In a move to succor the economic hardships faced by Indian companies and Indian startups due to the COVID-19 pandemic, more precisely because of the nation-wide lockdown, the Government of India (“Government”) gave its nod to Indian companies to directly get listed on an overseas Stock Exchanges by tabling the Companies Amendment Bill, 2020 (“Amendment”).
On June 12th, 2018, the Securities and Exchange Board of India (“SEBI”), the capital markets regulator of India, constituted a high-level committee comprising of members of SEBI, top financial institutions, and law firms of India. The task of the committee was to submit a report on the direct listing of equity shares of companies incorporated in India on overseas stock exchanges. The committee submitted its report in December 2018 where it strongly batted in affirmative for direct listing.
The Government incorporated the conclusions of the report as a part of its Rs 20 Lakh Crore economic package when it decided to amend the existing Companies Act, 2013 (“Act”). The Finance Minister (“FM”) tabled the Companies Amendment Bill, 2020 before the Lok Sabha to amend Section 23 of the Act. The amended Section 23 shall permit public companies to enlist themselves at permissible foreign stock exchanges; Section 23(4) has been added to exempts such companies from provisions of Section 89, Section 90, and Section 127.
This blog analyses how this Amendment will benefit Indian companies, as it will not only increase their sources of raising capital without incurring any extra costs, but it will also ensure lesser regulations by SEBI since the Amendment and the report make the entire process transparent and business-friendly.
The concept of direct and indirect listings
Companies raise capital through cross-border listing in order to attain more financial stability and generate a huge volume of capital. Cross-border listings can be done in two ways, namely, direct listing and indirect listing. Direct listing is when the companies offer their equities directly to the general public through stock exchanges without taking the route of Initial Public Offerings (“IPOs”), i.e., there is no involvement of promoters, underwriters, banks, or financial institutions for the direct listing. Thus, it turns out to be very economical for the companies as they tend to save huge overhead expenses in the form of fees and commissions. Currently, Indian companies are allowed cross-border listing only through indirect listing via Depository Receipts (“DRs”). DRs are financial negotiable instruments used by a bank to represent a foreign company’s publicly traded shares.
Indian companies raise funds through two types of DRs – Global Depository Receipts (“GDRs”) and American Depository Receipts (“ADRs”). GDR is the security certificate issued by intermediaries and underwriters, such as banking institutions to facilitate investment in a foreign company. Hence a GDR represents a specific number of shares that are not listed or traded in local stock exchanges. Similarly, ADR allows the underwriting banks, based exclusively in the United States, to issue such certificates.
Although the indirect listing helps Indian companies in raising funds from abroad, at the same time, it bears additional charges on companies for underwriters and financial institutions. Due to the opaqueness involved in indirect listing, it is kept under strict scrutiny by SEBI to check the flow of black money.
Direct listing: More transparency and lesser regulations
SEBI has encountered difficulties in dealing with the DR route of investment, especially the unsponsored DRs. Unsponsored DRs is a route of investment where the promoters of the company or the issuers of the security are not involved in the issue of shares and the work is outsourced to a financial corporation. This leads to difficulty in tracking down the ultimate beneficiary. In the year 2017, SEBI served a show-cause notice to over 50 individuals and companies, when in the preliminary investigation it found out about their role in suspected misuse of the GDR route to bring back illicit black money stashed abroad to India. In January 2019, SEBI banned Sanraa Media and seven other companies for five years due to their involvement in the manipulation of share prices using GDRs.
SEBI in its report has taken certain precautionary steps to regulate the flow of black money, fraudulent or money laundering activities through the direct listing. SEBI has prescribed a total of ten jurisdictions and stock exchanges where Indian companies can get listed directly, as these countries are treaty-bound to share information with India. These include NASDAQ, New York Stock Exchange, London Stock Exchange, and various other securities markets in France, Germany, Hong Kong, China, and Japan. All these countries and stock markets are members of the International Organisation of Securities Commission (IOSCO) and Financial Action Task Force (FATF).
Thus, with a more transparent transaction mechanism and easier tracking method, SEBI will be lenient with its regulatory measures. Minimal interference by the market regulators like SEBI will turn out to be beneficial for the Indian companies.
