Direct listing on foreign exchanges

Why in News

The Indian government has recently allowed certain Indian companies to directly list on specific foreign stock exchanges, enabling them to tap into global capital markets and potentially increase capital outflows.

Important Points

• The committee appointed by SEBI, consisting of members from SEBI, capital institutions, and large law firms, proposed allowing foreign listings to simplify taxation and FEMA provisions for Indian companies, thereby making foreign listings more viable.
• The proposal for amending the foreign exchange listing norms for Indian companies aims to liberalize the process of listing on foreign exchanges. As of now, Indian companies are required to list in India before seeking a foreign listing.
• The primary purpose is to make it easier for Indian companies to access international capital markets and to foster economic growth.

How do companies currently list on foreign bourses?

• Domestic listed companies would use depository receipts — American Depository Receipts (ADR) or Global Depository Receipts (GDR) — to list in the overseas market.
• Under this route, Indian companies wanting to get listed on foreign stock exchanges would give their shares to an Indian custodian, and depository receipts would be issued to foreign investors.
• According to Prime Database, between 2008 and 2018, 109 companies raised Rs 51,847.72 crore through the ADRs/GDRs route. After 2018, none of the companies got listed overseas.

Proposed changes will involve amendments to key Indian regulations, including:

• Foreign Exchange Management Act (FEMA): The proposed changes to FEMA will address issues related to the sale of shares to persons residing outside India. It will likely provide clarity on the process and regulations for Indian companies conducting foreign listings.
• Income Tax Act: The amendments may include changes in how share transfers within India are taxed, ensuring that they align with the new foreign listing norms.
• Companies Act 2013: The Companies Act is expected to see enabling provisions added to allow certain classes of securities to be listed on stock exchanges in foreign jurisdictions. This is a crucial step in enabling foreign listings.

Benefits for Indian Companies

• Access to Global Capital: Indian companies will have a new avenue to raise capital from international investors.
• Diversified Investor Base: Foreign listings will expose them to a wider, more diversified investor base, potentially driving up valuations and investments.
• Cross-Listing Benefits: Companies will be able to benchmark themselves against global peers, enhancing transparency and credibility.
• Support for Unprofitable Startups: Tech startups and unicorns, which may not be profitable initially, can access larger pools of capital from foreign markets.
• Global Expansion: It facilitates international expansion, global brand recognition, and financial support for expansion plans.

Challenges and Considerations

• Regulatory Compliance: Companies will need to ensure compliance with the regulations of the foreign exchange where they choose to list. This includes adhering to foreign listing requirements and disclosure norms.
• Tax Implications: Changes in taxation rules and FEMA provisions may affect the overall cost and feasibility of foreign listings.
• Market Choice: Indian companies will need to carefully consider the choice of foreign exchange for listing, taking into account factors such as market reputation, investor base, and regulatory environment.
• Legal and Financial Reporting: They will need to align their legal and financial reporting standards with the requirements of the foreign exchange.