[Eshvar Girish is a 5th year BBA LLB student at Christ University]
Recently, the Union Cabinet approved a proposal to allow the listing of Indian companies overseas directly, without being listed on the domestic stock exchanges. India Inc. has perceived this approval as a much-needed move. Keeping this in mind, this post aims to analyze the implications of direct listing of Indian companies overseas and the impact of such a move on the Indian economy at large. Further, it suggests various reforms to rejig the extant regulatory framework in order to facilitate the direct listing of Indian companies overseas.
Current Access to Global Capital Markets
Currently, India Inc.’s ingress into foreign capital markets is predominantly restrained to the listing of American Depository Receipts [ADRs] and Global Depository Receipts [GDRs] or the listing of debt securities such as masala bonds, foreign currency convertible bonds [FCCB], and foreign currency exchangeable bonds [FCEB] on foreign stock exchanges. Moreover, only listed Indian companies are allowed to be listed in foreign jurisdictions.
While making use of the limited options available, companies like Infosys, Wipro, and ICICI Bank are issuing ADRs to raise capital while other companies like MakeMyTrip have incorporated overseas to be listed on the Nasdaq. However, the cumbersome regulatory requirements have made overseas incorporation and listing of debt securities abroad a road less traveled by Indian companies.
In order to overcome the restrictive nature of the Indian bourses, SEBI set up an expert committee in 2018 to examine the implications of direct listing of Indian companies on foreign exchanges. Prior to the constitution of the expert committee, a similar committee called the Sahoo Committee was constituted in 2013 to review the framework of India Inc.’s access to domestic and overseas capital markets. While taking into consideration the findings of the Sahoo Committee, the expert committee has deliberated extensively on various legal, operational, and regulatory changes required to be made to allow Indian companies to directly list their equity shares abroad and vice versa.
SEBI Expert Committee Report
The expert committee comprising seven members has laid down a blueprint to orchestrate an efficient legal framework for direct overseas listing of Indian companies. The key findings of the expert committee [expert report] published in December 2018 are discussed below.
Due to the concerns regarding misuse of the overseas listing framework by companies to undertake prohibited activities such as round-tripping of funds, the expert report has suggested that listing must be allowed only on specified stock exchanges in permissible jurisdictions outside India. Permissible jurisdictions are those that are bound by treaty obligations to cooperate with Indian regulators in case of an investigation. These jurisdictions may be identified based on membership of countries of international organizations such as the International Organisation of Securities Commissions (IOSCO) and the Financial Action Task Force (FATF), which follow strict security regulations.
Further, SEBI’s notified list of permissible jurisdictions and stock exchanges for the listing of depository receipts can be used as a guide to determine where overseas listing could be allowed. The notified list includes Nasdaq and New York Stock Exchange in the US, Shanghai Stock Exchange and Shenzhen Stock Exchange in China, Tokyo Stock Exchange and Osaka Securities Exchange in Japan, Korea Exchange Inc. in South Korea, London Stock Exchange in the UK, Hong Kong Stock Exchange in Hong Kong, and Euronext Paris in France.
Choosing the listing avenues by SEBI must be contemplated on the nature of the business and the niche companies some stock exchanges are known for. For instance, Nasdaq is a lucrative platform for technology companies while the London Stock Exchange is lucrative for mining companies. Moreover, listing on stock exchanges abroad can fetch a much better valuation for such niche companies which might not be the case if they are listed on domestic stock exchanges.
Benefits of Access to Global Capital Markets
Listing of shares by companies incorporated in India on foreign stock exchanges will enable them to tap foreign capital at a lower cost. Further, this will facilitate the growth of the Indian economy thereby promoting economic development. Similarly, the listing of shares on the Indian stock exchanges by companies incorporated overseas will ensure the effective allocation of capital and enable Indian investors to have a diversified portfolio.
Furthermore, the expert report elucidates how Chinese companies have made the most out of tapping overseas markets. Between 2013 and 2018, 91 Chinese Companies managed to raise a whopping $44 billion through initial public offerings on the New York Stock Exchange and Nasdaq in the United States. Allowing direct overseas listing could have a similar effect on Indian companies. It is important to realize that direct overseas listing can attract a broader investor base, increase the competitiveness of Indian companies with respect to diversified pools of capital, and catapult the Indian brand globally.
