BY VARUN PANDEY, FIFTH-YEAR STUDENT AT UPES DEHRADUN
The Indian FDI regime has been vying for an enhanced investment environment over the last few decades. Recent measures such as codification of Insolvency and Bankruptcy Laws, taxation incentives for foreign investors and alleviating construction permits in the infrastructure space, among other reforms had elicited a significant rise within the global ease of doing business rankings. Unfortunately, this surge was short-lived and in a bid to revive the Covid 19-ridden distressed economy, the Ministry of Finance via the 5th stimulus package permitted direct overseas listing of Indian companies. This article analyzes the impact of overseas listing on Indian companies and dwells on the various regulatory roadblocks required to be overcome in order to facilitate such measure, and finally examines the consequent pay-off for Indian Investors.
I. What is Overseas Listing?
Direct Overseas Listing would allow companies registered in India to list their equity shares in foreign jurisdictions and gain liquidity. Currently, Indian companies have limited access to foreign capital markets in the form of American Depository Receipts (ADR’s) and Global Depository Receipts (GDR’s). Indian companies can avail Foreign Currency Exchangeable Bonds (FCCB’s) only for issuing debt securities, whereas foreign companies can access the Indian Capital Markets by the Indian Depository Receipts (DR’s) Scheme, 2014.
Interestingly, the Central Government had been mulling the said listing reforms way back since 2018. A SEBI Committee Report was published which evaluated various economic, legal and taxation aspects pertinent to foreign listing. One of the primary objectives for enabling direct listing is to expand the investment opportunities for Indian companies by attracting foreign capital and encourage them to compete on a global footing, facilitating their growth will also lead to an improved environment for ease-of-doing business in India. The recent Companies (Amendment) Bill, 2020 further incorporated the provision approving overseas listing of Indian Companies.
II. Regulatory Overhauls
The current laws and regulations dealing with listing of companies would require significant changes to facilitate overseas market access for Indian companies.
- Companies Act, 2013
Section 23 of the Act deals with public offer and private placement of shares, whereas Chapter III of the Act deals with the prerequisites for allotment of securities altogether. However, neither provisions explicitly permit overseas listing and are limited to listing of companies within the Indian securities markets only, accordingly, an exception will have to be carved out for the companies listing in approved foreign securities markets by way of an amendment within Section 23 or via a MOF circular/ notification . Furthermore, Section 88(3) of the Act mandates a company to maintain a registry of security holders in correspondence with Section 11 of Depositories Act. Thus, in the event of overseas listing of equities, a common ground is required to be attained between the inter-linked provisions with reference to Section 88(4) that permits a company to maintain the details of shareholders residing outside India.
- Foreign Exchange Management Act, 1999 and Regulations
Following the repeal of FEMA 20R Regulations and subsequent enactment of FEMA (Non-Debt Instruments) Regulations, 2019, changes will have to be incorporated within the provisions of Schedule II as it regulates FPI investments. These adjustments will have to be made by taking into account the various sectoral caps which persisted during the FEMA 20R era, where FDI was permitted via automatic route and government approval route. Additionally, retention of profits and other receipts of transactions will have to be regulated in a mechanism that mirrors the ADR/GDR framework currently in place.
- SEBI Regulations
SEBI is the sole regulatory authority that overlooks the Indian Capital Markets and the companies listed on domestic exchanges. In order to streamline the process of equity listings on foreign exchanges, it will have to construct a mechanism that is on par with the various pre-listing obligations of the recognized foreign stock exchange, for instance, provisions in tune with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 to secure the interests of foreign investors. This obligation extends to the listing company as well who will be mandated to issue their equities in compliance with the mutual laws and regulations.
Until now, the only Indian debt instrument which are listed on a foreign exchange are Masala Bonds. They are supervised via the SEBI (International Financial Services Centers) Guidelines, 2015 but there exists a lack of regulatory oversight with regards to equities listed by and Indian Corporation. Therefore, the definition of Permissible Securities under Section 7 of the guidelines can be amended to include such class of equities by virtue of the powers conferred to SEBI under Section 11 of the SEBI Act, 1992.
