By: Shweta Ojha
Securities provide a way to raise capital, investment with sufficient liquidity and wealth creation for investors. Listing of securities is essential to realise these goals as it provides liquidity, fair valuation and transparency in transactions. Companies are independent to choose the trading venue for its securities by the way of listing on a particular exchange. As a general practice, companies list their securities on a domestic stock exchange. However, a company may opt for a foreign exchange as either a substitute or a supplement to the domestic exchanges, depending upon the nature of business, value recognition, nature of the market participants and ease of listing process. This practice of listing on a non-domestic exchange is referred by various names as Foreign Listing, Overseas Listing, or Cross-listing. The cross-listing or the overseas listing allows internationalisation of the companies and better access to financial resources. Most companies are interested in overseas listing as it has potential to enhance the ability to raise equity, shareholder base, brand visibility and trading liquidity. This can be done either by direct listing or indirectly through Depository receipts.
After globalisation, companies started to look beyond their borders for raising capital. Investors are also now interested in new investment opportunities and geographically diverse portfolio. This trend led to development of Depository Receipt as Listings through American Depository Receipts (ADRs) or Global Depository Receipts (GDRs) are a popular way of internationalisation among firms from emerging economies. Indian companies started foreign listings in the early 1990s after liberalisation facilitated by Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme (1993), especially in new sectors such as information technology. However, this wave did not continue for long and a steep decline was observed in the coming years.
The current legal framework in India facilitates listing of securities of Indian companies on international exchanges only by the way of Depository Receipts ADR and GDR. However, debt securities can be listed on international exchanges in form of Masala bonds as popularly called. Similarly, Section 390 of the Companies Act, 2013 allows foreign companies to list their securities in India through Indian Depository Receipts (IDRs) in accordance with the Companies (Indian Depository Receipts) rules, 2004.
The newly enacted Companies Law Amendment, 2020 has made it possible to directly list the equity shares on foreign exchange. However, the related provisions are yet to be notified. Though the announcement of allowing Direct listing was made as a part of ‘Ease of doing business’ in COVID-19 Stimulus package, but the policy was under process from last two years. An expert Committee was constituted by Securities and Exchange Board of India (SEBI) on 12th June, 2018, to seek recommendations on listing of equity shares of companies incorporated in India on foreign stock exchanges and of companies incorporated outside India on Indian stock exchanges. The Committee submitted its report on 4th December, 2018 and recommended Direct Overseas listing citing its benefits and also suggested necessary regulatory changes. But the change faced reluctance from the side of government due to apprehension of Capital-erosion and complete giving away of the regulatory power.
After the amendments in Companies Act, consequent changes and clarifications in legal and regulatory regime are awaited. But the Amendment has necessitated the discussion on the probable benefits of direct listing and the challenges ahead.The essay explains the recent amendment and attempts to capture the expected benefits of Direct Overseas Listing. The essay also highlights the important regulatory and practical challenges that may be posed on implementation of provisions and intends to provide possible solutions. The essay focuses only on the Indian Companies aiming to list on Overseas Stock Exchanges and the issues regarding listing of securities of foreign-incorporated companies have been left.
COMPANIES ACT AMENDMENT, 2020: ANALYSIS WITH REGARD TO DIRECT OVERSEAS LISTING
The Companies (Amendment) Bill, 2020 has been passed by both the houses and received presidential assent on 28thSeptember 2020. The Amendment Act aims to promote ease of doing business in India. Among other provisions, the amendment also allows Direct Overseas Listing and following amendments have been brought in this regard In Companies Act, 2013:
Section 2(52): Definition of ‘Listed companies’
‘Listed company’ means ‘a company which has any of its securities listed on any recognised stock exchange’. The amendment inserted a proviso:
“Provided that such class of companies, which have listed or intend to list such class of securities, as may be prescribed in consultation with the Securities and Exchange Board, shall not be considered as listed companies.”
This Proviso has been inserted to provide exemption to companies listing their securities on the stock exchange overseas. The proviso will exempt such companies from requirements under Indian Listing Regulations (“LODR”) and it will allow them to fulfil the disclosure requirements of the relevant foreign jurisdiction.
