Foreign Direct Listing: Status of an Unlisted Public Company Post-Listing

[Sanyam Jha is a 4th year law student at West Bengal National University of Juridical Sciences, Kolkata]

The transformation of India’s legal framework in terms of global fundraising opportunities for local enterprises represents a key step toward attracting foreign investment and boosting growth potential. Historically, Indian enterprises sought access to foreign cash through methods such as depository receipts or borrowing abroad. Recognizing the need for a more efficient strategy to accessing global capital markets, the Government of India launched a progressive endeavor to permit direct listings of prescribed securities on recognized overseas exchanges.

This dramatic change was realized by the insertion of an enabling provision within the legal framework, especially through the Companies (Amendment) Act, 2020, which altered section 23 of the Companies Act, 2013 (‘CA, 2013’). This modification, which became effective on October 30, 2023, defined the procedures for direct listing of securities on specified stock exchanges in permitted foreign countries. The Ministry of Corporate Affairs (‘MCA’) then issued the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024 (‘LEAP Rules’), which went into effect on January 24, 2024, providing a comprehensive regulatory framework for the implementation of direct listings.

Recognizing the impact of cross-border share listings on money mobilization from non-resident firms, the Ministry of Finance (‘MoF’) revised the rules under the Foreign Exchange Management Act (‘FEMA’). The FEMA (Non-Debt Instruments) Amendment Rules, 2024 went into effect on January 24, 2024, and made the necessary changes to the FEMA (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’), primarily under Chapter X, which governs investments by permissible companies.

The operationalization of direct listings involves strict adherence to the sectoral caps and restrictions outlined in Schedule I of the NDI Rules. Furthermore, the issuance of shares by unlisted public companies for direct listing must adhere to prescribed disclosure standards, including the timely filing of a prospectus in form LEAP-1 with the Registrar of Companies (ROC) within seven days of finalization and submission to the permitted exchange.

Crucially, post-listing duties include the compilation of financial statements in conformity with Indian Accounting Standards (‘Ind AS’), highlighting the need of regulatory harmonization with global accounting principles. This combination of legislative and regulatory frameworks demonstrates the collaborative efforts to enable smooth access to international financial markets while maintaining transparency, investor protection, and regulatory compliance.

Regulatory Changes and Distinction Between Non-Dual v/s Dual Foreign Listing

The Government has undertaken several legislative adjustments to allow Indian firms to list directly in overseas markets. These regulatory reforms stem from the SEBI Expert Committee Report on the feasibility of permitting Indian firms to list on international stock markets and foreign companies to list on Indian stock exchanges. The findings sought to enable Indian firms to list on overseas stock markets and foreign companies to list on Indian stock exchanges. They also recommended the regulatory adjustments that would be required to do the same.

Based on this, the Government amended section 23 of the Companies Act to enable Indian firms to list on overseas stock markets while prohibiting foreign companies from doing the same. To list its securities in India, the latter must use the Indian Depository Receipts method. Similarly, the government issued the LEAP Rules and the FEMA Amendment Rules, which outline the procedure for listing on international stock exchanges as well as the qualifying requirements for Indian firms to list on foreign stock markets. The India International Exchange and the NSE International Exchange at India’s International Financial Services Centre are the two stock exchanges that are currently permitted for this purpose.

Section 23(3) provides that ‘[s]uch class of public companies may issue such class of securities for the purposes of listing on permitted stock exchanges … as may be prescribed’ . Rule 3 of the LEAP Rules indicates that they apply to both unlisted and listed public firms. This means that a public company can list its equity shares on either the international or local stock exchanges. The former can be referred to as a non-dual foreign listing, whilst the latter is a dual listing.

Implications of Allowing Non-Dual Foreign Listing

While allowing listed public firms to cross-list on approved overseas markets is a positive step, allowing unlisted public companies to directly list on permitted foreign exchanges requires caution. The latter would allow non-dual foreign listing, which would present additional issues.

Non-dual overseas listing will be damaging to domestic shareholders’ rights in India’s unlisted public businesses. Traditionally, the Securities and Exchange Board of India (‘SEBI’) has no jurisdiction over unlisted public businesses. This is further supported by the LEAP Rules, which provide that SEBI exclusively has jurisdiction over listed public entities. Its many rules, such as the SEBI (Listing Obligations and Disclosure Requirements) rules 2015 and the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 are only applicable to listed firms. These rules impose a slew of transparency obligations on businesses to safeguard the interests of all stakeholders, primarily shareholders. Allowing unlisted public corporations to list on overseas stock markets would enable these companies to raise cash from the public while avoiding SEBI’s regulatory authority. Furthermore, the foreign jurisdiction where the shares of the unlisted public company will be listed may impose less disclosure obligations on the foreign firm. For example, in the United States (a permitted jurisdiction), foreign direct listing businesses are subject to much reduced disclosure requirements.

