Overseas listing refers to the process by which a company incorporated in India is listed on a foreign stock exchange allowing it access to international capital in foreign currencies. Listing on a foreign exchange, separate from the exchanges in India, would allow Indian businesses to raise capital abroad, diversify their investor base, and expand their global presence. The access to international capital markets for Indian businesses till now has been limited to few avenues: primarily through depository receipts and debt securities, in addition to innovative structures involving flipping of ownership to overseas holding company or listing through special purpose acquisition companies. However, these avenues have had limited traction historically, and even in those situations, have been subject to regulatory scrutiny.
Current Regime & Recent Developments
After several unsuccessful attempts in the past, the Government of India (“GoI”) is making definitive moves to allow Indian companies to list their securities on foreign exchanges. The Ministry of Corporate Affairs (“MCA”) on September 28, 2020, issued the Companies (Amendment) Act of 2020 amending the existing company laws to allow for listing of securities of certain companies on foreign exchanges. However, the relevant amendment was only brought into force and effect by way of notification on October 30, 2023. This amendment allows a certain set of public companies to issue a particular class of securities tailored for listing on authorized stock exchanges within permissible foreign jurisdictions. Details around the classes companies, securities, exchanges, jurisdictions, and relevant conditions to enable overseas listing are yet to be notified by the MCA. There is a need to establish a proper regulatory framework to operationalize these changes, which includes amendments to a suite of laws, including, broadly the following:
(i) Company laws: Notification from the MCA exempting the application of: (a) detailed requirements applicable to Indian companies for public offers and private placements of securities; (b) procedural requirements including in respect of prospectus, beneficial ownership requirements, pertaining to dividend distribution and maintenance of register of shareholders.
(ii) Foreign exchange laws: Amendments to: (a) Foreign Exchange Management (Non- Debt Instruments) Rules, 2019 to provide a regulatory framework for purchase by a person resident outside India of equity shares of a company incorporated in India listed on a foreign stock exchange; (b) Allowing for receipt and retention of proceeds in a foreign currency account overseas. Additionally, clarifications around issues around round tripping, sectoral limits, and restrictions applicable to entities with foreign investment from specific countries; (c) Relax norms around remittance of foreign exchange and valuation of securities.
(iii) Tax laws: There are amendments required to: (a) exempt non-resident shareholders of Indian companies listed abroad from capital gains tax in India for transfers involving other non-residents (similar to the current regime for depository receipts of Indian companies listed on foreign stock exchanges); (b) reevaluate the need for valuation norms applicable to securities for determination of fair market value having adverse tax implications in case consideration received for such securities is less than the fair market value.
GIFT City & Regulatory Regime
Government authorities have indicated that to test the waters, the first step will be to allow listing on international exchanges in Gujarat International Finance Tec-City (“GIFT City”), India’s International Financial Services Centre (“IFSC”).GIFT City IFSC is a financial center and special economic zone established in 2015, regulated by the IFSC Authority, an independent regulator exclusive to the zone.
As mentioned above, GoI has decided to allow Indian companies to list directly on stock exchanges based in GIFT City, i.e., India International Exchange (IFSC) Limited and NSE International Exchange IFSC Limited (together “GIFT Exchanges”). In 2021, the IFSC Authority (“IFSCA”) issued regulations for capital raising at GIFT City, which contemplates the listing of securities. Working groups of IFSCA along with the other regulatory bodies are expected to issue regulatory guidelines to operationalize the changes.Based on statements made by officials, companies seeking to avail the listing facility will be subject to minimum eligibility criteria, including, a minimum duration of operation. Official statements have also indicated that overseas listing will enable start-ups to access global markets through GIFT City IFSC.The time horizon for the new listing regime to be functional is speculated to be the end of the year.
Investments in Indian equities through IFSC will involve a contract between foreign depositaries and Indian depositaries. These investments are expected to be given certain tax exemptions. The initial phase of listing Indian companies overseas is aimed at assessing investor interest in Indian equities.Listing a company on GIFT Exchanges is equivalent to listing on international exchanges such as NYSE or NASDAQ, as it allows foreign investors to invest in public markets where Indian companies are listed in currencies other than the Indian Rupee.
Tax scenario
While IFSC in GIFT City is a special economic zone, Indian tax laws still apply to the zone. Current tax law provisions have been amended to introduce various beneficial provisions to incentivize listing on GIFT Exchanges. Any gains derived from certain securities being transferred by a non-resident on a recognized stock exchange (“RSE”) in the IFSC (where the consideration for such transaction is undertaken in foreign currency) is exempt from tax in India. There are specific kind of securities listed on an RSE located in an IFSC that would be eligible for the exemption from capital gains tax which include foreign currency denominated equity share of a company. Further, subject to certain qualifying conditions, non-resident eligible foreign investors deriving income from a transaction on an RSE in foreign currency would be subject to a beneficial tax rate of 20% (twenty per cent). Whilst this does not yet include an exemption for direct listing of equity shares on an RSE, it seems to be the next prospective step towards incentivizing and allowing overseas listing of Indian companies.