Section 23: Public offer and private placement
This section specifies the modes by which a public or a private company may issue securities. Sub-section (1) specifies the route for issuance of certain securities, i.e., Public offer, Private placement and Rights or Bonus issue. The Amendment Act introduces a new route for issuance of certain securities by listing in foreign jurisdictions. Sub-sections (3) and (4) has been inserted:
“(3) Such class of public companies may issue such class of securities for the purposes of listing on permitted stock exchanges in permissible foreign jurisdictions or such other jurisdictions, as may be prescribed.
(4) The Central Government may, by notification, exempt any class or classes of public companies referred to in sub-section (3) from any of the provisions of this Chapter, Chapter IV, section 89, section 90 or section 127 and a copy of every such notification shall, as soon as may be after it is issued, be laid before both Houses of Parliament.”
Section 23(3) allows specific class of public companies as may be prescribed, to list their securities on overseas stock exchanges in permissible jurisdictions. Sub-section (4) exempts such companies from provisions of Section 89 (Declaration in Respect of Beneficial Interest in any Share), Section 90 (Investigation of beneficial ownership of shares) and Section 127 (Punishment for failure to distribute dividends). The relevant foreign Regulations will apply in these matters.
These amendments intend to provide regulations regarding direct overseas listing for Indian companies. It is expected that the Amendment would allow Indian companies to raise money through direct listing without strict regulatory measures and hence it will improve the ease of doing business in India.
BENEFITS OF DIRECT OVERSEAS LISTING
Listing at foreign exchanges has many palpable benefits such as availability of capital, lower costs of capital, enhanced liquidity and cost efficiency” Indian Companies were hindered from availing these benefits which directly affected their growth in comparison to their foreign counterparts. Many established and listed Indian companies such as Infosys, Reliance industries and Vedanta adopted Depository route to access overseas equity capital markets. Meanwhile, many India-based companies were forced to take another route to list their securities on Exchanges in foreign countries. MakeMyTrip had to incorporate itself in Mauritius to facilitate overseas listing at NASDAQ without going public in India. The newly enacted amendment is expected to have positive effects on Indian companies and economy as a whole. The benefits can be summarised in given points:
1) Alternate source of capital: The direct benefit of Direct Overseas Listing is in terms of access to capital markets outside of the country for Indian Companies which can result in huge pooling of capital by the broader investor base and also help in attaining better financial stability.
2) Diversified Investor Base: Venturing into the new capital markets will result in a diversification of investor base that can acquire and trade the company’s shares. Such Listing will enable companies to diversify their capital-raising activities and remove sole reliance on domestic market. It gives opportunity to list their shares on stock exchanges of various jurisdictions at the same time, allowing them to distribute home market risks.
3) Reduction in cost of capital: The cost of capital in India is relatively higher than foreign markets. Direct Listing can also decrease the cost of Capital if listing is done in advanced economies with developed financial markets. A simple and principle-based international listing regime enabling Indian companies to raise capital at optimizes cost, is needed to allow fair chances. Companies incorporated in developing nations can reduce their cost of capital and increase firm value by issuing equity on foreign markets. In addition to this, listing on foreign exchange will expand the investor base. This diversified investor base will increase the demand for company’s securities and help in decreasing the cost of capital.
4) Flexibility to raise funds from a jurisdiction of choice – Overseas Listing allows companies to choose the most suitable jurisdiction for listing as per their nature of business, resources and requirements. Generally, companies tend to target overseas listing in markets that are larger, highly capitalised and have a more liberal tax environment.
5) Better investment opportunities to investors: Form Investor’s perspective, listing at foreign exchanges provide better investment opportunities as it presents more options and allows diversification of portfolio and in turn lower the risks in the equity market.
