An Appraisal of Developments in the Overseas Listing Regime of India
[Arpit is a student at National Law University, Jodhpur.]
Recently, the Companies (Amendment) Bill 2020 (Bill) introduced an enabling provision for overseas listing of securities by Indian companies. According to Clause 5 of the Bill, the government can allow 'a class of public companies' to issue 'a specified class of securities' to list on the stock exchange(s) in 'permissible foreign jurisdictions'. The Indian government, together with the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) will deliberate upon these details of the provision in the upcoming months. The move will encourage Indian corporates to raise capital through foreign markets and investors to buy securities of foreign companies listed in India. More importantly, however, the move can be the first step towards the integration of the Indian market with the global securities market. In this note, I will deal with: (a) the status quo of the overseas listing regime in India; (b) the discourse which led to the introduced provision; and (c) the forthcoming challenges in the possible integration with the global securities market.
Overview of the Law
Listing of securities means the admission of a company’s securities on a stock exchange for public trade in the market. According to Section 2(52) of the Companies Act 2013 (Companies Act), it means listing of securities by a company incorporated in India on any recognized stock exchange. A company may list either debt securities (i.e., borrowed money) or equity securities (i.e., issuance of shares). Although listing is not mandatory, a company may decide to list its securities for various advantages such as capital and liquidity. For listing, a company may look at various factors such as ease of the listing process, value recognition of the securities and maturity of the market participants to decide its preferred stock exchange. Companies may also list securities on a stock exchange of a jurisdiction other than the one where they are incorporated. For example, a company incorporated in India may list its securities on the London stock exchange or NASDAQ. This is known as 'overseas listing of securities'. Further, if the company lists common securities in more than one jurisdiction, it is known as 'cross-listing' or 'secondary listing' of securities.
Broadly, there are three routes for overseas listing, which are by way of: (a) a public offering, wherein a company invites investors from the foreign market to subscribe to its securities which is then listed on the stock exchange; (b) direct listing, which permits companies to list its securities by converting the existing ownership into stock without raising any capital; and (c) indirect listing through a depository receipt (DR) instrument, wherein a company issues securities to a depository bank in the jurisdiction of the foreign stock exchange and the bank will, in turn, issue DRs to investors in that jurisdiction.
The Indian Scenario
India is different in terms of its listing framework for debt securities and equity securities. Companies can issue debt directly through foreign currency convertible bonds, foreign currency exchangeable bonds or masala bonds (i.e., rupee-denominated bonds). They are governed by the Foreign Exchange Management Act 1999 (FEMA), and RBI’s Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations. However, for equity, the framework allows only indirect overseas listing because regulatory bodies and governments have historically feared that domestic capital will leave the country, adversely affecting the primary market. Another concern is that it may also mean domestic investors will exhaust their money in foreign companies which have to be correspondingly allowed to list on Indian stock exchanges.
According to the erstwhile Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme 1993, only listed companies could use DRs. However, on the recommendations of Sahoo Committee, the new Depository Receipts Scheme 2014 allowed both listed and unlisted companies to indirectly list their securities through DRs. Unfortunately, due to alarming reasons, the use of DRs decreased even with the broadened scope. Allegedly, several companies using DRs indulged in money laundering and market manipulation. After a scrutiny of these dubious transactions, SEBI banned 19 companies in 2017 from using this route and levied a heavy fine on another company in 2019. Further, introduction of Qualified Institutional Placements also discouraged the raise of capital through foreign markets since it facilitated domestic issue of securities with lenient regulations.
The sole route for overseas equity listing, thus, became largely condemned. Consequently, in 2018, SEBI set up an expert committee to deliberate upon an alternative route of 'direct overseas listing for equity securities'. Through a circular dated 10 October 2019, SEBI also restricted the use of DRs to listed companies again, and introduced stringent regulations for such issues.
2018 Expert Committee
Although discussion over the provision is pending, the expert committee provides a preliminary draft of anticipated changes in the regime. The committee opined that opening up of the direct route of overseas equity listing follows the ongoing internationalization and evolution of the capital market. Moreover, Indian companies are now better equipped to face foreign competition and will benefit from an alternate source of capital and broader investor base. As a result, companies may also access reduced cost of capital, better valuations or other strategic advantages in the foreign market.
Understandably, the committee suggested access for listing to only permissible jurisdictions. It stated that listing be allowed in “a jurisdiction which has treaty obligations to share information and cooperate with Indian authorities in the event of any investigation.” Therefore, the jurisdictions must maintain the standards of regulations prescribed by the Board of International Organization of Securities Commissions and Financial Action Task Force.
Besides, the committee also highlighted that changes will have to be made to the existing legal regime in India. For one, obstacles may arise under FEMA regulations in the absence of a provision to invest in the issue of equity by an Indian entity. Further, to encourage direct overseas listing, exemptions must be given to the companies from provisions such as prospectus and allotment of securities and maintenance of the register of members. Since the companies will fulfill similar requirements in the foreign stock exchange, it may be deemed sufficient under the Companies Act. Moreover, Indian companies not listed on the domestic stock exchange only need to comply with the foreign stock exchange requirements and relevant Indian laws such as the Companies Act. On the other hand, listed companies which cross-list their securities will have to comply with the requirements of both the concerned stock exchanges.
Alongside opportunities, the new provision also brings forth unforeseen challenges. Primarily, the market has to modify the legal and regulatory framework to facilitate the global functioning of the companies. For example, the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 require foreign currency to be held in a particular manner by Indian companies and the RBI’s Liberalised Remittance Scheme imposes a cap on investment by Indians in assets located overseas. Further, companies need to prepare for compliance with distinct accounting standards and other reporting requirements of the foreign stock exchange. Consequently, this will also increase compliance costs.
Above all, cross-listing of securities will compel corporates and regulators to become more efficient. With securities listed on two geographically distant stock exchanges, companies need to ensure that they not only comply with the rigorous requirements of both the exchanges but also address the shareholders’ considerations. Companies need to ensure that a share (of the same class) held in both jurisdictions represents an equal value and also enjoys the same rights. Moreover, shareholders must be given a reasonable opportunity to vote and participate through effective overseas communication and a strong e-voting mechanism. Additionally, companies have to introduce a channel for seamless transfer (buying and selling) of shares from one jurisdiction to another. Also, the regulatory bodies need to ensure that there is coordination between the regulations of both exchanges and resolve any possible conflicts.
The Indian domestic market will cheerfully welcome the step of enabling Indian companies to directly list their securities on a foreign stock exchange. It is essential to globalize the capital market for greater economic development and benefits to the Indian corporates. It is expected that the government and the regulators will put in place an efficient framework for the functioning of this route of overseas listing. However, moving ahead in this direction, the market must be prepared to prevent any mishap which occurred in the indirect listing route and upgrade itself in consonance with the global market.