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  • Pushkar Gadhwal, Kiran Singh

Direct Listing Overseas: Listing of Equity Shares in Permissible Jurisdiction Rules 2024

[Pushkar and Kiran are students at Chanakya National Law University.]


Indian companies were allowed to raise capital from foreign investors by the issuing of depository receipts listed abroad or by allowing non-residents to invest in domestic issuances or by borrowing cash from outside. In an effort to facilitate access to global capital markets, the Ministry of Corporate Affairs (MCA) announced measures to simplify the process of raising capital from aboard or, simply put, acquiring foreign money, through its notification dated 30 October 2023, amending Section 23 of the Companies Act 2013 (CA 2013).


The authors explain the Companies (Listing of Equity Shares in Permissible Jurisdictions Rules) 2024 (2024 Rules) and their applicability and exclusions. Also, they examine how direct listing of equity shares, being far more feasible than depository receipts, impacts the capital market.


Listing of Securities on Permitted Stock Exchanges under CA 2013


Section 23(3) of CA 2013 was inserted with an aim to stimulate foreign capital, to unleash growth, and give Indian companies more agility in raising funds by permitting a class of public companies to issue its securities, with the intention of listing them on authorised stock exchanges in permissible foreign jurisdictions. However, there was a lack of established structure or procedures for the inclusion of these securities on authorised stock exchanges until 24 January, 2024, when MCA and the Ministry of Finance (MoF) issued a notification regarding the 2024 Rules and further modifying the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (NDI Rules 2019).


What are Depository Receipts?


Prior to issuance of the 2024 Rules, the listing of equity shares in a foreign jurisdiction was done through depository receipts which are negotiable instruments issued by a domestic bank that reflect ownership of shares in that particular foreign company. Furthermore, companies from developing economies such as India, at times, want to internationalize their company by listing their stocks via instruments such as American depository receipts (ADRs) or global depository receipts (GDRs). Domestic companies often choose to cross-list for various reasons, including expanding their investor base to secure more capital for company investments, reaching a larger customer base, enhancing stock liquidity, increasing global visibility, and capitalizing on potentially higher valuations that may be overlooked in the domestic market.


What is Direct Listing Overseas?


Direct listings, also known as direct public offers, enable a business to be listed on a stock market without following the conventional process of an initial public offering. During a direct listing, companies sell their shares directly to the market without using a listing bank or an investment bank. Direct public offerings aim to eliminate intermediaries in business transactions in order to reduce transaction costs for the listed firm and enhance transparency and feasibility. Esteemed corporations are likely to possess a clear understanding of their value, while the market is already aware of their company activities.


A Brief Overview of 2024 Rules


The 2024 Rules framed under the provisions of Section 469 of the CA 2013 clearly provides for companies that are covered under the rules or allowed to raise capital from abroad by listing their shares in permissible stock exchanges in a permissible jurisdiction through direct listing. Companies have the option of raising cash via either issuing new capital/shares or offering their current shares to an investor. In the second scenario, the current shareholders submit their shares for consideration. Both procedures are authorised for listing equity shares on eligible stock exchanges according to the 2024 Rules and NDI Rules 2019. According to Para 2 of Schedule I to NDI Rules 2019, there are specific industries where investment is restricted i.e., Companies involved in certain sectors are not permitted to obtain funding from foreign sources. The same rules apply for listing in International Financial Services Centre (IFSC), whether via new issue or via offer for sale.


Companies Not Eligible to Raise Foreign Funds under the 2024 Rules


The 2024 Rules clearly specify the companies that are not eligible for listing their shares on permitted stock exchanges in permissible jurisdiction under Schedule I. For instance, a company having a “negative net worth” or a company which has “defaulted in payment of dues to any bank or public financial institution et al. The aim of excluding certain class of companies from issuing its equity shares for listing is to guarantee investor protection, trust and transparency, while adhering to the international norms.


Analysis of the 2024 Rules


MCA, by issuing the 2024 Rules, has provided the structured framework for listing of equity shares of listed and unlisted companies in permissible stock exchanges. The rules aim to guarantee that corporations comply with stringent financial and governance requirements, therefore fostering transparency and bolstering investor trust. The inclusion of regulatory authorities, implementation of due diligence, and appointment of advisers emphasise the stringent nature of the listing process, underscoring the need of comprehensive paperwork and expert guidance.


Further, the approval and subsequent listing signify a significant advancement, offering organisations fresh prospects to generate capital, broaden their investor pool, and maybe enhance share liquidity. The prerequisites for post-listing compliance, including ongoing reporting and adherence to regulatory directives, underscore a commitment to enduring transparency and accountability.


Additionally, these rules through its provisions are expected to foster positive relationships between different jurisdictions and encourage international cooperation in regulatory oversight. Nevertheless, the effectiveness of 2024 Rules, hinges on its ability to adapt to the evolving dynamics of global markets and effectively address emerging challenges.


Lastly, these rules are likely to greatly influence the future development of cross-border listings. They will provide a regulatory framework that encourages international investment while ensuring the integrity and stability of financial markets. Businesses that adhere to these standards are likely to be well-equipped to navigate the intricacies of international finance and enhance the interdependence and robustness of the global economy.


Conclusion


Therefore, direct listing might be advantageous for several Indian enterprises or companies seeking to obtain funds outside the conventional capital market, here in India. The 2024 Rules can potentially make the cross-border investment easier by making the listing of shares accessible to foreign investment.  Further, the conventional method of raising capital via GDR/ADR is outdated and has been tarnished by accusations of abuse and circular trading, as well as uncertainty about taxes. This has resulted in an atmosphere of fear among both investors and enterprises when it comes to subscribing and issuing. Therefore, MCA by enabling the direct listing of equity shares in foreign market would not only enhance the trust of Indian investors but also facilitate the promotion of the Indian economy on the world arena.

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