6)Better Valuation: Direct Overseas Listing will allow Indian Companies to attract higher valuations due to a broader investor base and sophisticated asset management infrastructure used by foreign exchanges in comparison to the Indian counterparts. In addition, Overseas listings will enable companies in niche sectors such as high technology, internet, bio-technology etc. to access specialized industry-specific investor classes, who possess institutional sectoral expertise and are thus better able to value these securities.
7) Brand awareness and visibility: Direct Listing on a foreign stock exchange will also result in increased brand awareness and visibility which can be helpful for companies in tapping into the consumer market in foreign countries and expansion of operations. Enhanced international corporate prestige and visibility can be an important reason for an interest in listing on a foreign exchange.
8) Special benefit to Start-ups: One of the expected benefits of Direct Overseas Listing is better valuation specifically for the Start-ups. Many upcoming start-ups working in niche areas like technology, mobile applications, artificial intelligence, biotech etc., face difficulties to raise capital in Indian market as they are not profitable in initial stages. Indian listing regulations also require to show profitability in last three financial years in order to be eligible for listing. Direct listing at foreign exchanges may allow these start-ups to pool the required capital from developed economies which have required risk-appetite. Markets in the US, the UK, other European countries, South Korea, Singapore and Japan have more experience and expertise in valuing such companies.
Comparison to Indirect Listing
The wave of indirect listing by the way of ADR/GDR during the late 1990s and early 2000s, is now declining sharply. The number of Companies as well as volume of capital under depository route is falling. In 2012-2013, none of the Indian companies opted for GDR/ADR and selling of Bonds was preferred than the equity offerings. The ADR/GDR route has not been found profitable for investors.
From regulatory perspective, GDR has been difficult to manage for Regulators and SEBI has expressed its concern that ADRs and GDRs are difficult to monitor and may be used for money laundering and market manipulation. International authorities have also noticed investment of illicit funds through GDRs causing losses to the investors. There are various allegations of round-tripping and SEBI kept 50 accused under investigation for suspected misuse of GDRs for routing black money back to India.
The allegations of misuse and ongoing investigations have deterred companies from adopting GDR route which might seemed to have plagued with various abnormalities in the market. In this time, a new way of raising capital is necessary to provide boost to Indian companies and hence Direct Overseas Listing can be seen as a welcoming change.
ISSUES AND CHALLEGES AHEAD
With the better opportunities of listing overseas, the newly enacted Amendment brings several regulatory and practical challenges. There are numerous issues that must be dealt with before allowing the Overseas Direct listing and several amendments in various laws are required in order for hassle-free implementation.
1) Eligibility of Company:
The amendment does not provide any criteria of the eligibility of companies which can bring out these issues on overseas exchanges. The eligibility criteria of the current GDR Regulations can be utilised as a guide which provides that the companies should have a consistent track record of good performance (financial or otherwise) for a minimum period of three years, on the basis of which an approval shall be granted by the Department of Economic Affairs.
But this will not resolve the issue of eligibility for unlisted companies and start-ups which are most likely to utilise the direct listing. Hence, pre-defined performance-based eligibility criteria should be brought by SEBI in consultation of MCA or a Committee should be set up to decide on the eligibility on case-to-case basis for new companies and start-ups which are not profitable yet. In both the case, a clarification on eligibility must be issued which will allow the interested companies to devise strategy to meet that eligibility before the implementation of amended provisions.
2) Permissible Jurisdiction:
The SEBI Report also recommends 10 jurisdictions where Overseas Direct Listing can be allowed in Annexure C: 1. United States of America 2. China 3. Japan 4. South Korea 5. United Kingdom 6. Hong Kong 7. France 8. Germany 9. Canada 10. Switzerland.
The recommendation has not been accepted formally. The list of jurisdictions has been prepared on the basis of adherence to ‘Board of International Organization of Securities Commissions (IOSCO)’ or ‘Financial Action Task Force (FATF)’ with strong anti-money laundering regulations or countries which have a bilateral agreement with the Securities and Exchange Board of India (SEBI).It gives an inclination that the list of such permissible jurisdiction is likely to change if and when another county comes within the criteria. An indication as to that this list is subject to timely revision must be expressly stated. In the light of current geo-political scenario, it is also important to note that whole list of countries as recommended by SEBI cannot be used as China is also listed. This kind of situation may also arise in future with other nation and in that case, investors will be left devoid of any choice. A mechanism to ensure protection of those investors by the way of Exit option in extreme geo-political scenarios, must be provided to instill confidence of foreign investors.
