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Overseas Direct Listing of Indian Companies

Background:

  • Earlier, companies incorporated in India could list their debt securities on international exchanges (Masala Bonds) but their equity share capital could be listed abroad only through the American Depository Receipt / Global Depository Receipt route. Similarly, companies incorporated outside India could access the Indian capital markets only through the Indian Depository Receipt route. Direct listing of the equity share capital of companies incorporated in India was not permitted on foreign exchanges and vice versa.
  • Considering the evolution and internationalization of the capital markets, and to facilitate companies incorporated in India to directly list their equity share capital abroad and vice versa, the Securities and Exchange Board of India (“SEBI”), the capital markets regulator of India, constituted a high-level committee comprising of members of SEBI, top financial institutions, and law firms of India on June 12, 2018. The task of the committee was to submit a report on the direct listing of equity shares of companies incorporated in India on overseas stock exchanges. The committee submitted its report in December 2018[1] (“SEBI Report”) where it strongly batted in the affirmative for direct listing.

 

The companies (amendment) bill, 2020:

  • The following are the stages of introduction of the Companies (Amendment) Bill, 2020 which was introduced in Lok Sabha by the Minister for Corporate Affairs, Ms. Nirmala Sitharaman.
    • Introduced in Lok Sabha- March 17, 2020
    • Passed in Lok Sabha- September 19, 2020
    • Passed in Rajya Sabha- September 22, 2020
  • As per the Government Press Release[2], the Ministry of Finance, in consultation with the Ministry of Corporate Affairs, the Reserve Bank of India (RBI) and SEBI has commenced working on a framework for this purpose.

 

The companies (amendment) act, 2020 (“act”) – overseas direct listing:

The Act provided for amendment an in Section 23[3], Companies Act, 2013 which provides for ‘Public Offer and Private Placement’ whereby the following sub-clause was added:

(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.

(4) The Central Government may, by notification, exempt any class or classes of public companies referred to in sub-section (3) from any of the provisions of this Chapter, Chapter IV, section 89, section 90 or section 127 and a copy of every such notification shall, as soon as may be after it is issued, be laid before both Houses of Parliament.

 

Permissible foreign jurisdiction:

Section 23 (3) (inserted through amendment) under the Act states that public companies may issue such class of securities to be listed on permitted stock exchanges in ‘permissible foreign jurisdiction’. The term ‘permissible foreign jurisdiction’, as per the SEBI Report, may include a jurisdiction which has treaty obligations to share information and cooperate with Indian authorities in the event of any investigation. It was 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:
  • a jurisdiction having strategic anti-money laundering or combating the financing of terrorism deficiencies to which countermeasures apply; or
  • 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;
  • any other jurisdiction 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 SEBI Report had suggested the following 10 permissible jurisdictions which have strong anti-money laundering laws:

  • United States of America- NASDAQ, NYSE
  • United Kingdom- London Stock Exchange
  • China- Shanghai Stock Exchange, Shenzhen Stock Exchange
  • Japan- Tokyo Stock Exchange, Osaka Securities Exchange
  • Hong Kong- Hong Kong Stock Exchange
  • South Korea- Korea Exchange Inc.
  • Switzerland- SIX Swiss Exchange
  • France- Euronext Paris
  • Germany- Frankfurt Stock Exchange
  • Canada- Toronto Stock Exchange

 

Benefits:

This amendment batted strongly for fewer regulations regarding direct overseas listing for Indian companies, and to a large extent, it had been successful in doing so, but at the same time, the Government or SEBI did not exempt companies from any kind of regulation as it would then facilitate money laundering through a direct listing. This Amendment would give a free hand to companies to raise money through direct listing and requires regulatory measures only where it is necessary, hence improving the ease of doing business in India. The Act facilitates for issuing securities in permissible foreign jurisdictions has various benefits with regard to the ease of doing business, as mentioned hereunder, especially for the start-ups:

  • Financial Stability/Alternate source of capital: Companies incorporated in India can benefit from accessing capital markets outside of their country of incorporation for various reasons. Many of these benefits are attained from a reduction in the cost of capital in advanced economies with developed financial markets. Given inherent inflation and relatively smaller domestic institutional and non-institutional pools of capital, the cost of capital in India is still higher vis-à-vis that for a foreign corporate thereby putting the Indian company at a disadvantage in the marketplace. Thus, a simple and principle-based international listing regime that enables all 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 is the need of the hour. Raising capital through cross-border listing helps to attain more financial stability and generate a huge volume of capital.
  • Attracts higher and accurate valuations: The markets hit by COVID-19, and the upcoming start-ups will benefit extremely from the overseas listing. Indian unicorn start-ups, like Unacademy and Oyo Rooms, would be allowed to list their shares in the overseas market. The companies would get access to a larger pool of capital. The new rule will allow the Indian companies to compete with foreign entities and attract higher valuations, a broader investor base, and will boost the market globally. Companies listing on foreign stock exchanges with sophisticated asset management infrastructure generally expect to obtain more accurate valuations on their securities than in their domestic capital markets.
  • Better Valuation: Overseas listings enable companies to access specialized industry-specific investor classes, such as high-tech investors, who possess institutional sectoral expertise and are thus better able to value these securities. 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 toward more accurate benchmarking and valuations.
  • Diversified Investor Base: The diversified investor base will increase the demand for their securities and help in decreasing the cost of capital. Listing on foreign stock exchanges broaden and diversify the pool of investors that can acquire and trade the company’s shares, which increases the demand pool for the company’s shares and helps to decrease the cost of capital. For example, a company incorporated in India listed in the United States would be able to access numerous investment funds that would otherwise be prevented by their internal investment criteria from investing in companies not listed in the United States. Such listings also enable companies to diversify their capital-raising activities rather than being reliant only on their domestic market. Besides, Indian start-up or emerging-growth companies will be able to access capital from investors overseas that 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 start-up or emerging-growth companies.
  • Other strategic benefits: Additionally, companies incorporated in India may derive benefits from listing on a foreign stock exchange for other strategic reasons, including facilitation of their international employee compensation strategies, increase in their brand awareness and visibility, and by gaining a currency of exchange with which to pursue their international expansion plans.

 

There are reports that Indian market giants will get listed on overseas platforms in the coming years. Reliance Industries Limited is planning to get its subsidiary Jio Platform listed on NASDAQ by 2021. Several Indian start-ups such as PhonePe, Flipkart, Policybazaar are already preparing to list themselves in the overseas stock market. Walmart Inc-controlled Indian e-commerce firm Flipkart is preparing for an initial public offering overseas as early as 2021. This will help the firm to raise approximately $50 billion.

 

[1] https://www.sebi.gov.in/reports/reports/dec-2018/report-of-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-exchange_41219.html

[2] https://pib.gov.in/PressReleseDetail.aspx?PRID=1605295

[3] 23. (1) A public company may issue securities—

(a) to public through prospectus (herein referred to as “public offer”) by complying with the provisions of this Part; or

*(b) through private placement by complying with the provisions of Part II of this Chapter; or

(c) through a rights issue or a bonus issue in accordance with the provisions of this Act and in case of a listed company or a company which intends to get its securities listed also with the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules and regulations made thereunder.

(2) A private company may issue securities—

(a) by way of rights issue or bonus issue in accordance with the provisions of this Act; or

*(b) through private placement by complying with the provisions of Part II of this Chapter.

(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.

(4) The Central Government may, by notification, exempt any class or classes of public companies referred to in sub-section (3) from any of the provisions of this Chapter, Chapter IV, section 89, section 90 or section 127 and a copy of every such notification shall, as soon as may be after it is issued, be laid before both Houses of Parliament.

Explanation.—For the purposes of this Chapter, “public offer” includes initial public offer or further public offer of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder, through issue of a prospectus.