Insights by: Sumit Kochar & Shivam Gera
In a landmark move, the government has opened the gateway for Indian public companies to spread their wings on the global stage. Following the visionary announcement by Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman, on July 28, 2023, the wheels of change have been set in motion to facilitate direct listings of securities by Indian public companies on the International Financial Services Centre (IFSC) exchanges at Gujarat International Finance Tec-City (GIFT City) which is maiden IFSC.
“These, together, provide an overarching regulatory framework to enable public Indian companies to issue and list their shares in permitted international exchanges,” the finance ministry said in a statement.
This groundbreaking development comes on the heels of strategic amendments made by the Department of Economic Affairs (DEA) on January 24, 2024, to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules). The newly introduced ‘Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme’ has been complemented by the Ministry of Corporate Affairs (MCA) with the issuance of Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024.
The journey toward international listings began earlier when the MCA granted permission for Indian companies to be listed on foreign exchanges, as per Section 5 of the Companies (Amendment) Act, 2020, effective from October 30, 2023. This historic amendment to the Companies Act, 2013, paved the way for direct listings, ushering in a new era for the Indian capital market. The path to international listings is laden with considerations ensuring a seamless transition for Indian public companies. These include adherence to sectoral caps, regulatory provisions, and the foreign holding limit as mentioned in the NDI Rules. Equity shares must be in dematerialized form, maintaining parity with those listed on Indian stock exchanges.
Conditionalities
The NDI Rules also introduced the concept of a “permissible holder”. The permissible holder may purchase or sell equity shares of an Indian company listed on an international exchange subject to limit specified for foreign portfolio investment. It is also stated that the permissible holder from countries sharing land borders with India has to go for approval from the central government before investing.
The NDI Rules also contain stringent conditionalities govern the issuance of equity shares, emphasizing the financial health and regulatory compliance of public Indian companies, their promoters, directors, and existing shareholders. Criteria such as avoidance of wilful default, absence of ongoing investigations, and the non-association with fugitive economic offenders play a pivotal role in obtaining approval for overseas listings.
Challenges & Benefits
The advent of the novel regulatory framework signifies a pivotal juncture for public companies, as it grants them the latitude to issue shares with differential voting rights within the IIFSC, employing a myriad of permutations and combinations. This translates into the provision of distinct share classes tailored for foreign stakeholders within the IFSC, thereby endowing the Indian public companies with a heightened flexibility in structuring their capital. Nevertheless, it behooves us to contemplate a plausible scenario wherein conflicts may arise among the disparate classes, a prospect looming on the horizon. It is imperative to note, however, that the NDI Rules imposes a constraint on Indian listed companies. In the event that listed companies opt for a direct listing of shares in the IFSC, they are obligated to maintain equity shares pari passu with those listed on the mainland of India, specifically on recognized stock exchanges i.e., NSE and BSE. Furthermore, should Indian-listed companies choose to embark on the listing journey at the IFSC, the unfolding operational guidelines and regulations remain eagerly awaited from the Securities and Exchange Board of India (SEBI).
It is evident that the IFSC, while physically located within India, stands distinct from the nation itself. Consequently, any foreign investment directed towards the IFSC does not constitute a part of Foreign Direct Investment (FDI) or Foreign Portfolio Investment (FPI) in India per se, and is exempt from the associated compliance obligations. In this context, Indian public companies are not mandated to establish a presence in the IFSC under new regime; rather, they are only required to engage in arrangements with designated international exchanges, such as the India International Exchange or NSE International Exchange.
This arrangement essentially channels the foreign investment back into India as per the NDI Rules which is an additional layer of regulatory considerations. Notably, the rules stipulate that permitted investors must adhere to foreign portfolio investment compliance, introducing a requirement that permissible holders may find less favorable, as it implies an additional licensing process. Moreover, if a permissible holding exceeds 10% in an Indian public company operating within the IFSC, the company may be obligated to conform to FDI norms. Conversely, if the holding is below 10%, the regulatory framework of FPI comes into play. This nuanced distinction adds complexity to the regulatory landscape governing investments in the IFSC.
There exists a notable advantage for Indian public companies, especially startups, endowed with existing promoters or investors seeking to divest their shareholdings. These companies now have the opportunity to facilitate exits for their shareholders through an Offer for Sale (OFS) on the international stock exchange. This introduces an additional exit route, presenting a novel avenue for well-established startups to provide an exit strategy for existing shareholders.
Importantly, this alternative route through IFSC comes with less stringent norms in comparison to the process of listing on recognized stock exchanges in mainland India. The flexibility inherent in offering shares through OFS on IFSC can also be advantageous for promoters of family-owned companies, as it allows for a more streamlined liquidation process. This circumvents the need for extensive compliance with the major guidelines of the SEBI, providing a smoother path for promoters and investors to realize liquidity from their holdings.
While there exists a restriction on residents in India directly investing in shares listed on international stock exchanges of Indian public companies, a viable alternative is the establishment of a Family Investment Fund (FIF). This structure permits investments in listed securities, providing a strategic avenue for Indian residents to participate indirectly in this market. Additionally, residents in India also have the option to invest in an investment fund launched in the IFSC, which can subsequently engage in acquiring shares of Indian public companies listed within the IFSC. However, a point of uncertainty lingers regarding whether such investments necessitate licensing akin to FPI, given that the ultimate destination of the investment is back in India.
A notable concern arises from the fact that transactions of this nature will not be regulated by the SEBI takeover code. This presents a potential risk of hostile takeovers, wherein competitors could acquire securities of Indian public companies without the regulatory safeguards provided by the takeover code. The absence of these safeguards may pose a challenge, as there might be no structured opportunity for permissible holders to exit in the event of a hostile takeover. As the dynamics of international investments through IFSC evolve, it is anticipated that SEBI will address and provide clarity on these aspects to mitigate the risks associated with hostile takeovers and ensure a robust regulatory framework for such transactions.
As the regulatory landscape evolves, the Ministry of Finance’s notification and the subsequent industry response remain crucial milestones. For foreign investors, this scheme presents a golden opportunity to partake in the growth story of Indian companies within a business-friendly regulatory environment. While this journey signifies a significant step forward, detailed regulations and alignment with existing laws are imperative before the first Indian company can leverage this method for listing on international exchanges.