3) Multiplicity of listing laws:
India-listed entities which are cross-listed overseas shall simultaneously be bound by SEBI-LODR and other regulations and the listing requirements of foreign jurisdiction. This necessitates co-ordination between Indian and foreign listing requirements. Occasionally, situations of outright conflict may arise between these two sets of laws. Mechanisms to resolve such conflicts must be evolved, which may require swift regulatory action, including changes to extant Indian securities laws.
4) Compliance costs due to differing accounting standards:
All Indian companies are required to prepare financial statements in accordance with the Indian Accounting Standards or the Indian Generally Accepted Accounting Principles. Other jurisdictions where Indian Companies may list their securities may require accounting as per different standards and reporting requirements. It will result in additional burden on the companies as they will be required to publish two sets of financial statements to deal with any differences in regulatory requirements between India and the jurisdiction in which they are being listed. This will undeniably increase the compliance costs.
To facilitate the overseas-listed companies, MCA may issue a notification to provide exemption on Accounting Standards to such companies. Alternatively, a reconciliation statement to supplement the Financial statements prepared, may be sought if there are major points of divergence in accounting standards.
5) Maintaining equality among shares and shareholders:
Shares of a company represent equal interest and hence, shareholders are also equally placed as per their shareholdings. Indian companies listing their shares on overseas exchanges must maintain the homogeneity in the rights available to all shareholders, irrespective of the jurisdictions. This may create issues as shares of the company would require to be consistent with law applicable in all jurisdictions where shares are being traded, in order to be identical in nature. In addition to this, shareholder’s meeting cannot be effectively convened given the widespread location of shareholders.
All listed companies must be mindful of the legal requirements of shares in all jurisdictions before overseas listing. The problem of voting can be solved through a robust e-voting mechanism. But problem will still persist in jurisdiction where e-voting is not allowed. Proxies can be appointed on such cases.
6) Interoperability among Clearing houses:
Ideally, regardless of where shares are listed, they must be interchangeably traded in different jurisdictions as a company’s shares represent an identical interest in the company. In India, the interoperability among clearing houses came only in November, 2018.
It is still not decided if the interoperability can be allowed in the case of Overseas Listing. All European Union member countries allow interoperability. US and Canada also allow trading of shares between themselves. If interoperability is allowed, India’s securities market infrastructure may have to be expanded and links have to be created between various market participants, to facilitate trading in multiple jurisdictions and seamless transfer. The problem of time gap must also be dealt with.
7) Applicability of Capital Gains Tax:
Capital gains on the transfer of shares of Indian companies between non-residents may be taxed in India, as they constitute ‘capital assets situated in India’. This may make Indian shares appear unattractive to investors on overseas stock exchanges vis-à-vis their foreign counterparts. Trading in depository receipts issued abroad has been exempted from such taxation.
A notification from Central board of direct Taxes should be issued granting exemption to securities of Indian companies listed on Overseas stock exchanges.
8) Applicability of FEMA Regulations:
FEMA Regulations have an automatic application in Direct Overseas Listing as money of non-residents is involved and it will be brought in the country. There is lack of Regulations on the issuance of equity shares by a company incorporated in India that is listed on a stock exchange outside India to a person resident outside India. Hence, there is no framework on entry routes, prohibited sectors, sectoral caps, and pricing restrictions.
To ensure the clarity on the matter and address technical concerns related to foreign currency, Amendment is necessary in the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. SEBI in its report also suggested a draft for the same.
9) Sectoral caps under FDI:
Direct Listing on Overseas Exchanges permits unlisted Indian companies to list their securities on stock exchanges abroad without the need to list in India. The same has not been exempted from the compliance with the Foreign Direct Investment Policy. There is a major issue to be dealt with where FDI is permitted only via government approval route and sectoral caps have been put. No clarification in this regard has been issued.
