[Tanaya Desai is a 5th-year student at ILS Law College, Pune]
In its press release dated June 12, 2018, the Securities Exchange Board of India (“SEBI”) expressed its intention to consider facilitating unlisted companies incorporated in India to directly list their equity share capital on foreign exchanges and, concurrently, of foreign firms on Indian exchanges.
In furtherance of the same, by way of the said press release, an Expert Committee (“Committee”) was constituted to further assess this proposition in detail, and inter alia, evaluate the implications and requirements of the same in different aspects. The Committee shall broadly analyse the economic considerations for allowing direct listing of Indian companies on foreign exchanges and vice versa, while also examining the legal, operational and regulatory limitations in facilitating the same. The Committee shall further make appropriate recommendations, upon perusal of the proposal, for a suitable framework for enabling such listing.
The Status Quo
Presently, foreign companies can only list on Indian exchanges by issuance of Indian Depository Receipts (“IDRs”), while Indian companies may do the same by floating American Depository Receipts (“ADRs”) or Global Depository Receipts (“GDRs”). The institution of IDRs in the Indian market, and the subsisting legal framework governing them, was put in place with the intent of facilitating capital raising by foreign investors from the domestic market, and at the same time providing the domestic investors with an opportunity to invest in securities of multinational companies listed on foreign exchanges. The rationale behind issuance of GDRs was to increase the global presence of the Indian companies in order to expand the capital infusion by inducing foreign investors.
Section 2(44) of the Companies Act, 2013 (“Act”) defines GDR as “any instrument in the form of a depository receipt, by whatever name called, created by a foreign depository outside India and authorised by a company making an issue of such depository receipts”, while IDRs are defined by section 2(48) as “any instrument in the form of a depository receipt created by a domestic depository in India and authorised by a company incorporated outside India making an issue of such depository receipts.”
Under the existing regulations, direct listing of foreign entities on the Indian exchanges is not permissible, and an entity may only raise funds by floating such above-mentioned instruments which are created by a domestic depository against the underlying equity of the issuing company. Strict compliance requirements have been in place to regulate this domain as well, with such fund raising permitted to only those entities which comply with the eligibility criteria set out in the Companies (Registration of Foreign Companies) Rules, 2014 in addition to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”) and any directions issued by the Reserve Bank of India (“RBI”). Further, in addition to such eligibility criteria, a foreign company can only undertake an issue of IDRs where:
– It is listed in the country where it is incorporated.
– It has a track record of compliance with the securities market regulations in that country.
– It has not been prohibited from issuing securities by any regulatory body.
The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) amended regulation 98 of the ICDR Regulations, introducing clause (g) to the said regulation, which provides that in addition to the other conditions for issue that an entity has to comply with, “the issuing company shall ensure that the underlying equity shares against which IDRs are issued have been or will be listed in its home country before listing of IDRs in stock exchange(s).”
Evidently, under the existing law, unlisted foreign companies cannot float IDRs unless the entity is first listed on its home exchange, while the same holds true for Indian companies seeking to list on the overseas market. Given the lack of clarity in relation to certain aspects of the mechanism, including repatriation and taxation, while a reasonable number of Indian companies have opted for the GDR route, the IDR mechanism has failed to attract more than one issuer.
While the above restrictions apply to equity listing of companies on the Indian or foreign exchange, as the case may be, it is pertinent to note that Indian entities are permitted to list their debt securities on international exchanges, in the form known as ‘Masala Bonds’.
Remarking on this recent proposition, the markets regulator, SEBI, stated that“Considering the evolution and internationalisation of the capital markets, it would be worthwhile to consider facilitating companies incorporated in India to directly list their equity share capital abroad and vice versa.”
Until now, such avenue remained closed due to SEBI’s concerns over regulation of such entities listed directly on foreign exchanges, without being listed in the domestic market, and also loss of capital from the domestic markets due to the same. If this venture pans out as expected, the change in the legal framework shall provide Indian companies seeking to raise funds with an opportunity to directly tap the offshore capital markets. At the same time, listing of foreign firms in India without having to float INR backed instruments or being subject to restrictions on fungibility would lead to a more competitive securities market, although only time will tell whether it shall indeed augment market conditions or dampen the domestic market.
If approved with a suitable framework out, this proposal to facilitate direct listing shall indeed be a welcome change, by improving fundraising avenues for Indian companies. Though this is in principle certainly a good proposition, from a practical perspective there are numerous regulatory aspects to be dealt with before implementing this proposal. While dealing with direct listing agreements and foreign listing regulations shall be the primary consideration, various tax and other laws reforms in the domestic as well as overseas jurisdiction shall also have to be facilitated.
– Tanaya Desai