[This guest post is by Pratik Datta and Mehtab Hans,
who are Consultants at the National Institute of Public Finance and Policy
(NIPFP), New Delhi. They can be reached at prat.nujs@gmail.com
and mehtabhans@gmail.com respectively.]
who are Consultants at the National Institute of Public Finance and Policy
(NIPFP), New Delhi. They can be reached at prat.nujs@gmail.com
and mehtabhans@gmail.com respectively.]
Last week, the SEBI
(Issue of Capital and Disclosure Requirements) (Fourth Amendment) Regulations,
2015 were issued to facilitate listing of start-ups on institutional
trading platforms (ITPs) in India. The regulator is optimistic that start-ups
which list on ITPs will eventually grow and move on to list on the main market.
This is certainly a move in the right direction. But if the regulator is
genuinely interested to give a boost to Indian start-ups, it should supplement
this measure by facilitating Indian start-ups’ access to international capital
markets through depository
receipts.
(Issue of Capital and Disclosure Requirements) (Fourth Amendment) Regulations,
2015 were issued to facilitate listing of start-ups on institutional
trading platforms (ITPs) in India. The regulator is optimistic that start-ups
which list on ITPs will eventually grow and move on to list on the main market.
This is certainly a move in the right direction. But if the regulator is
genuinely interested to give a boost to Indian start-ups, it should supplement
this measure by facilitating Indian start-ups’ access to international capital
markets through depository
receipts.
However, the SEBI
Chief’s recent comments seem to suggest otherwise. Regarding the implications
of this new start-up listing regulations, Mr. U.K. Sinha reportedly
remarked:
“I am hopeful that many of these companies, which
were being approached by Singapore and New York exchanges earlier, would come
and list here.” This seems to suggest that
these new listing norms are more in response to some start-ups’ eagerness to
list abroad. The regulator seems to be under the impression that foreign
listing of Indian start-ups is undesirable from a policy perspective.
Chief’s recent comments seem to suggest otherwise. Regarding the implications
of this new start-up listing regulations, Mr. U.K. Sinha reportedly
remarked:
“I am hopeful that many of these companies, which
were being approached by Singapore and New York exchanges earlier, would come
and list here.” This seems to suggest that
these new listing norms are more in response to some start-ups’ eagerness to
list abroad. The regulator seems to be under the impression that foreign
listing of Indian start-ups is undesirable from a policy perspective.
We argue
that this line of reasoning is fallacious. Listing on an Indian ITP is not necessarily
a substitute for admission
to trading or listing on a foreign trading platform or exchange.
Unlisted Indian start-ups may want to access foreign capital markets like New
York or Singapore for various inherent commercial advantages which Mumbai
cannot offer.
that this line of reasoning is fallacious. Listing on an Indian ITP is not necessarily
a substitute for admission
to trading or listing on a foreign trading platform or exchange.
Unlisted Indian start-ups may want to access foreign capital markets like New
York or Singapore for various inherent commercial advantages which Mumbai
cannot offer.
Some
counterfactuals
counterfactuals
Let us start by assuming for a moment that foreign listings can be
substituted by domestic listings. That would mean that no company incorporated
in Singapore or US would ever want to list abroad – say in London – because
they can raise all the capital they want domestically in Singapore or US
respectively. However, this is not what happens in reality.
substituted by domestic listings. That would mean that no company incorporated
in Singapore or US would ever want to list abroad – say in London – because
they can raise all the capital they want domestically in Singapore or US
respectively. However, this is not what happens in reality.
For example, Constellation Healthcare is a company incorporated in
Delaware, US. Although unlisted in US, it is admitted
to trading on AIM
(London Stock Exchange’s international market for smaller
growing companies). The securities of
Constellation Healthcare that are traded on AIM are not domestic US shares but
Depositary Interests (DIs). DIs are simply mirror images of the domestic
shares, akin to depositary receipts. DIs are issued by a depositary against
underlying shares and have the same International Security Identification
Number (ISIN) as the domestic shares.
Delaware, US. Although unlisted in US, it is admitted
to trading on AIM
(London Stock Exchange’s international market for smaller
growing companies). The securities of
Constellation Healthcare that are traded on AIM are not domestic US shares but
Depositary Interests (DIs). DIs are simply mirror images of the domestic
shares, akin to depositary receipts. DIs are issued by a depositary against
underlying shares and have the same International Security Identification
Number (ISIN) as the domestic shares.
