Cross Listing of Shares: A Start

[Rahul Sinha is a consultant with EY]

The Securities and Exchange Board of India (“SEBI”) constituted 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’ on 12 June 2018 with a view to facilitating companies incorporated in India to directly list their equity shares on foreign stock exchanges and companies incorporated outside India to list on Indian stock exchanges. The Expert Committee submitted its report on 4 December 2018.

A cross listing (also termed a ‘secondary listing’) occurs where one company’s shares are listed on more than one stock exchange. The company generally starts with an initial or primary listing on one exchange, and then moves to list in another or multiple jurisdictions. Listing in another jurisdiction allows the company to access capital that it would not readily have access to within its primary listing jurisdiction.

A dual listed structure is a series of contractual arrangements between two listed entities under which they operate as if they were a single economic enterprise while retaining their separate legal identities. The shares of each entity are not convertible into the other, but the shareholders benefit from the combined profits of the companies.

The only available routes for companies incorporated in India to access the equity capital markets of foreign jurisdictions is through the American Depository Receipts (“ADR”) and Global Depository Receipts (“GDR”) regime. Companies incorporated in India can list their debt securities on foreign stock exchanges directly through the masala bonds and/or foreign currency convertible bond (“FCCB”)/foreign currency exchangeable bonds (“FCEB”) framework.  On the other hand, companies incorporated outside India can access the Indian capital markets only through the Indian Depository Receipts (“IDR”) framework.

Why Cross Listing?

– Dual listing is an easy option as it can help avoid capital gains tax and other complex tax issues while offering the benefits of scale and merger synergies without the need for a disposal or transfer of shares.

– Another advantage from the company’s perspective is an increased profile and global presence, which can be valuable when expanding brands or operations into other markets or overseas.

– From shareholders’ perspective a secondary listing may offer diversification of their investment, increased liquidity of their shares, and potentially lower investment risk as the shares are exposed to two or more markets rather than one.

– The market works a lot on sentiments of investors, and getting a domestic company listed on NYSE or NASDAQ would demand better valuation for homegrown companies as well as enhance the status of organization.

– Domestic companies will have access to foreign currencies which can be used to fund project at a global level.

Highlights of the report submitted

1. The framework should allow listing only on specified stock exchanges in Permissible Jurisdictions outside India. A Permissible Jurisdiction includes a jurisdiction which has treaty obligations to share information and cooperate with Indian authorities in the event of any investigation. Permissible Jurisdictions have also been defined in the report. The criteria to determine permissible jurisdiction is like the one used by the Reserve Bank of India (“RBI”) for listing of masala bonds.

2. Amendments to the Foreign Exchange Management Act, 1999 (“FEMA”) along with its circulars, press notes, etc., the Companies Act, and SEBI regulations must be carried out to legally implement the framework.

3. The KYC and Anti Money Laundering requirement could be similar to ones issued by RBI for masala bonds in the permissible jurisdiction. The Significant Beneficial Owners rule, 2018 have to be extended to include persons residing in the permissible jurisdiction and the requirements could remain constant.

4. If a foreign company is listing on Indian stock exchanges then e-voting must be made mandatory, financial statements should be prepared in English and according to one of the following: Ind AS; IFRS; US GAAP; or the country of incorporation’s local GAAP.

5. The Department of Revenue could exclude foreign companies from requirements under Place of Effective Management (“POEM”) provisions solely because it being listed in India.

6. The taxation aspect of the cross listing will have to be undertaken by Income Tax Department.

The report is well intended and if cross listing is allowed it can take the Indian economy to new heights, and the brand ‘India’ will also get its due share in the financial market. The regulatory struggle is high, there would be requirements of higher accounting and governance standards, and amendments in a number of regulations and Acts have to be undertaken. There would be additional burden of regulation on SEBI, NSE and BSE. There are several tax issues to be resolved such as determination of fair market value of shares.

Rahul Sinha

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