[Sarthika is a student at National Law University, Visakhapatnam.]
The Indian financial market has seen remarkable growth, boasting a stock market capitalization exceeding USD 4 trillion in 2023, securing its position as the fifth-largest globally. Coupled with the third-largest startup ecosystem, India has experienced substantial growth in new ventures, increased startup funding and global investor influx. However, certain challenges persisted in accessing foreign capital through traditional means, such as American Depository Receipts and Global Depository Receipts such as: (a) money laundering risks; (b) profitability concerns; (c) regulatory challenges and (d) deterrence for companies.
Through its expert report dated December 2018, SEBI recognized India’s compelling investment prospects for the global investor community and articulated the necessity for internationalization of the Indian capital market. This vision materialized with the Companies (Second Amendment) Act 2019, approved by the Union Cabinet on 4 March 2020. In September 2020, the amended act was officially notified, introducing Sections 23(3) and 23(4) to empower certain public companies in India to issue securities for listing on permissible foreign stock exchanges. The enabling provisions of the Companies (Amendment) Act 2020 took effect on 30 October 2023.
In a press release dated 24 January 2024, the Ministry of Corporate Affairs, in collaboration with the Ministry of Finance, issued the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules 2024 (LEAP Rules), and the Foreign Exchange Management (Non-debt Instruments) Amendment Rules 2024 (NDI Rules), respectively. The rules aimed at establishing a comprehensive framework to facilitate the internationalization of the Indian capital market, allowing certain public companies to list and issue securities on the International Financial Services Centre in India (IFSC), with India International Exchange and NSE International Exchange as the recognized stock exchange platforms (International Exchange).
This post analyzes the key takeaways from the new rules and examines the implications and the potential challenges centric to the oversea listing of equity in the foreign capital market.
Understanding the Rudiments: LEAP Rules
The LEAP Rules outline eligibility and ineligibility for public companies, detail procedural aspects, and prescribe the compliance requirements post-listing.
Eligibility criteria
The rules are targeted at unlisted public companies and extend to listed ones only insofar as they adhere to the SEBI or the IFSC Regulations 2021. Currently, the framework permits listing of unlisted entities as SEBI is yet to formulate operational guidelines for listed public companies.
Ineligibility
Rule 5 of the LEAP Rules serves as a gatekeeper by setting stringent eligibility criteria, ensuring that only financially sound and compliant companies can opt for international listings. Ineligible companies include those registered under section 8, declared as a Nidhi, limited by guarantee with share capital, with outstanding deposits, negative net worth, defaulting in payments, applying for winding-up, or defaulting in filing annual returns or financial statements.
Listing requirements
The equity shares must be listed in dematerialized form, subject to compliance with sectoral caps and prohibited activities outlined in Schedule I of the Rules. Post finalization, the unlisted public companies must file the prospectus in e-Form LEAP-1 within 7 days, accompanied by the requisite fees and comply with Ind-AS and other relevant accounting standards for filing financial statements with securities regulator or stock exchanges.
NDI Rules: Charting the course for internationalization
The NDI Rules delineate conditions for the issuance and listing, prerequisites for permissible holders, eligibility criteria, incumbent obligations, and specifications regarding voting rights and pricing.
Compliance requirements
A public Indian company or its existing shareholders can internationalize their equities provided that they, along with promoters, or directors are: (a) not debarred from accessing the capital market; (b) not a wilful defaulter; (c) not under inspection, or investigation under the Companies Act 2013; (c) do not hold a fugitive economic offender status. Aggregate equity shares in permissible jurisdictions, along with those held in India by non-residents, must not exceed the foreign holding limit outlined in Schedule I, preventing undue concentration of foreign ownership.
Permissible holder
Permissible holders encompass holders of shares listed on International Exchange. Explanation 1 clarifies that a permissible holder is not a person resident in India and they must seek approval from Central Government if they are citizens of countries sharing a land border with India, or those whose beneficial owners belong to these nations.
Voting rights
Public Indian companies must ensure voting rights on equity shares are exercised directly by permissible holders or through their custodian.
Pricing
For listed companies, pricing must match domestic issuance standards. Initial listings of shares by public unlisted Indian companies should follow a book-building process, ensuring fair market value, while subsequent issuances should adhere to International Exchange norms.
