India Inc gets global play: Allowing public companies to list on IFSC will make them more competitive

A company intending to raise capital from foreign jurisdictions would issue securities to the depositories incorporated in that particular jurisdiction

On January 24, 2024, the Centre notified the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024 (LEAP Rules) and amended the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules), paving the way for certain public companies in India to list their shares directly on international exchanges in GIFT International Financial Services Centre (IFSC). These notifications are based on the recommendations of the Working Group, which was tasked with suggesting a regulatory framework for facilitating the same.

Until now, Indian companies could only issue and list their securities in the overseas market through depository receipts (DRs) such as American Depository Receipts (ADR) or Global Depository Receipts (GDR). A company intending to raise capital from foreign jurisdictions would issue securities to the depositories incorporated in that particular jurisdiction. These would issue depository receipts in the name of the company to the investors.

Presently, only a handful of companies have opted for this route, given the stringent and tedious regulatory framework along with the time and costs associated with the issuance of DRs. Moreover, unlike equity shareholders, the holders of DRs are not entitled to vote unless they convert them into underlying shares. Fraudulent issuance of a company’s GDR and its manipulation are other risks associated with DRs.

To address these challenges, the recent notifications have introduced a regulatory framework that allows both listed and unlisted public Indian companies to issue and list their equity shares (including by way of offer for sale) on stock exchanges in permitted jurisdictions viz., India International Exchange and NSE International Exchange, set up by BSE and NSE respectively in GIFT IFSC.

The significance of this framework is crucial for India, as it not only presents a roadmap for direct listings of public Indian companies, but also aims to enhance the appeal of GIFT IFSC as a distinguished global financial hub. In the pursuit of global competitiveness, it is imperative for Indian companies to secure capital at the most favourable cost. Foreign investors, known for their inclination towards securities listed in their home country, often assign disproportionate weightage to such assets in their portfolios.

This inherent home bias placed Indian companies at a distinct disadvantage when courting foreign investments. Opting for foreign listings in the IFSC emerges as a strategic solution to mitigate this bias, effectively reducing the cost of capital for companies as investments in these companies can now be made in hard currency. Notably, companies are not obligated to undergo domestic listings concurrently, granting them the flexibility to establish a presence solely on an international exchange in IFSC.

The opportunities expected to be generated by the revised regulatory framework are immense. Companies incorporated in India can unlock several advantages by accessing foreign capital markets. One significant benefit is that Indian companies can now attract funds from international investors, who often have the capacity to provide ample quantities, keeping in mind the valuation of these companies based on global standards.

Listing in IFSC is also likely to open up a broader investor base for companies as a diverse pool of investors would be interested, thus ultimately increasing the demand for the company’s shares. For instance, a company listed on international exchanges in IFSC gains access to numerous investment funds also situated in IFSC.

If this was not the case, these international funds might not have considered investing in Indian companies, given the necessity to register as a portfolio investor with Sebi and dealing with currency conversion. However, foreign investors may prefer investing in only well-established and thriving companies.

Foreign listings are also likely to lead to better valuation as companies listed on international stock exchanges benefit from sophisticated asset management infrastructure, resulting in more accurate valuations of their securities. Companies will now have the option to access both markets—domestic market for raising capital in rupees and the international market at IFSC for raising capital in foreign currencies. Startups would now gain access to funds from foreign investors instead of the traditional ways of crowdfunding and seed funding.

However, the framework provides that in order to secure listing on international exchanges, the public Indian company as well as its stakeholders must not be debarred from accessing the capital market. Additionally, it is also a prerequisite that none of the promoters or directors of the company holds such positions in any other Indian company that is debarred from accessing the capital market.

Further, any company which is under inspection or investigation under the provisions of the Companies Act, 2013 or whose promoters or directors are wilful defaulters or fugitive economic offenders are also not allowed to list their equity shares on international exchanges. While these stringent conditions are implemented to ensure that only financially sound and reliable companies secure listings in IFSC, the ineligibility on account of pending inspection/investigation may be revisited.

Further, only permissible holders (persons who are not residents of India) are authorised to trade shares of Indian companies that are listed on international exchanges. It is also pertinent to note that permissible holders belonging to countries that share a land border with India will require approval from the Centre to engage in transactions in IFSC. This provision is likely to cause friction, but necessary friction, given the nature of some of our neighbours.

It remains to be seen if a framework that paves the way for presently foreign-listed Indian companies to move from global exchanges to exchanges situated in GIFT IFSC can be adopted. Regarding the direct overseas listing of already-listed Indian companies, Sebi is expected to clarify the mechanism by issuing detailed operational guidelines.

These notifications are not only aimed at benefitting Indian companies in fundraising but also marks a significant step in realising the Centre’s vision of promoting GIFT IFSC as a global financial hub. Nonetheless, prudent implementation and development of a well-defined framework addressing potential loopholes are imperative for ensuring the long-term effectiveness and sustainability of direct listing.

Sandeep Parekh, Managing partner, Finsec Law Advisors Co-authored with Shivaang Maheshwari, Associate, Finsec Law Advisors to pen this piece for Financial Express.

Views are personal and do not represent the stand of this publication.