III. Indian Entities and Investors
There are glaring queries in the face of benefits accruing to Indian investors by this move, since neither the Companies (Amendment) Bill, 2020 nor the SEBI Report explicitly discuss the consequences in their preliminary disclosures permitting overseas listings. At first glance, it is apparent that Indian entities that will opt for direct listing on overseas platforms will get first-hand exposure to multiple sources of capital from Alternate Investment Funds (AIF’s) and foreign industry-exclusive investor classes that were initially prevented from diversifying their investments to Indian entities due to their respective investment laws and regulations. However, uncertainty regarding authorization of Indian investors subscribing to such entities listed on overseas stock exchanges is sustained, as there are neither any sectoral caps identified on class of shares, nor any clarification about whether the Indian investors will be able to subscribe to equity under the automatic route or the government approval route.
IV. Relevant Concerns
In order to facilitate direct overseas listing, there are multiple areas that could prove to be a challenge for the entities as well as the regulators and will need to be rectified.
Firstly, the SEBI Report identified 12 permissible jurisdictions for overseas listing of Indian companies including the NASDAQ, London Stock Exchange, Euronext Paris etc. To ensure swift listing of equities, Indian entities will be required to coordinate with the local listing regulations under the permissible jurisdictions along with the SEBI framework that shall govern overseas listings, which could hand a double-blow for the Indian corporations due to multiplicity of norms. For instance, an Indian corporation directly listing on the LSE, in order to prohibit insider trading, will have to figure out a mutual ground between SEBI (Prohibition of Insider Trading) Regulations, 2015 and the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016 of the UK to prevent any potential conflicts which may arise in between their provisions. Similar issues extend to corporate governance norms that may not be unequivocal with the permissible jurisdiction’s regulations.
Secondly, if a conflict does arise between the regulators, there is a need for a swift dispute resolution mechanism that is relatively quicker than traditional arbitration. Furthermore, since the primary accountability will rest with SEBI, it is imperative that its extra-territorial powers are expanded to encompass any such disputes relating to the Indian equities listed on overseas stock exchanges, also to ascertain that SEBI shall exercise exclusive authority in dealing with corporate offences that may arise on the permissible jurisdiction. Although, the current KYC norms for Indian investors form a reliable frame of reference to curb such occurrences, pairing up with countries which are members of the Financial Action Task Force (FATF) would significantly prevent any large-scale economic offences such as money laundering through these channels.
Finally, even prior to the legislative amendments, there is an immediate need to strengthen the infrastructural capacity of the Indian Depositories framework and the concerned registrars of Indian securities. A lack of stable gridwork could potentially affect the inter-links between Indian registrars and their foreign counterparts, consequently hampering the efficient trading of equities on the foreign permissible jurisdiction.
It is admitted that a plethora of concerns related to overseas listing will be clarified once SEBI releases an elaborated framework, yet there are still issues that would require detailed elucidations. For instance, whether overseas listing would grant an exemption to the corporations involved within the prohibited sectors under FDI regime; or what would be the process of subscription to such equities, and which sectors would fall under the government approval route and whether there will be sectoral caps? etc. These are just a few queries that would have to be resolved prior to any Indian entity’s first IPO on foreign soil.
It is also to be noted that just like much of the reforms announced under the stimulus, overseas listing was already in consideration and might have mitigated the strain on Indian companies had it been already enforced and was functioning. Nevertheless, the move to allow direct listing to overseas exchanges should be welcomed by cash-strapped Indian entities which would now be able to tackle the liquidity-crunch arising from Covid-19 by accessing foreign investors and capital. Furthermore, this leaves the door open for foreign entities to directly list on Indian markets as well, that may allow Indian investors to diversify their stock portfolio as well.