[Garv is a student at Hidayatullah National Law University.]
In July 2023, the Central Government permitted various domestic companies, whether listed or unlisted, to list their equity shares on the International Financial Services Centre (IFSC) at Ahmedabad. In furtherance of the same, the Ministry of Corporate Affairs (MCA), through its recent notification, has permitted certain Indian companies to list their securities overseas instead of the traditional route. The notification has enabled Section 5 of the Companies (Amendment) Act 2020 which amends Section 23 of the Companies Act 2013 (CA 2013). It inserts in Section 23 a provision that “such class of public companies may issue such class of securities for the purposes of listing on permitted stock exchanges in permissible foreign jurisdictions or such other jurisdictions, as may be prescribed”. This amendment has given the Central Government the power to allow public companies to list their securities in the stock exchange of foreign Jurisdiction. It also provides that the Central Government may exempt any classes or class of public companies from various procedural requirements of Sections 89, 90 or 127 of CA 2013.
The current procedure of issuing and listing securities in the foreign market is through the global depository receipts (GDRs) only. In this route, the domestic companies intending to raise capital from the overseas market have to issue shares to the domestic custodian of the company. The overseas depository bank issues the shares to the foreign investors on the instruction of the domestic custodian. This procedure has various shortcomings as discussed in the subsequent part.
The notification has removed the cumbersome route of GDRs and allows certain public companies to directly list their securities in the overseas market. This article highlights the overcoming of the traditional method of issuing securities in the overseas market. It also delves into the feasibility of direct listing and possible challenges pertaining to it.
Shortcomings of the Existing Mechanism of Listing in Overseas Stock Exchanges
Currently, domestic companies follow an indirect way of listing their securities in the foreign stock exchange. They are required to issue their securities to the depositories incorporated in the foreign jurisdiction and such depository in turn issues depository receipts to the investors in the name of the company. Such indirect issue of the listed company in the foreign stock exchange is governed by Companies (Issue of Global Depository Receipts) Rules 2014. It provides that “the depository receipts shall be issued by an overseas depository bank appointed by the company and the underlying shares shall be kept in the custody of a domestic custodian bank.”
However, this procedure has various lacunas that have prevented domestic companies from raising capital from foreign investors. The cost and the time associated with the GDRs may be high and the regulatory framework makes it more cumbersome. The holders of the depository receipts are not entitled to vote unless they convert them into underlying shares. Furthermore, only the listed companies are permitted to depositories receipts on the fulfilment of certain stringent requirements. The GDRs also run the risk of forex exchange rate fluctuations, and a slight up and down in the exchange rate can have a substantial impact on the price of the overall security. Moreover, the recent trend highlights various cases of misuse of GDRs to commit fraud or to route black money in India. The recent cases of GDR manipulation cases further throw light on the drawbacks of the GDRs.
Implications of Direct Listing in the Foreign Stock Exchange
This notification is a welcome step as it will enable Indian companies to access the global markets. It will help to generate capital from the overseas investors through direct route and attain financial stability. This amendment will allow domestic companies to compete with their foreign competitors and hence attract higher valuations with a more diversified investor base. It will make the companies less reliant on the domestic market and explore various avenues for raising capital.
The SEBI Expert Committee issued a report in 2018 that deals with the possibility of listing the shares of domestic companies on foreign stock exchanges and highlights various benefits to companies incorporated in India. As per the report, domestic companies will get an alternate source of capital by reducing the cost of capital and optimising it in terms of branding, quantum, and value. It further provides that “companies listing on foreign stock exchanges with sophisticated asset management infrastructure generally expect to obtain more accurate valuations on their securities than in their domestic capital markets.” The startups and other emerging companies would also be benefitted as they would be able to raise capital funds from overseas investors instead of the traditional ways of crowdfunding and seed funding etc.
The direct listing on foreign capital will also provide relief from the cumbersome process of listing through the GDR route which involves high cost and stringent regulatory framework.
Challenges Involved in Direct Listing in a Foreign Jurisdiction
Despite the benefits that the domestic companies would get from direct listing of their securities in the foreign stock exchanges, there are plethora of ungoverned issues that need to be addressed. At the outset the amended provisions are ambiguous and vague. There is no clarification as to which classes of companies will be permitted by the government and what shall be the basis on which the companies will be permitted to directly list their shares in the foreign jurisdiction. It does not provide which classes of securities shall be allowed for direct listing and which are the foreign jurisdictions and the permitted stock exchanges.
There may be a substantial increase in the regulator compliance on the domestic company. The companies shall adhere to the laws of the two jurisdictions which has the potential to increase the overall cost. Further, the provisions of CA 2013 as well as the Foreign Exchange Management Act 1999 shall be amended to provide for the listing of companies in the foreign jurisdiction. At present, there enactments do not provide any regulatory framework for such listing of shares in the foreign jurisdiction. Section 88 of CA 2013, which makes it mandatory for companies to maintain register of members, must be amended to further include 'foreign register' to contain the particulars of the foreign shareholders of the companies listed in the foreign jurisdiction.
The Companies (Prospectus and Allotment of Securities) Rules 2014 provides for regulations for the companies that list their shares in the foreign stock exchange through the medium of GDRs. It does not contemplate any scenario for the listing of shares in the foreign jurisdiction through the direct route. Moreover, it is still unclear whether cross border trading of securities of the company shall be permitted.
Conclusion
The MCA notification is a welcome step for domestic companies as it diversifies the investor base and explores the foreign stock exchange markets to raise capital for securities. It provides for the aberration from the typical indirect listing of shares through the GDRs, and consequently, it will promote the trend of direct route of listing shares that was not possible for the Indian companies yet. However, there are various problems that persist and need to be resolved to unveil the full potential of these provisions. The Indian regulatory framework needs to be considerably overhauled for the better implementation. In the absence of such framework, the notification is a mere rubber stamp that does not really provide for any enforcement in true sense.