Another example is Yujin International. This company is incorporated
in Singapore but is admitted
to trading on AIM through the DI route. Yujin International’s prospectus
explains the reasons for its admission on the AIM platform. They are to:
in Singapore but is admitted
to trading on AIM through the DI route. Yujin International’s prospectus
explains the reasons for its admission on the AIM platform. They are to:
1. Enhance the company’s reputation with customers and suppliers.
The Directors believe that as an AIM company, Yujin will be in a stronger
position to negotiate contracts and will be seen as a more attractive partner;
The Directors believe that as an AIM company, Yujin will be in a stronger
position to negotiate contracts and will be seen as a more attractive partner;
2. Strengthen commitment from existing employees and to attract
further high quality employees through participation in employee share ownership
schemes. The Directors believe that the prestige of working for a company whose
shares are trading on AIM, together with the possibility of participating in
the Company’s success and growth through employee share ownership is extremely
attractive.
further high quality employees through participation in employee share ownership
schemes. The Directors believe that the prestige of working for a company whose
shares are trading on AIM, together with the possibility of participating in
the Company’s success and growth through employee share ownership is extremely
attractive.
Clearly, these companies are listing their securities in London not
merely because of availability of capital but something more. A related
interesting phenomenon observed by Howson
and Khanna is reverse cross-listing – where listed companies from developed
economies (with matured capital markets) cross-list in developing economies
(with less matured capital markets). To understand why these happen, we need to
go back to the basics.
merely because of availability of capital but something more. A related
interesting phenomenon observed by Howson
and Khanna is reverse cross-listing – where listed companies from developed
economies (with matured capital markets) cross-list in developing economies
(with less matured capital markets). To understand why these happen, we need to
go back to the basics.
Why do firms list abroad?
Substantial literature already exists on this subject. The Sahoo Committee
Report on depository receipts also addressed it. Some of the potential reasons relevant for
the present purpose are explained below:
Report on depository receipts also addressed it. Some of the potential reasons relevant for
the present purpose are explained below:
1. Cost of capital: Cost of capital is more important than mere access to capital. If
AIM in London offers better cost of capital than NYSE in New York, it makes
sense even for a US company to list on AIM. The same logic applies to start-ups
in India. If a Bangalore based start-up is getting better cost of capital in
New York or Singapore as compared to Mumbai, it should be free to choose the
former. Forcing it to stick to Mumbai over New York or Singapore is not in the
best interest of the start-up; however, Indian stock exchanges will clearly
gain out of such a policy since it would shield them from competition with the
international capital markets.
AIM in London offers better cost of capital than NYSE in New York, it makes
sense even for a US company to list on AIM. The same logic applies to start-ups
in India. If a Bangalore based start-up is getting better cost of capital in
New York or Singapore as compared to Mumbai, it should be free to choose the
former. Forcing it to stick to Mumbai over New York or Singapore is not in the
best interest of the start-up; however, Indian stock exchanges will clearly
gain out of such a policy since it would shield them from competition with the
international capital markets.
2. Better valuation: Certain jurisdictions have advantages in particular sectors with
sophisticated sectoral analysts offering better valuation. Let us assume a
company operates as an unlisted Indian start-up producing niche chocolate
products. There are five options to list: Mumbai, New York, London, Singapore
and Switzerland. Such a company may legitimately prefer to list on the Swiss
Stock Exchange (SIX) which dominates the
European food products industry (Nestle SA is listed there) and is likely to
give the company a better valuation. Plus, that may also benefit its brand of
chocolates by associating it with Switzerland. Asking it to list in Mumbai may
not make much commercial sense.
sophisticated sectoral analysts offering better valuation. Let us assume a
company operates as an unlisted Indian start-up producing niche chocolate
products. There are five options to list: Mumbai, New York, London, Singapore
and Switzerland. Such a company may legitimately prefer to list on the Swiss
Stock Exchange (SIX) which dominates the
European food products industry (Nestle SA is listed there) and is likely to
give the company a better valuation. Plus, that may also benefit its brand of
chocolates by associating it with Switzerland. Asking it to list in Mumbai may
not make much commercial sense.
