiveness vis-à-vis their global competitors by enabling them to derive the same benefits, whether in terms of access to capital (including at reduced costs) or in terms of other strategic advantages, thus benefiting the health of the Indian economy.
- Alternate Source of Capital for domestic companies – Accessing capital markets in the foreign jurisdiction allows to raise money with relatively lesser cost of capital in advanced economies with developed financial markets. Thus, international listing enables companies incorporated in India to raise capital in the market which optimizes cost and provides the greatest benefits in terms of value, quantum, quality and branding.
- Broader Investor Base – Listing on foreign jurisdiction broadens and diversifies the pool of investors which increases the demand for the company's shares and helps to decrease the cost of capital. Indian start-up or emerging-growth companies will be able to access capital from investors overseas who may be more receptive to their securities than Indian investors, who have typically focused on companies with proven track records of profitability and growth, and have generally exhibited less appetite for startup or emerging-growth companies.
- Better valuation – Companies listing on foreign stock exchanges generally obtain more accurate valuations on their securities when compared to that of domestic capital markets. Listings on foreign stock exchanges can also increase analyst coverage for the listed shares and facilitate clearer comparisons against other peer companies that are listed overseas, each of which contribute towards more accurate benchmarking and valuations.
- Strategic benefits – Domestic companies experience increase in their brand's awareness and visibility, and gain a currency of exchange with which to pursue their international expansion plans.
- Availing benefits under other schemes: Direct listing would allow the Indian companies to use the Liberalized Remittance Scheme to use up to $250,000 per financial year for investment/expenditure outside India.
IMPACT ON INDIAN START-UPS
For Indian start-ups, permission for foreign direct listing would be extremely beneficial as majority of domestic start-ups fails to go public in the Indian stock markets. Now, the venture capitalist and the private equity firms can use overseas Initial Public Offering (IPO) in the liquidation preference as an exit option. In India, the start-ups are not able to go public in Indian stock exchanges as they don't have sufficient profits to get listed in the market though they have high growth prospects factor. Listing in overseas jurisdiction helps companies to access capital at lower cost and at better valuation.
GAINING IPO THROUGH SPECIAL PURPOSE ACQUISITION COMPANY (SPACS)
SPACs are the most viable option available to the startups as it would be difficult for a start-up company to get an IPO without any proper presence or financial performance to meet the cost involved in IPO. SPACs raise money from the public with an intention to acquire companies with good growth prospects making it relatively easier for start-ups to enter foreign stock markets. 2
Already two venture capital firms, Elevation Capital and US-based Think Investments, are setting up a SPAC focused on Indian tech companies seeking to list in America. This would help the Indian tech companies who want to go public in overseas stock market, as this SPAC would be focusing on the Indian technology ecosystem. Indian companies such as Grofers and ecommerce major Flipkart have already started exploring the SPAC route for foreign listing and few other Indian start-ups such as Policy Bazaar, Nykaa and Delhivery plan to go public through the SPAC route.
Indian companies are now allowed to list their shares on foreign stock exchanges through Global Depository Receipts and American Depository Receipts. Overseas listing of securities will help them to raise funds from foreign stock exchanges. This will enable them to have a better presence in the global markets and give them a global level playing field. As majority of start-ups lack profit in initial stages, this could be a crucial competitive edge for companies which have better growth prospects even without meeting the profit criteria.
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.