Before implementation, it is required that the issues regarding sectoral caps and FDI in Multi-brand retail companies are dealt with. Also, additional checks and balances will be required to monitor the companies in sectors coming under the ‘government route’.
10) SEBI’s extra-territorial jurisdiction:
The effect of Securities-related crimes or wrongdoings is not bound by the jurisdictional borders, especially when same company trades on Stock exchanges in multiple countries. Price-manipulation in securities in any jurisdiction can impact the prices of the security on domestic stock exchanges. In such scenario, SEBI might require to exercise extra-territorial jurisdiction to effectively monitor any wrongful activity occurring outside India in order to protect the interests of Indian investors. But this will create a jurisdictional conflict and exercise of such power will require coordination among regulators of different countries where the listing is permitted.
To avoid such conflict, SEBI may enter into agreements with regulators of permissible jurisdiction which will define the powers of each regulator and ensure proper coordination in case of wrongdoing and crimes.
The 2020 amendment in Companies Act allowing Direct Overseas Listing, is a welcoming step in line with the fast-growing liberalised Indian economy and ease of doing business. It will help in integration of India in global Capital market and internationalisation. The direct Overseas Listing will provide the much-needed boost to Indian companies by infusion of larger pool of capital at reduced cost by allowing access to the global equity capital markets. The change is especially important for the start-ups which till now have struggled to raise capital in the domestic market and also suffered due to stringent regulations. Direct Listing will provide Indian companies with alternate sources of capital, increase the pool of investors and ensure higher valuation of the securities. It will also offer increased brand visibility and choice of jurisdiction that can be utilised as per the nature of business and capacity of the company.
The existing mechanism of Overseas Listing through the American Depository Receipt / Global Depository Receipt is no longer attractive for Indian companies due to several pending investigations and reported losses to investors. Overseas listing of Indian companies will have a considerable impact on the Indian economy. These amendments intend to provide regulations regarding direct overseas listing for Indian companies, but there are many regulatory hurdles in actual implementation of the law. A thorough check of all applicable laws, rules and regulations is required to seamlessly allow the direct listing at overseas exchanges. Determination of the classes of companies that may list overseas, permissible classes of securities, permissible jurisdictions and stock exchanges where listing will be allowed, has not been declared yet and are much awaited. Regulatory regime has to be made more adaptive towards the companies going for direct listing. Actual implementation of the policy would require amendment to several regulations including Foreign Exchange Management (Non-debt Instruments) Rules, 2019, Income Tax Act and SEBI regulations related to listing and disclosures. RBI, SEBI, MCA and CBDT has to coordinate to make this Policy successful and devise methods for successful implementation.
SEBI and MCA are required to prescribe complete regulations as prescribed for GDR/ADR discussing aspects related to eligibility criteria, permissible jurisdiction and exchanges, distribution of powers of Regulator and necessary exemptions. In addition, SEBI as a part of its training programme may also educate companies the differences between various permissible jurisdiction so that they can choose rightly apt for the business requirements. A comparative analysis of the provisions that are applicable in India along with the requirements applicable in the Permissible Jurisdiction can be given to the companies to facilitate proper compliance.
Direct Listing will prove to be boon for many companies who are seeking a different investor base especially the start-ups. In this global economy, integration of market including the financial market cannot be avoided. This will boost he Indian economy, provide competitors to Indian companies and hence, increase overall efficiency. It will also boost the image of India at global scale. The implementation and regulatory changes in various laws are much-awaited.
(Shweta is currently a law postgraduate at National Institute of Securities Market- MNLU Mumbai. The author may be contacted via mail at firstname.lastname@example.org)
Cite as: Shweta Ojha, ‘Direct Overseas Listing in India: Regulatory Hurdles in Liberalised Regime’ (The RMLNLU Law Review Blog, 10 May 2021) <https://rmlnlulawreview.com/direct-overseas-listing-india-regulatory-hurdles-in-liberalised-regime/> date of access