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by Tarun Thakur, National Law University, Odisha.
Introduction
In a watershed moment in October 2023, the Ministry of Corporate Affairs (MCA) notified Section-5 of the Companies (Amendment) Act, 2020 (CA 2020). In 2020 the MCA via amendments added Section 23(3) and 23(4) which gave a green light to the Indian public companies to directly list their securities in the permissible foreign jurisdictions. After the span of more than 3 years, MCA has finally enforced Section-5 of the CA 2020. The enforcement of Section-5 does not come as a thunderbolt as there were various negotiations and talks at multiple levels that direct listing should be allowed. The overseas listing will provide much needed opportunities to the Indian public companies to tap the overseas capital and increase their investor base. Earlier, the direct listing was not permitted and companies used to raise capital via indirectly listing their securities on the foreign stock exchanges. By the virtue of the 2020 amendment, not only will the Indian companies be able to list their securities directly on the foreign exchanges but vice versa will also be allowed.
Equity foreign listings were a vital necessity, as it would provide Indian public companies with more avenues that were earlier not accessible. Also, the earlier framework of tapping overseas capital were through Depository Receipts (DR) which had its own set of problems. The new amendment presents a glimmer of hope to the Indian public companies as it will have a significant impact on the corporate governance and capital of the companies. But the road is not yet clear as there are some regulatory impediments which needs to be addressed by the MCA.
Earlier Regimes: A lost Charm
The earlier mechanism which was employed to raise capital from overseas market was mostly DR. DR played an integral role in bringing foreign investments in the Indian market. DR allows a company to raise large amount of capital but the issuance of DR are on a constant decline due to some regulatory compliances and money laundering concerns. SEBI in 2019 even tried to revive the DR framework by issuing a robust framework for the issuance of DR. But the same was not able to boost the issuance of DR as in the past 5 years not even a single ADR has been issued which raises a big question on the efficacy of the DR.
Bold Leap: Why there was a need for Direct Overseas Listing
The mechanism of issuing DR to list the securities overseas and garner capital from there has been prevalent since 1927, but now there was need for a new mechanism as DRs mechanism has become outdated. The companies were also facing issues in raising capital from overseas as the DRs have been on decline owing to the regulatory compliance and operational issues that come with them. It must also be noted that due to the decline in DRs, SEBI introduced Qualified Institutional Placement (QIP) a new capital raising mechanism to tackle the issue of capital deficit and to fasten the process of fund raising. But in QIP funds are raised from domestic investors which had its own limitations. Moreover, the issuance of ADR and GDR presented many problems. For instance, in 2017 SEBI banned several companies from securities market as there were manipulations in issuances of GDRs. Further, SEBI also suspected ADR and GDR for paving the way for black money in India.
So, as there were many issues in the earlier regime it was imperative to introduce a new mechanism so that companies can tap into the overseas market. The new direct overseas listing can be a game changer as it will reset the earlier mechanism and address the lacunae which were present in the earlier system, provided a full-fledged regulatory system is put in place.
A Paradigm Shift: India’s Overseas Listing Framework Unveiled
From quite a time there was a need to amend the Foreign Exchange Management (Non-Debt Instrument) Rules 2019 (NDI rules) so that a regulatory framework can be laid out. As a result, the Ministry of Finance (MoF) recently notified the amended NDI rules which brought amendments to the 2019 rules.
Firstly, the government has added a notable provision in the NDI Rules that if holder of securities is of such a country which shares border with India, then the holder can hold shares only if it has the approval of the central government. Now, justification behind this new provision is not yet out of the clouds. One justification for such a move can be to increase transparency and to also bolster the security. In short, the move aims to safeguard Indian companies interests as previously also government had imposed restriction on Chinese companies and investors in context of investing in Indian companies.
The new amended rules allow both listed and unlisted public companies to list on foreign exchanges. Now, this is a major departure from the earlier norm as in the earlier regime the Indian companies had to first list their securities in the domestic market and were then allowed to list overseas but that too indirectly. However, now this has been done away with. The new amended NDI rules also set forth the rules for pricing of equity shares. It mandates two different rules- For listed companies it mandates that they must issue equity shares at a price not less than that is offered to domestic investors. On the other hand, for unlisted companies, the price for shares shall be determined by a block-building process allowed by the international exchange on which the company is listing. Now the new rules have made a clear distinction between the listed Indian companies and the unlisted ones in context of pricing dynamics. The pricing rules for listed companies seems justified as it clearly reflects the government intention of not putting the domestic investors at loss, that’s why price of shares should not be of a differential nature. On the other side of the coin, the pricing rules for unlisted companies is based on a book building process by virtue of which a company determines the quantity of shares they intend to issue and at what price, the price is not fixed priorly.
In this whole new framework, it was expected that government would provide companies with some relaxation in case of preparing accounting standards, but the government in the new LEAP rules have clearly mandated that the companies have to comply with the Indian Accounting standards. The companies may also have to comply with the accounting standard of foreign jurisdictions. This can increase the compliance cost and the companies will face the brunt of dual compliance.
Now both the new amended NDI rules and LEAP rules provide an overarching framework to usher in the new change of the direct overseas listing of equity shares. But the work is not done yet, as there are also some changes to different statutes which needs to be notified by the central government as soon as possible. For instance, the government has already notified that SEBI is in the process preparing operational guidelines for the listed public companies.
India: Rising Star for Global Investors
The Indian economy has been growing at a good pace from the last three years. Recently in the second quarter of FY 23-24, Indian GDP marked a growth rate of 6.5 percent, which even exceeded the RBI forecast. Last year in 2023, when the strong economies were struggling to counter recession, but in that time also Indian economy growed at a good pace. India has a capacity to develop its economy at very big level and for that it needs a large amount of capital. By the new direct overseas listing mandate, it can attract more global investors. Earlier China was the main attraction for the global investors, but now India can acquire the center stage in attracting global investors. Also, some of the global investors after the Covid-19 pandemic are looking for China’s alternative. This can be a huge opportunity for India to attract all the global investors who are looking to invest their capital in an emerging economy. In short, if the global investors are convinced that India has a long-term potential and it can yield them high profits. The global investors will invest high capital in India. What India needs to do is address the concerns of global investors from time to time as otherwise slowly the global investors will not invest in the Indian companies which will defeat the main aim of the direct overseas listing. At the same time Indian companies should be provided with much needed protection so that they cannot be exploited by the global investors.
Conclusion
In conclusion, the enforcement of Section-5 of the CA 2020 marks a significant shift in country’s corporate landscape moment as now companies will be able to directly list their securities overseas. The new mechanism provided by government was the need of the hour as now startups, businesses will be able to access a larger pool of capital. To further streamline the process of direct overseas listing government have also exempted capital gains that arise of transfer of shares from tax. Moreover, the government has started also started addressing the regulatory impediments by amending various requisite statutes and rules which are not in consonance with direct overseas listing. As the bright future awaits the Indian companies, the companies should tap into this big opportunity and take a giant leap which will benefit both the company and the Indian economy.