Listing Regulations
The IFSCA introduced the IFSCA (Issuance and Listing of Securities) Regulations, 2021 (“Regulations”) pertaining to the listing of securities on GIFT Exchanges, with certain relevant points set out below:
1. Eligibility for IPO issuance: For an initial public offering (“IPO”), the issuer must have an operating revenue of at least USD Twenty Million in the preceding financial year; or the issuer must have an average pre-tax profit, based on consolidated audited accounts, of at least USD One Million during the preceding three financial years. Additionally, the issuer shall have commenced business at least 3 (three) years prior to the date of filing of the prospectus.
2. Eligibility criteria for start-ups and SME companies: Start-up companies are allowed to list on the GIFT Exchanges without the mandatory requirement of an IPO, provided it meets the set-out criteria. The offer document being submitted by the company has to be filed within a period of 10 (ten) years from the date of its incorporation / registration and the annual turnover of the company shall not have exceeded USD Twenty Million. The requirements also lay down the business scope of the company, narrowing it down to innovation, development or improvement of products or processes or services, or it is a scalable business model with a high potential of employment generation or wealth creation.
3. Dual listing: Companies can pursue dual listing, which means they can be listed both on domestic Indian exchanges and GIFT Exchanges. This provides them with increased access to capital, additional liquidity, and access to international capital markets.
4. Securities eligible for listing: The regulations cover a wide range of securities that can be listed on GIFT Exchanges, including equities, debt instruments, mutual fund units, and depository receipts.
5. Retail participation: Retail investors are also allowed to participate in the IPOs and trading of securities listed on IFSC exchanges. This provides an opportunity for a diverse range of investors to engage in international financial markets.
6. Currency of listing: Securities can be listed and traded in foreign currencies, which allows for increased flexibility and ease of transacting for international investors.
7. SEBI Rules not applicable: Various regulations issued by Securities and Exchange Board of India (“SEBI”) pertaining to publicly traded companies on Indian stock exchanges, including in relation to takeovers, insider trading and the like would not be applicable to such listings. While it is possible that analogous regulations will be notified, it is expected that the same will not be as stringent.
The Regulations aim to create a conducive environment for the listing of securities on GIFT Exchanges, fostering international investment and expanding opportunities for businesses to access global capital markets. Regulations allowing certain classes of Indian public companies to list on GIFT Exchanges are anticipated.
Rationale
The decision to pursue an overseas direct listing has substantial implications for the growth trajectory of Indian companies. It can lead to increased market capitalization, enhanced liquidity, and access to advanced expertise available in international markets. Furthermore, successful overseas listings might attract more foreign investment into India, stimulating economic growth and fostering legal advancements in cross-border regulations and compliance frameworks. In this regard, the implications for foreign investors arising from listing on GIFT Exchanges includes the following:
1. Access to International Companies: It provides investors with an opportunity to invest directly in Indian companies that choose to list their shares on the GIFT Exchanges in currencies such as United States Dollar. This expands investors' access to a broader range of international companies beyond those listed on their domestic exchanges.
2. Diversification: Investors can diversify their portfolios by investing in companies from various global markets. It enables them to spread risk across different economies, industries, and currencies, potentially reducing the overall risk exposure.
3. Tax Benefits: Investments made through GIFT Exchanges may come with tax benefits. The investments in Indian equities through GIFT Exchanges will likely be exempt from capital gains tax, securities transaction tax, and stamp duty, providing a favorable tax environment for investors.
4. Currency Exposure: Investing in overseas-listed companies exposes investors to currencies other than their domestic currency. GIFT Exchanges allow for investment in United States Dollars and other such currencies, thereby mitigating currency risk that would take place in terms of their investment in Indian companies (which would be in Indian Rupees).
While overseas listings could open up opportunities for Indian companies, a well-regulated framework is needed to address potential risks and ensure proper monitoring by regulators.
Prospects
While developments are awaited which operationalize listing on GIFT Exchanges, this is the first step in allowing Indian companies to access foreign capital markets. Details of the capital markets being considered can be understood from the report of the expert committee set up by SEBI formed in 2018 which examined the possibility of allowing Indian companies to list their shares on foreign stock exchanges. Among its various recommendations, the expert committee in its report identified a list of ‘permissible jurisdictions’, a phrase used in the recent company law amendment referred to earlier, where the securities of Indian companies could potentially be listed. It includes jurisdictions that are:
1. Members of Board of International Organization of Securities Commissions ("IOSCO”), with securities market regulators having information sharing arrangements with SEBI; and
2. Members of the Financial Action Task Force (“FATF”); and
3. Not identified in the public statement of the FATF as: (a) jurisdiction having deficiencies in strategic anti-money laundering or in combating financing of terrorism; or (b) jurisdiction not having made sufficient progress in addressing deficiencies or non-committal to action plan to address deficiencies.
To this extent, the list produced by SEBI included jurisdictions such as United States and London and stock exchanges such as NYSE, NIFTY and LSE for listing of Indian company securities. As such, we anticipate that soon such listing will be operationalized allowing for easier access to international capital.
While overseas listings could open up opportunities for Indian companies, a well-regulated framework is needed to address potential risks and ensure proper monitoring. This could be a seminal moment for one of the world’s largest economies to integrate further with the global economy and the leading capital markets of the world.