Tweaking the foreign exchange control regime
With the objective of making domestic listings attractive for overseas companies, the report extends further relaxation to the Indian depository receipt [IDR] framework such as doing away with the mandate of identification of promoters since most global companies do not follow the concept of controlling group. The report also seeks relaxations in the Foreign Exchange Management Act, 1999 [FEMA] to permit resident Indians to invest in and transfer securities of companies incorporated overseas and to allow such companies to open bank accounts in India denominated in the rupee.
Enabling provisions under the Companies Act
Although regulations pertaining to the listing of shares under the Companies Act, 2013 such as the issuance of prospectus might be similar across different jurisdictions, other regulations are likely to differ. The expert report recommends that companies listing overseas must be exempted from the applicability of such provisions.
While the expert report dwells sufficiently on the reforms to be made, the author shall suggest a few reforms which need to be made by the SEBI, RBI, and the tax authorities to revamp the regulatory framework for the overseas listing of Indian Companies.
A friendly approach by SEBI
SEBI must adopt certain relaxations on disclosures of beneficial ownership. An Indian company listing overseas would be subject to the laws of two jurisdictions, i.e., India and the host country where its shares are listed. Since the listing company has to adhere to the beneficial ownership requirements of the host country’s stock exchanges, SEBI must not impose any additional Indian requirements in order to facilitate the ease of doing business for such companies. Further, disclosure requirements of two jurisdictions would be tedious to follow owing to the increase in compliance requirements and compliance costs for companies.
When Indian entities are listed overseas, they will be bound by SEBI regulations as well as the security regulations of the foreign jurisdictions. Therefore, the extant SEBI regulations must be modified to align with the regulations of the foreign jurisdictions. However, if conflicts still arise, India must be able to co-ordinate with the other jurisdictions in order to resolve the same.
Relaxation of norms by RBI
The Liberalised Remittance Scheme [LRS] imposes a cap on Indians investing in assets located overseas that is inclusive of foreign companies. If the current Foreign Portfolio Investment [FPI] limits persist, foreign investors can invest up to the prescribed limit in the shares of companies listed overseas whereas Indian investors will be subjected to the limits prescribed under the LRS. The RBI will have to do away with the applicability of such a cap on investments to ensure a level playing field for domestic and foreign investors.
Currently, it is ambiguous as to how the issuance and marketability of rupee-denominated shares on foreign stock exchanges will be facilitated in the absence of full capital account convertibility, i.e., conversion of local financial assets into foreign financial assets without any restrictions. Therefore, the RBI needs to efficiently address the issue of full capital account convertibility.
The Foreign Exchange Management (Non-debt Instruments) Rules must be amended to include investments by a non-resident entity in the equity shares of an Indian company listed overseas.
Relief from tax authorities
Under the current income tax law, capital gains tax is levied on the transfer of overseas-listed equity shares since such shares are treated as a capital asset situated in India. Levy of capital gains on transfer of shares of offshore listed Indian companies between two foreigners may render them unattractive when compared to foreign companies. The absence of tax relief in such cases would be contradictory to the objective of overseas listing. As the expert committee has rightly pointed out, the exemption from capital gains for offshore listed depository receipts must be extended to offshore listed equity shares as well.
There are already rumours doing the rounds that Reliance Industries Limited is gearing up to list its subsidiary, Jio Platforms, on Nasdaq by 2021. This could set the trend for other companies to list their equity shares overseas. Further, this could not only be a great way for Indian companies to raise capital but it could also bolster the cross-border collaborations between India and other countries.
Surprisingly enough, the decision to allow overseas listing is not all rosy. The absence of quality listings on the Indian bourses in recent times has led to the creation of a polarized market wherein investors are only willing to buy the top 150-200 stocks since they account for the major turnover of the Indian equity market. The author contends that a higher level of polarization will be seen in the equity markets once the overseas listing regulations are rolled out as bigger companies will want to be listed overseas. Consequently, this will cause a decline in the long-term development of the Indian equity markets which needs to be prevented by taking appropriate measures on this front.
– Eshvar Girish