Benefits for Indian companies
Overseas listing is welcomed by Indian companies, especially those in their initial stage. The markets hit by COVID-19, and the upcoming start-ups will benefit extremely from the overseas listing. Indian unicorn start-ups, i.e., start-ups that are valued at $1billion or above, like Unacademy and Oyo Rooms would be allowed to sell their shares in the overseas market. The companies would get access to a larger pool of capital. The new rule will allow the Indian companies to compete with foreign entities and attract higher valuations, broader investor base, and will boost the market globally. The diversified investor base will increase the demand for their securities and help in decreasing the cost of capital. The entities engaged in cross-listing will have to fulfil Indian and foreign listing requirements.
In addition to the abovementioned advantages, the direct listing also allows the Indian Companies to use the Liberalised Remittance Scheme (“LRS”). LRS is a scheme by the RBI which allows the Indian residents to use up to $2,50,000 per financial year for investment (buying immovable property) or expenditure (travelling, studying) in another country.
Though there are various complications that Indian companies will face in order to get listed in the overseas market, one of the major impediments will be the proposed Amendment to Section 23 of the Companies Act, 2013. The Bill provides for enabling provisions that should be laid down to allow the direct listing of shares to expand permissible foreign jurisdictions. The checks and balances will increase as every company would have to comply with the laws of two jurisdictions. Additionally, every overseas-listed Indian company will have to prepare accounts using Indian Accounting Standards as well as according to the foreign jurisdiction. This will increase the compliance cost of the company. Though the company will incur additional expenses, the benefit it will get due to the direct listing will increase. In the future, as direct listing progresses, SEBI can propose fewer steps of compliance. This will help to save a lot of expenditure of the company. Thus, the law needs to be adjusted in order to provide relief accordingly.
Hurdles faced by Indian companies in overseas listing
Currently, LRS restricts the buying and selling of foreign exchange abroad under the Schedule II of Foreign Exchange Management (Current Account Transaction) Rules, 2020. There is no clarity on whether the corporate sector can utilise such funds. Since the transfer and valuation of equity shares will attract capital gains, the company will have increased tax liability. This will become favourable for the company if amendments are notified under Section 56 of the Income Tax Act. So, the regulations of the Foreign Exchange Management Act and taxation will have to have to be addressed specifically by the Government before the Amendment is enacted.
Less regulations and easy business
To prevent the malpractices and minimise price-manipulation by the companies, SEBI has decided that the direct listing route will only be available to companies that have a minimum of 10% paid-up capital listed on the Indian exchange, and issue size of at least Rs 1,000 crore with a minimum of 200 investors. SEBI has faced concerns about price manipulations in the past as well. In the case of SEBI v. PAN Asia Advisors Ltd and Anr., the Supreme Court held that SEBI has an extra-territorial jurisdiction when the shares are listed in Indian securities through GDRs. It has the power to regulate securities entirely listed in a foreign country.
This Amendment bats strongly for less regulations regarding direct overseas listing for Indian companies, and to large extent it has been successful in doing so, but at the same time Government or SEBI cannot exempt companies from any kind of regulation as it will then facilitate money laundering through direct listing, i.e., the same problem which SEBI faces while dealing with DRs. Thus we can conclude that this Amendment will give a free hand to companies to raise money through direct listing and requires regulatory measures only where it is necessary, hence improving the Ease of Doing Business in India.
There were reports that Indian market giants will get listed on overseas platforms in the coming years. Reliance Industries Limited is planning to get its subsidiary Jio Platform listed on NASDAQ by 2021. Similarly, Flipkart is preparing to list its initial public offering overseas by 2021. This will help the firm to raise approximately $50 billion. India has taken a significant step on the path to consolidate its presence in the global arena as it will help it in strengthening cross-border collaboration. Direct Listing will provide Indian companies with alternate sources of capital, increase the pool of investors, and companies will have higher chances to obtain better value on their securities. Thus, the overseas listing of Indian companies will have a considerable impact on the Indian economy. The road ahead for the Indian Government is to make the regulatory measures more adaptive towards the companies going for direct listing.
The article has been authored by Varun Singh and Simran Sabharwal, students at Rajiv Gandhi National University of Law.