Implications of the New Requirements
The new mandate brings forth potential implications that shape the landscape for businesses, startups, and investors. To begin with, the rules are expected to tackle the growing trend among Indian founders to ‘flip’ their ownership to oversea-structures for the ease of capital raising, valuation and regulatory risks.
The GIFT-IFSC financial ecosystem establishes a globally competitive investment landscape, offering better tax-saving opportunities for investors and diverse pools of capital for businesses. IFSC facilitate transactions in US Dollars, enhancing business ease for foreign investors. Operating over 20 hours daily, they offer flexibility and accessibility, appealing to investors from key global jurisdictions.
Listing on GIFT City’s International Exchanges is comparable to global exchanges like NYSE or Nasdaq. The structure, hence, strengthens the case for existing foreign listed companies to transition back to GIFT IFSC, offering potential savings on global listing expenses. Noteworthy relocations, like PhonePe moving from Singapore to India and Razorpay and Groww relocating to India, underscore this trend.
Allowing the listing in IFSC would also entail several benefits to both the companies and the investors. The IFSC Regulations 2021 streamline financial compliance by allowing the preparation of statements according to US GAAP, Ind AS, or any applicable accounting standard, saving the company’s burden of publishing two sets of financial statements.
For investors, Indian tax laws lay down provision for capital gains tax exemption on transfer on IFSC exchange in the hands of non-residents. In accordance with Rule 114AAB of the Income-tax Rules, 1962, eligible foreign investors are exempted from obtaining a PAN if they do not generate income in India, except for income derived from the transfer of a capital asset mentioned in Section 47(viiab) of the Income-tax Act 1961 (IT Act).
Challenges Posed by the NDI Rules
The imposition of new rules aims to raise the profile of Indian startups helping them compete on a global stage. However, these rules also bring forth several challenges that need to be addressed.
Startups, known for initial losses and negative net worth due to substantial growth investments, may face challenges accessing foreign capital due to the ineligibility of companies with negative net worth. The exclusion of convertible instruments from net worth computation adds to this hurdle. This restriction poses a potential obstacle to innovative startups seeking to list on IFSC, potentially hindering their growth. Amendments to these rules could be considered to better accommodate the distinctive financial characteristics of startups in the dynamic entrepreneurial landscape.
Another challenge lies in the restrictions on resident investors under the NDI Rules. These investors are restricted from holding listed shares, depriving them of continuous liquidity and limiting their investment portfolio options. Unlike foreign holding companies listed on overseas stock exchanges, where residents can own shares, IFSC’s policy limits residents to selling shares only in subsequent offer-for-sale rounds. There is a need for a reevaluation of the regulatory framework to enhance resident investor participation without jeopardizing IFSC's international standing.
Recommendations and Way Forward
As a next step, India should consider listing on the US stock exchange Nasdaq as a strategic move to enhance global access for Indian companies. Nasdaq, in collaboration with Indian officials, advocates for expanding foreign listings beyond IFSC and including foreign bourses in policymaking. Leading investment firms, including Tiger Global, Sequoia Capital, and Lightspeed, emphasized this move and underscored amplified opportunities for entrepreneurs and venture capitalists Nasdaq's introduction of ETFs tracking its indexes in India further solidifies its commitment to pivot India’s global economic presence.
Furthermore, dividend income for non-residents is subject to a 20% tax rate under Section 115A/115AD of the IT Act. However, dividends on are taxed at a reduced rate of 10% (Section 115AC/115AD). A proposed concessional tax rate of 10% for dividends from shares of Indian listed companies on International Exchanges should be implemented.
Additionally, IFSCA and SEBI should explore the prospect of a bilateral memorandum of understanding to enhance cooperation and information exchange. Although both entities are already signatories to the IOSCO multilateral memorandum of understanding, the intricacies involved in regulating dually listed companies and implementing direct listings may require heightened cooperation and coordination. This underscores the imperative of adopting a structured and collaborative regulatory approach for overseeing dual listings on IFSC exchanges.
Conclusion
In conclusion, the rules are a welcome in transforming India’s financial landscape. By facilitating international listings, these rules not only open avenues for global investment but also encourages transparency, compliance, and accountability, essential for sustained market growth. However, it is crucial to continually assess and adapt these rules, especially considering their impact on startups and resident investors. As India integrates into the global financial system, collaborative efforts between regulatory bodies such as IFSCA and SEBI are essential for effective oversight in the dual-listing scenario.