Direct Overseas Listing: Assessing the Viability of Proposed Reforms

[Suneha Kasal and Swini Khara are III year law students at NALSAR University of Law, Hyderabad]

Considering the ongoing evolution and internationalization of capital markets across the globe and change in the complexion of Indian companies, the Securities and Exchange Board of India (SEBI) recently acknowledged that the current regulatory framework on ‘direct overseas listing of equity shares’ comes in the way of global expansion.

Under the prevailing regulatory structure in India, the only available route 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) regimes. Companies incorporated in India can list their debt securities on foreign stock exchanges directly in the form of masala bonds, foreign currency convertible bonds (FCCB) and foreign currency exchangeable bonds (FCEB).  On the other hand, companies incorporated outside India can access the Indian capital markets only through the Indian Depository Receipts (IDR) framework. However, an economic case is evidently absent because IDRs do not have liquidity and trading volume, while ADRs and GDRs have a currency conversion differentiation in the stock prices as a result of which investors have access to only a handful of stocks.

Moving past India’s restrictive tendencies which seem to have continued post-liberalization, the SEBI set up an expert committee to consider the direct listing of Indian firms on foreign exchanges. The panel continued from where Sahoo committee left matters in 2013 by identifying potential economic benefits and policy issues associated with direct listing of shares abroad. It recommended legal, operational and regulatory changes in order to facilitate companies incorporated in India to directly list their equity share capital abroad and vice versa.

The report makes suggestions for amending existing securities regulations to facilitate maximum efficiency in overseas listing of shares by allowing companies to follow a wide range of accounting standards, requiring high paid-up capital and implementing strong anti-money laundering policy. However, it does not particularly address measures for investor protection against foreign companies. Among prohibitions on insider trading, investor awareness and stringent disclosure guidelines, a feature which used to be exclusive to India was IPO grading which was only recently removed.

IPO grading is a rating of a listed firm on a five-point scale which indicates fundamentals and prospects of the issuing business entity in comparison with other listed firms. Pricing is not affected as the grading does not take into consideration or comment on the issue price of shares, but grades purely on the reliability of the IPO. This grading is targeted more towards individual investors who are relatively less informed of the market than institutional investors. Applying neutral credit agency grading to foreign corporations listed on Indian stock exchanges will aid Indian investors who generally do not have any idea about the background, stability, credibility and competence of the foreign company being listed.

The report proposes that companies follow compliance requirements and securities regulations of home country and the foreign jurisdiction where it is listed.  Companies may choose to not list on Indian stock exchanges due to burdensome and differential regulatory requirements. There is a necessity for simultaneous participation in a regulatory market which is integrated through mutual recognition of different regimes of various countries. An example of this mutual recognition is the Tafara-Peterson Framework of substituted compliance of the U.S. Securities and Exchange Commission (SEC) with Canada, Australia and European Union.

The concept will allow SEBI to pick certain foreign stock exchanges and jurisdictions which substantially comply with Indian securities law. Firms listed on such exchanges will be exempted from registering and complying with with Indian regulations and instead could continue operating under home-state regulations. While anti-fraud and money laundering regulatory power remains with SEBI, collaborating with similar securities regulators in a manner analogous to selecting permissible jurisdictions can go a long way towards achieving high regulatory standards in a globalized market. Substituted compliance can increase the ease of doing business, reduce transaction costs, keep up with blurred market borders and increase access of Indian investors to foreign markets.

Additionally, the report does not actively counter currency fluctuation risks in case of rupee denominated shares listed on foreign browsers and the Foreign Exchange Management Act (FEMA) regulations associated with it. This in all possibility has a potential effect on free float and buy back of the shares once they have been listed. In case of a buy back, the report is silent with respect to applicability of remittance restrictions.

Finally, a major traction on the issue of overseas listing is the non-inclusion of stock exchanges set up within the International Financial Services Centre (IFSC) in Gujarat International Financial Tech-City SEZ (GIFT City) as a ‘permissible jurisdiction’ in the report, such that Indian companies could list there directly.

Stock exchanges in the IFSC, such as the India International Exchange Limited and the NSE International Exchange (NSE IFSC) are recognized as overseas exchanges where companies incorporated in India can list their debt securities such as masala bonds and foreign currency bonds to raise funds. However, the report has not recommended recognizing such exchanges as foreign exchanges for dealing in equity shares of Indian companies.

Stock exchanges within the IFSC sufficiently satisfy the criteria adopted by the committee to choose ‘permissible jurisdictions’, which mainly requires membership in the board of the International Organization of Securities Commissions (IOSCO) and the Financial Action Task Force (FATF), and compliance with treaty obligations which necessitates sharing of  information and cooperating with Indian authorities in the event of any investigation.

Furthermore, stock exchanges operating within the IFSC provide competitive advantage in the following terms:

–    Provision of peculiar tax structures and supportive regulatory framework that e comparable with other global financial centres. These include waiver of several taxes like securities transaction tax, commodities transaction tax, dividend distribution tax, capital gains tax and goods and service tax.

–  Availability of trading in securities in any currency, which also reduces the risks involved with respect to currency fluctuations as previously discussed.

–  Provision of longer trading days than what stock exchanges are currently permitted in India. These timings facilitate international investors and non-resident Indians to trade from anywhere across the globe at their preferred timings.

At times, direct overseas listing is expensive due to the costs involved in the initial listing and ongoing obligations. Differing regulatory and accounting standards may complicate the company structure affecting operational efficiency of the company. Thus, drawbacks of direct overseas listing may overpower advantages associated with it. However, stock exchanges within the IFSC to a large extent subvert the differences in regulatory systems and accommodate Indian companies without necessitating a change in their structure thereby conferring upon them the benefits associated with direct overseas listing.

There is a need for making Indian securities regulation more adaptable by standardizing compliance mechanisms with global markets, increasing investor protection at an international level and including international exchanges established within Indian territory in the cross-listing framework. Implementation of the proposed structure will enable great strides in Indian participation in the global capital markets.

Suneha Kasal and Swini Khara

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