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Ms. Tejawini Kaushal is a 3rd year B.A., LL.B. (Hons.) student at Dr. Ram Manohar Lohiya National Law University, Lucknow
Before 24 January 2024, Indian companies remained restricted from directly listing on overseas markets and instead used equity instruments like ADRs or GDRs. Now, the government has notified the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024 (“Listing Rules 2024”), which allows public Indian companies to directly issue shares on the GIFT-IFSC stock exchanges for being subscribed by foreign entities. While this development introduces a wide array of opportunities, such as access to a broader investor base, increased visibility, and improved corporate governance, an equal number of uncertainties for issuers, regulatory authorities, and subscribers also crop up. This piece offers an overview of the regulatory framework established to enable companies to directly list equity shares in permissible jurisdictions and hedge against possible issues and grey areas impacting this scheme at this primary stage of its introduction.
The Legislative Roadmap for Foreign Direct Listing
The roadmap to listing securities on international exchanges was established well in 2021 through the IFSCA (Issuance and Listing of Securities) Regulations, 2021 (“ILS Regulations”). Regardless of these being in place, there were no enabling provisions to facilitate the listing effectively. Subsequently, section 23(3) of the Companies Act 2013 was incorporated in 2020 and notified on 30 October 2023. It allows certain classes of domestic public companies to list their securities on foreign stock exchanges, including the GIFT-IFSC. Thereafter, the MCA has notified the Listing Rules 2024 as well as amended the FEM (Non-debt Instruments) Rules, 2019 (“NDI Rules 2019”) on the same day to add Schedule XI with the heading, “Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme” (“Direct Listing Scheme”). These are further supplemented by an FAQ on the Direct Listing Scheme of NDI rules.
Snapshotting the Regulatory Regime
As per clause (aaa) of rule 2 of the NDI Rules, 2019, the permitted International Exchanges are listed in the Annexure to Schedule XI of the Rules, namely, BSE’s India International Exchange and NSE International Exchange. These exchanges are operational for trading approximately 21 hours a day, a clear benefit for the traders and issuers over domestic exchanges. Listing on IFSC GIFT City offers several other advantages, such as increased liquidity for Non-Resident Shareholders due to easier share transactions and higher returns within GIFT-IFSC’s business-friendly regulatory environment. Additionally, under Section 47A of the Income Tax Act, 1961, transfers of capital assets by non-residents on IFSC stock exchanges are not subject to capital gains tax. For Indian issuers, especially startups seeking better valuations and growth opportunities, it provides access to a diverse global investor base. Companies listed in GIFT-IFSC are seen as professionally managed, enhancing credibility for attracting investors. Moreover, listing in IFSC eliminates forex risks for Indian companies, as transactions are conducted in foreign currency.
Analysis, Anticipations, and Concerns
One interesting area of analysis revolves around the applicability of FDI norms on direct listing. The aggregate of equity shares issued/offered under the listing shall not exceed the limit of permitted foreign holdings. Furthermore, the entity itself must be permitted under the FDI regulations to raise foreign funds. While the current regime remains silent on these issues, it is only through logical imputation one can assume that entities like chit funds cannot get listed.
Secondly, the current circular derives highly from the initially notified ILS regulations, and so these need to be read and analyzed together. For instance, special guidelines for startups and SMEs as well as Initial Public Offer (“IPO”) specifications for the operating revenue to be greater than or equal to USD 20 million in the preceding financial year, and average pre-tax profit should be greater than or equal to USD 1 million in the preceding three financial years, are still derived for the ILS Regulations. This results in a needlessly complex regime, with multiple legislative documents governing various aspects of foreign direct listing requirements.
