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Ms. Muskan Agarwal is a 3rd year B.A., LLB (Hons.) student at Jindal Global Law School in Sonipat.
The landscape of capital markets is ever-evolving and to access the capital markets abroad, the Ministry of Finance has recently amended the Foreign Exchange Management (Non-Debt Instruments) Rules, 2024 and the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024. These amendments will enable the direct listing of Indian companies on the International Financial Services Centre Authority.
Introduction
Direct Listing of securities by Indian entities on the permitted international stock exchanges has now been enabled by the Government of India (“GoI”) through the Department of Economic Affairs on the 24th of January 29, 2024. The GoI, amended the Foreign Exchange Management (Non-Debt Instruments) Rules, 2024 (“FEMA Rules”) and the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024 (“MCA rules”) to legislate the same. Both these amended legislatures allow for a legislative framework which shall facilitate a smoother execution for listed Indian entities to issue and list shares at the designated international exchanges. Before the amendment, Indian entities could not list their companies on foreign stock exchanges. Before the amendment of the FEMA and the MCA Rules, Section 23 of the Companies Act, 2013 which defines public offer and private placement was amended in 2020. This Section enabled the listing on permissible jurisdictions i.e. International Financial Services and Centre in India. This framework will allow the unlisted Indian entities to list their companies on the permissible international markets. However, the framework does not mandate an Indian company listed on permissible stock exchanges in foreign jurisdictions to list their companies in the domestic stock exchanges as well.
GIFT- IFSC
India International Exchange and India International Exchange along with the GIFT-IFSC are the only permitted stock exchanges as per the Amended rules. GIFT-IFSC is India’s first international financial services facility. International Financial Service Centre (“IFSC”) is set up under Section 18 of the Special Economic Zones Act, 2005. These bodies fall under the ambit of the International Financial Services Centre Authority (“IFSCA”) under the International Financial Services Centre Authority Act, 2019. The stock exchanges will have 20 hours of trading time as compared to 6 hours for the convenience of investors from all permitted jurisdictions. GIFT-IFSC will become a tax haven for investors as the capital gains from the transfer of shares of Indian companies will be exempted from paying taxes. For better regulation, the IFSCA has been vested with the powers of the Securities and Exchange Board of India, Reserve Bank of India, Insurance Regulatory and Development Authority of India and the Pension Fund Regulatory and Development Authority for regulating the financial market in the GIFT-IFSC.
Key Amendments to the FEMA Regulations
Conditions for Issuance of equity shares:
Under the new amendment, any public Indian company may issue equity shares or offer equity shares of the already existing shareholders on permissible stock exchanges abroad. Those shares shall be in dematerialised form and shall rank pari passu with equity shares listed on a recognised stock exchange in India. Those shares can be listed on either the India International Exchange NSE or the International Exchange. However such issues shall be subjected to prohibited activities and sectoral caps as prescribed under paragraphs 2 and 3, Schedule I of the Rules. The holders of these shares shall be regarded as ‘permissible holders’ under Regulation 2 of the FEMA Rules. The offer document by the Indian companies shall mandatorily disclose that the holders or their beneficial owners cannot be residents of India and shall obtain the permission of the Central Government before holding the shares. Only after the permission is granted, can these holders freely buy and sell shares on the stock exchanges.
Eligibility Criteria for listed Indian Entities
A listed Indian company and the existing shareholders of the public Indian company shall be eligible to issue equity shares only if the promoters, the promoter group or the selling shareholders are not debarred from accessing the capital market by any applicable governmental or regulatory having the authority over company law matters. However, if the promoter group or its directors are part of a company which is debarred from accessing the capital markets they shall become ineligible. The company’s promoters or directors cannot be wilful defaulters or fugitive economic offenders under Section 2(1)(f) of the Fugitive Economic Offenders Act, 2018. The company should also not be under inspection/ investigation under the Companies Act, 2013. The companies will also have to mandatorily comply with the conditions and other requirements as specified by the Securities and Exchange Board of India and the Ministry of Corporate Affairs as published on their website.
Miscellaneous Laws
The company can enter into necessary arrangements with the Indian depository and foreign depository. The equity shares that are issued or offered along with the shares that are held in India, should not exceed the limit of the foreign holding as mandated under schedule I of the Rules. Further, Regulation 5 of the Rule states that only pursuant to the voting instructions from the permissible holders of the equity shares, or directly by the permissible holders, voting rights can be exercised over equity shares. To combat unfair practices and to maintain uniformity in the pricing of the equity shares, the Ministry of Finance has stated that when the equity shares are already listed on the Indian stock exchange the same should be issued at a price, which shall not be less than the applicable price to a corresponding mode. In the case of the initial listing of equity shares on the International Exchange, the price shall be determined by a book-building process. The laws of those specific jurisdictions shall apply to the book-building process and the price of the issue shall not be less than the fair market value under applicable rules or regulations under the Foreign Exchange Management Act, 1999.
Key Amendments to the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024:
Process of Listing
The MCA rules apply to unlisted public companies and listed public companies, which seek to issue equity shares on the designated stock exchange in permissible jurisdictions by the GoI. An unlisted public company, which does not fall under Rule 5 of the FEMA Act and has no partly paid-up shares, can issue equity shares for the purposes of listing. The unlisted company shall file the prospectus in e-Form LEAP-1 which is provided in the Second Schedule. Along with the form, fees shall be deposited within seven days after the listing has been approved by the permissible exchange. After the listing is complete on the list of stock exchanges in permissible jurisdiction, the company shall comply with Indian Accounting Standards under the Companies (Indian Accounting Standards) Rules, 2015 in preparation of their financial statements in addition to any other accounting standards.
Ineligibility Conditions
Under Regulation 5 of the MCA rules a company shall not be eligible for issuing its equity shares for listing if it is registered under Section 8 of the MCA Rules. It may also become ineligible if it is declared as Nidhi (non-banking financial company) under Section 406 of the Companies Act, 2013. Apart from these, the MCA rules also state that a company may become ineligible if it is limited by guarantee and also has a share capital. Other components such as any outstanding deposits, a negative net worth, and default in payment of dues make a company ineligible. Any company which has filed for winding up or bankruptcy under the Insolvency and Bankruptcy Code, 2016 and no such resolution for winding up is pending will also become ineligible. It also states that any default in filing of the annual return or a financial statement under the Companies Act will also result in disqualification.
Expected Impact of the Amendments
This new mechanism will connect the country to global opportunities while also enabling the Indian economy to link with the global financial system. To facilitate the same, the Press Information Bureau in a recent press statement stated that the SEBI will issue operational guidelines for listed Indian entities. This initiative by the Ministry of Finance will allow seamless and easy movement of global capital into India. Indian entities will be able to access the domestic markets for raising capital in INR and the international markets at IFSC for raising capital in foreign currency. This scheme will allow Indian entities for value creation and high returns on their investments. Thus has the potential to reshape the Indian Capital Markets landscape.