As a result of the combination of these considerations, non-dual international listing considerably limits shareholders’ transparency rights. This is especially essential since rule 4(1) of the LEAP Rules permits both the issuance of new equity shares and the offer by existing shareholders to sell their shares for listing on a foreign stock exchange. The issuance of additional equity shares would still require the approval of the majority of current shareholders, since a special resolution is required under section 62(1)(c) of the Companies Act, 2013. In the case of a public company, however, an offer to sell shares by even a few owners does not require the permission of other shareholders. This means that a few owners can list their shares on a foreign stock market at the expense of the majority of other domestic stockholders.

Furthermore, non-dual listing creates information asymmetry between domestic and foreign shareholders, with the latter still receiving higher disclosures due to the foreign regulator, as opposed to Indian shareholders who are no longer subject to SEBI’s jurisdiction. This issue would not arise in the event of dual listing since SEBI would already have authority over the listed public entities, which would be subject to stricter disclosure obligations under the applicable SEBI laws.

Non-dual listing would also have a negative influence on India’s macroeconomic conditions. It would allow unlisted public businesses to list their equity shares on a foreign stock market, at the expense of the Indian stock exchanges. This has the potential to cause a large-scale transfer of firms listing on international stock markets rather than on Indian stock exchanges, resulting in significant commercial losses for Indian stock exchanges. Financial disclosure levels frequently impact company listing choices. As a result, lesser disclosure requirements in foreign countries might encourage corporations to list directly on overseas stock markets rather than their Indian equivalents. This would also reflect a wider unfavorable opinion toward the Indian economy as a whole, since corporations may choose to prefer international stock markets over Indian stock exchanges. Finally, it has the potential to dampen investor enthusiasm in India since a significant number of Indian firms may begin listing only on foreign stock markets, denying the Indian people the option to participate in these companies. These problems would be eliminated in the event of dual listing because public firms would already be listed on Indian stock markets.

Status Post-Listing: What Happens to an Unlisted Public Company after Direct Listing?

Indian corporations are considering direct listing for their equity shares and/or convertible instruments. However, the definition of a ‘listed company’ under the Companies Act, 2013 requires a firm to have any of its securities listed on a recognized stock exchange. This classification is consistent with the criteria stated in the Securities Contracts (Regulation) Act, 1956 (‘SCRA’), which states that a recognized stock exchange is one acknowledged by the Central Government in line with section 4 of the SCRA. Given the regulatory jurisdiction  of the International Financial Services Centres Authority (IFSCA), neither the India International Exchange nor the NSE International Exchange have statutory recognition under the aforementioned rules. Furthermore, clause (c) of rule 2A of the Companies (Specifications of Definitions Details) Rules, 2014 (‘SDD Rules’) states that public companies that are not listed on a recognized stock exchange but are listed on an exchange in a specified jurisdiction under section 23(3) of the Act do not qualify as listed companies.

As a result, the status of an unlisted public company stays unchanged following direct listing, exempting such entities from the additional regulatory duties imposed on listed firms under CA, 2013, due to the express exception established in the SDD Rules. However, it is important to emphasize that Indian firms seeking to list on stock exchanges in International Financial Services Centres (‘IFSC’) must follow the listing duties and disclosure requirements provided in Chapter XI of the IFSC Regulations, where applicable

Given the possible negative consequences of directly listing unlisted public firms on international stock markets, regulatory involvement is recommended to prevent such occurrences. Allowing direct listing without previous domestic listing may encourage management opportunism, allowing circumvention of local regulatory supervision, particularly that of SEBI. As a result, unlisted public businesses should be required to list on Indian stock markets before pursuing global listing opportunities. This regulatory requirement, although incurring some cost for these organizations, is consistent with the larger goal of protecting investor interests, maintaining regulatory compliance, and promoting capital market integrity. Furthermore, it emphasizes the need of cross-listing as a strategic necessity, with numerous benefits such as increased access to finance, a diverse investor base, and improved valuation measures.

Sanyam Jha

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