Thirdly, only non-residents can hold shares on IFSC International exchanges. Resident-owned shares will remain unlisted, which means the liquidity impact is significant for shareholders as proprietary trading isn’t allowed. This means that only shares offered for sale through an IPO or Offer for Sale (“OFS”) can be purchased by foreigners. Indian shareholders who do not participate in these offerings cannot list or sell their shares on these exchanges due to restrictions under the Foreign Exchange Management Act, 1999. For example, if a company offers 20% of its shares through an OFS, the remaining 80% owned by Indian shareholders cannot be traded on the IFSC International exchanges until the next OFS. This creates a situation where Indian shareholders must wait for the company to offer more shares for sale, limiting liquidity for their holdings.
Fourthly, the ineligibility Criteria for Indian Public Companies under Rule 5 of Listing Rules 2024 and Para 3 of Schedule XI of NDI rules include having a negative net worth. If capital has been raised through instruments like convertible debentures or debt instruments, these are not included in the net worth calculation as per Section 2(57) of the Companies Act. This can significantly impact companies with high valuations but negative net worth due to funding losses. For example, a unicorn startup may have a high valuation, but if it has incurred losses funded by convertible instruments, its net worth could be negative as per Companies Act calculations.
Fifthly, there is no clear guidance on whether all convertible securities must be converted to equity shares before IPO. Unlike SEBI regulations for domestic listing through the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR”) and SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (“LODR”), there is no specific requirement for liquidation prior to the listing found in the regulations for IFSC exchanges for unlisted public companies, and specific regulations for listed public companies are yet to be released by the SEBI.
Sixthly, given the lack of regulations by SEBI at this stage, listing on GIFT-IFSC can only be anticipated to follow a process similar to SEBI’s domestic listing requirements, albeit potentially more flexible, with steps like appointing a custodian or lead manager being similar but more relaxed.
Seventhly, Existing shareholders can retain special rights equity shares in IFSC, contrasting with the SEBI regulations for domestic issues, potentially causing alignment issues for Indian companies listed on both Indian and IFSC exchanges.
Eighthly, the fungibility of shares between domestic and IFSC exchanges remains unclear. Since IFSC is considered a foreign jurisdiction, how shares listed on both domestic and IFSC exchanges will function in terms of trading and ownership is ambiguous.
Ninthly, the status of public unlisted Indian companies listed on international stock exchanges does not change under Section 2(52) of the Companies Act, 2013, which defines a “listed company” as one with securities listed on a recognized stock exchange. The international stock exchanges are not recognized for this purpose as per Section 4 of the Securities Contracts (Regulation) Act, 1956. Despite being listed on a stock exchange, these companies are excluded from important obligations and compliances of listed companies under the Companies Act, 2013, such as providing investor protection.
Tenthly, regarding the lock-in period for existing shareholders after an IPO, there isn’t one specified by any of the laws and regulations for direct listing on IFSC, unlike in both ICDR and IFSC regulations that provide for a 180-day lock-in period. This is likely to bring up uniformity issues.
Lastly, there are some compliance concerns and ambiguities. An unlisted public company has to file the prospectus for listing in e-Form LEAP-1 as given in Schedule II of the Listing Rule 2024. A point of contention is that it is currently accessible on the V2 version of the MCA portal, whereas most forms are now being processed through the V3 version. The key distinction between V2 and V3 is that in V2, forms need to be downloaded, filled, and then uploaded to the portal, whereas, in V3, forms are filled out directly on the site, allowing for the saving of partially completed forms to be filed later. However, this particular form has been issued in the older format only.
Moreover, in domestic filings, material documents are often included, but the instruction kit for e-Form LEAP-1 is silent on this matter. It can only be anticipated that including material documents with the form, like a copy of the board resolution, will be advisable to avoid issues in the future.
Furthermore, while the form is primarily for record-keeping and procedural purposes, it is not currently clear whether inspection of documents, etc., can be called for by the ROC in the GIFT City. This is another factor that is to be monitored as the process evolves.
Since India has only recently initiated this process last month, there haven’t been any real-life cases or issues yet. However, several clarifications and notifications will likely be released to address any discrepancies in the current structure, as well as more amendments are expected to align more broadly with international best practices for listing in foreign jurisdictions directly.