3. Brand visibility and
business operations: A start-up may be exporting
products to a foreign market where it intends to expand its business. In that
case, the start-up may want to list in that foreign market to enhance its brand
visibility – Howson and Khanna refer to this as consumer-commercial markets
bonding. Although listed in India, Infosys was driven by similar considerations
when it undertook a US listing in the late 1990s, as Khanna
and Palepu have analysed. Also, raising capital in the currency of that
foreign jurisdiction, for business operations there, would help it hedge
currency risks. An example
of this phenomenon are Japanese companies with business interests in
mainland China listing in Hong Kong.
business operations: A start-up may be exporting
products to a foreign market where it intends to expand its business. In that
case, the start-up may want to list in that foreign market to enhance its brand
visibility – Howson and Khanna refer to this as consumer-commercial markets
bonding. Although listed in India, Infosys was driven by similar considerations
when it undertook a US listing in the late 1990s, as Khanna
and Palepu have analysed. Also, raising capital in the currency of that
foreign jurisdiction, for business operations there, would help it hedge
currency risks. An example
of this phenomenon are Japanese companies with business interests in
mainland China listing in Hong Kong.
As is evident from the above examples, there are myriad commercial
reasons that may motivate unlisted start-ups to prefer listing abroad rather
than listing domestically. Cost of capital, although important, is just one
factor. Left to itself, an Indian start-up may for genuine business interests
(beyond capital raising) prefer a New York or Singapore listing over Mumbai.
reasons that may motivate unlisted start-ups to prefer listing abroad rather
than listing domestically. Cost of capital, although important, is just one
factor. Left to itself, an Indian start-up may for genuine business interests
(beyond capital raising) prefer a New York or Singapore listing over Mumbai.
Foreign listings do not harm the Indian economy
The fundamental assumption of capitalism is that markets work. If
there is any potential of market failure, regulations must specifically address
them. If there is no potential market failure, no state intervention in the
form of regulation is necessary. The market should be allowed to function
freely.
there is any potential of market failure, regulations must specifically address
them. If there is no potential market failure, no state intervention in the
form of regulation is necessary. The market should be allowed to function
freely.
So what is the potential market failure for foreign listings? The
only possible market failure is lack of investor protection. That is exactly
what securities law tries to do in the first place by imposing disclosure
obligations on the issuer of securities. In case of Indian start-ups listing
abroad, investor protection is a concern for the foreign jurisdiction where the
Indian start-up is listing its securities. It is not a concern for the Indian
regulator. There is no other potential market failure in India. Therefore,
allowing unlisted Indian start-ups to list abroad does not in any way harm the
Indian economy.
only possible market failure is lack of investor protection. That is exactly
what securities law tries to do in the first place by imposing disclosure
obligations on the issuer of securities. In case of Indian start-ups listing
abroad, investor protection is a concern for the foreign jurisdiction where the
Indian start-up is listing its securities. It is not a concern for the Indian
regulator. There is no other potential market failure in India. Therefore,
allowing unlisted Indian start-ups to list abroad does not in any way harm the
Indian economy.
Conclusion
The socialist Indian state has been used to the command and control
form of dirigiste regulations. Post-liberalisation this tendency seems to have continued
by way of inertia. However, in a capitalist market economy (that we now
claim to be), regulations must not seek to substitute business judgement of
commercial firms. Instead it must only address market failures. As we have
explained, there is no market failure in foreign listings for the Indian
regulators to be worried about. Therefore, the most optimal policy solution
would be to create a level playing field between domestic and foreign listings;
and leave it to the start-ups to choose where they want to list. This approach
would be more aligned with the current Government’s aspirations of `start up
India’ and its broader economic philosophy.
form of dirigiste regulations. Post-liberalisation this tendency seems to have continued
by way of inertia. However, in a capitalist market economy (that we now
claim to be), regulations must not seek to substitute business judgement of
commercial firms. Instead it must only address market failures. As we have
explained, there is no market failure in foreign listings for the Indian
regulators to be worried about. Therefore, the most optimal policy solution
would be to create a level playing field between domestic and foreign listings;
and leave it to the start-ups to choose where they want to list. This approach
would be more aligned with the current Government’s aspirations of `start up
India’ and its broader economic philosophy.
– Pratik Datta & Mehtab Hans