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Exploring Global Markets: Prospects and Challenges in Overseas Listing forIndian Companies

Updated: Feb 10

by Tanishq Sharma and Aayushi Choudhary*



Introduction

In July 2023, the Central Government granted approval for both listed and unlisted domestic companies too publicly list their equity shares on the International Financial Services Centre (IFSC) in Ahmedabad. To implement this decision, the Ministry of Corporate Affairs (MCA) issued a recent notification allowing specific Indian companies to opt for overseas listing instead of the conventional process. This notification activates Section 5 of the Companies (Amendment) Act 2020, amending Section 23 of the Companies Act 2013 (CA2013). The modification introduces a provision in Section 23, stating that "certain categories of public

companies may issue specified types of securities for the purpose of listing on approved stock exchanges in eligible foreign jurisdictions or as otherwise specified." Consequently, this amendment grants the Central Government the authority to permit public companies to list their securities on foreign stock exchanges. Additionally, the amendment empowers the Central Government to exempt particular classes of public companies from procedural requirements outlined in Sections 89, 90, or 127 of CA 2013. The current method for issuing and listing securities in foreign markets relies solely on global depository receipts (GDRs). Under this approach, domestic companies seeking capital from overseas markets must issue shares to

the domestic custodian, who then instructs the overseas depository bank to issue the shares to foreign investors. This process is associated with various drawbacks, as elaborated in the subsequent section. The recent notification has eliminated the cumbersome GDR route, permitting specific public companies to directly list their securities in foreign markets. This article discusses the departure from the conventional approach to issuing securities in foreign markets, emphasising the feasibility of direct listing and addressing potential challenges associated with this alternative method.


Deficiencies in the Current Mechanism for Listing on Foreign Stock Exchanges

Presently, domestic companies adopt an indirect approach to list their securities on foreign stock exchanges. This involves issuing securities to foreign jurisdiction-incorporated depositories, which subsequently provide depository receipts to investors in the company's name. The regulation governing this indirect issuance on foreign stock exchanges is outlined in the Companies (Issue of Global Depository Receipts) Rules 2014. According to these rules, "depository receipts shall be issued by an overseas depository bank appointed by the company, and the underlying shares shall be kept in the custody of a domestic custodian bank." Nevertheless, this procedure has several shortcomings that hinder domestic companies from attracting capital from foreign investors. The expenses and time associated with Global Depository Receipts (GDRs) can be considerable, and the regulatory framework adds to its complexity. Depository receipt holders lack voting entitlements unless they convert them into underlying shares. Additionally, only listed companies meeting specific stringent criteria are allowed to issue depository receipts. GDRs are susceptible to foreign exchange rate fluctuations, with even minor fluctuations impacting the overall security price significantly. Recent trends

also reveal instances of GDR misuse for fraudulent activities or channeling black money in India. Notably, recent GDR manipulation cases underscore the limitations and drawbacks of the GDR system.


Legal Ramifications of Direct Listing on Foreign Stock Exchanges

This announcement is a positive development as it opens up opportunities for Indian companies to access global markets. It facilitates the raising of capital from international investors through a direct avenue, contributing to financial stability. The amendment empowers domestic companies to compete effectively with their foreign counterparts, attracting enhanced valuations from a more diversified investor base. Consequently, this reduces dependence on the domestic market and offers diverse channels for capital procurement. In 2018, the SEBI Expert Committee published a report exploring the potential listing of shares of Indian companies on foreign stock exchanges, emphasizing multiple advantages for domestically incorporated

companies. According to the report, this initiative provides an alternative capital source, reducing the cost of capital while optimizing branding, quantum, and value. The report also asserts that "companies listing on foreign stock exchanges with sophisticated asset management infrastructure generally expect to obtain more accurate valuations on their securities than in their domestic capital markets." This move is particularly beneficial for startups and emerging companies, enabling them to secure capital from overseas investors, departing from traditional methods such as crowdfunding and seed funding. Direct listing on foreign markets alleviates the complexities associated with the GDR route, offering relief from high costs and a stringent regulatory framework. This streamlined approach not only reduces financial burdens but also enables companies to navigate international markets more efficiently, focusing on value creation and global competitiveness.


Obstacles in Directly Listing in a Foreign Jurisdiction

Despite the advantages that domestic companies could derive from directly listing their securities on foreign stock exchanges, numerous unregulated issues require attention. Initially, the revised provisions lack clarity, offering no guidance on government-permitted company classes or the criteria for direct listing in foreignM jurisdictions. The amendments do not specify the eligible securities, recognized foreign jurisdictions, or permitted stock exchanges. This initiative may entail a significant increase in regulatory compliance for domestic companies, obliging

adherence to the laws of two jurisdictions, potentially elevating overall costs. Amendments to CA 2013 and the Foreign Exchange Management Act 1999 are necessary to establish a regulatory framework for listing companies in foreign jurisdictions. Currently, these enactments lack a regulatory structure for such share listings abroad. Section 88 of CA 2013, mandating companies to maintain a register of members, should be further amended to include a 'foreign register,' documenting particulars of foreign shareholders of companies listed in foreign jurisdictions.

The Companies (Prospectus and Allotment of Securities) Rules 2014 address regulations for companies listing shares on foreign stock exchanges through GDRs but do not consider scenarios for direct listing in foreign jurisdictions. Additionally, the permissibility of cross-border trading of a company's securities remains unclear.


Conclusion

The recent MCA notification signifies a positive stride for domestic companies by expanding their investor base and tapping into foreign stock exchanges for capital. By allowing a departure from the conventional indirect listing through GDRs, it paves the way for a more direct route, a previously unavailable avenue for Indian companies. This shift holds promise, but challenges persist, demanding comprehensive solutions to unlock the full potential of these provisions. A substantial overhaul of the Indian regulatory framework is imperative for effective implementation. Without such enhancements, the notification could be viewed as a mere formality lacking genuine enforceability. To fully realize the benefits of direct listing, the regulatory landscape must address ambiguities and provide clarity on permitted company classes, criteria for direct listing, eligible securities, and recognized foreign jurisdictions or stock exchanges. Additionally, bridging the regulatory gaps between domestic and foreign jurisdictions is crucial to streamline compliance and mitigate potential conflicts. Achieving these enhancements will not only foster investor confidence but also establish a robust regulatory foundation, ensuring the successful and transparent execution of the MCA's forward-looking initiative.


*Tanishq Sharma and Aayushi Choudhary are fourh year students at GNLU at the time of publication of this blog.





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