Sebi panel bats for direct listing of Indian firms on foreign exchanges

Move will help new-age companies access foreign capital at a lower cost

In a move that could open up a fresh source of funding for domestic unicorns and new-age companies, an expert committee constituted by the Securities and Exchange Board of India (Sebi) has endorsed direct listing of Indian firms on foreign exchanges. The panel has also proposed measures to encourage global companies to list in India. 

The existing legal framework doesn’t allow a company incorporated in India to directly list on foreign bourses. Similarly, companies incorporated outside India cannot directly list their equity shares on the Indian stock exchanges. 

Given the “ongoing evolution and internationalisation of capital markets across the globe,” the Sebi panel has endorsed a framework that will make direct overseas listings simpler for Indian companies.

Currently, India has more than one dozen unicorns and nearly 100 companies with valuation of more than $100 million  that could benefit if the latest recommendations are implemented. 

The committee, set up in June, was tasked with examining the economic benefits of direct listings and various regulatory aspects to facilitate the move. Cyril Shroff, managing partner, Cyril Amarchand Mangaldas, and Sujit Prasad, executive director, Sebi, were among the committee members.

Regulatory hurdles

Key regulations that require amendment to enable companies to list overseas

• Foreign Exchange Management Act 
   
• Companies Act
   
• Sebi ICDR (Issue of Capital and Disclosure Requirements)
   
• Sebi LODR (Listing Obligations and Disclosure Requirements) 
   
• Sebi PIT (Prohibition of Insider Trading)
   
• Sebi Takeover Code (Substantial  Acquisition  of  Shares  and  Takeovers)
   
• Sebi Buy-Back Regulations
   
• Sebi Delisting Regulations

Taxation issues

• Currently, income  earned  from  transfer  of  equity  shares of an unlisted Indian company listed on a foreign stock exchange is subject to  capital gains tax in India
   
• If shares of a company incorporated in India are acquired at less than the fair market value (FMV),  the difference between the FMV and the  subscription price is subjected to tax at the hands of acquirer 

“The current framework comes in their way of global expansion. Given the change in the complexion of Indian companies and global markets, direct overseas listing will incur huge benefits,” said Ranu Vohra, managing director and CEO, Avendus Capital, a member of the panel.

Some of the economic benefits spelt out by the committee in the report include increased competitiveness for Indian companies, a boost to “brand India” globally, and improved economic relations with other countries. Broadening of the investor base, better valuations, and an alternative source of capital for Indian companies are among other benefits.

“Equity listings by companies incorporated in India on foreign stock exchanges would allow them to access foreign capital at a lower cost. The Indian economy, in turn, will experience added growth and economic development. Similarly, equity listings of companies incorporated outside India on the Indian stock exchanges would improve the efficient allocation of capital and diversification for investors across the Indian economy,” said the committee in the report. The report also highlights how Chinese companies have benefited by tapping overseas markets.

Between 2013 and 2018, 91 companies with business operations primarily in China raised $44 billion through initial public offerings on the NYSE and Nasdaq in the United States, the report says.

On the regulatory front, one of the key recommendations made by the committee is to allow domestic companies list only on “permissible jurisdictions” outside India. Permissible jurisdictions are the ones that have treaty obligations to share information and cooperate with Indian authorities in the event of any investigation. 

Also, investors, brokers and investment bankers associated with listing of Indian companies will have to be registered and compliant with all the requirements of the jurisdiction concerned.

The committee has also proposed that the disclosure of end-beneficiary information can be made as prescribed in the jurisdiction where an Indian company chooses to list. To boost direct listing, the committee has proposed several tax concessions. Among them is a provision that the income earned from the transfer of equity shares of an unlisted Indian company listed on a foreign stock exchange would be subject to capital gains tax in India, as these shares would be considered ‘capital assets situated in India’. The committee has proposed relaxation in ‘fair market value’ norms to reduce the tax obligation on the share acquirer. The committee has recommended that the domestic company wanting to list outside will have to comply with the Indian Accounting Standard.

To make domestic listings more attractive for overseas companies, the panel has recommended further relaxation to the Indian depository receipt (IDR) framework such as removal of the requirement of identifying promoters as most global companies don’t have the concept of controlling group. The panel has also sought relaxations in the Foreign Exchange Management (Fema) Regulations to allow listing of overseas companies on the Indian exchanges. The changes sought include permitting resident Indians to invest and transfer securities of companies incorporated outside India, and allowing companies incorporated outside India to open bank accounts in India denominated in the rupee.

In 2013, the government set up a panel under the leadership of MS Sahoo to look at overseas listing norms for Indian companies. Back then, the panel had suggested measures to allow listing of companies overseas without having to list domestically. The recommendations, however, were never implemented. 

Sebi has sought public comments before December 24 on the various recommendations made by the panel, following which the market regulator will make a representation to the government and other authorities to make changes to the regulatory framework to enable direct listing.