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The post is authored by Tanisha Taneja, a third-year student of B.A. LL.B (Hons.) at the Maharashtra National Law University, Mumbai.
1.INTRODUCTION
The great saga of 1991, did not just witness the opening up of the Indian economy, but also other collateral events which gave India the prowess to ultimately become the 5th largest economy in the world. One of the most significant events was the establishment of National Stock Exchange (NSE) in 1992, which significantly bolstered India’s capital markets by introducing technological innovations, fostering transparency, and providing efficient trading platforms. It democratized access to financial markets, spurred liquidity, and facilitated better price discovery, thus catalysing the growth and development of India's economy.
In October 2023, India once again achieved another milestone by allowing direct listing of securities on foreign markets. With an aim to expand its capital markets, the strategic shift from traditional Initial Public Offer (IPO) to Direct Listing (DI) will not only diversify investment opportunity but also fortify India’s global financial presence, attracting international investors and fostering economic growth. This move will enable Indian companies to obtain financial investment from non-residents as well and is in line with the Government’s vision to make India an hub for businesses. By allowing direct access to international investors, this overarching regulatory framework will enable listed and unlisted public companies to issue and list their shares in permitted international exchanges.
In the blog, the author will discuss the implications of cross-border listings for Indian companies, exploring the potential benefits and challenges associated with accessing foreign capital markets. They will analyse the necessity for robust regulatory oversight by the Indian government to ensure investor protection, market integrity, and compliance with international standards. Additionally, the article will explore strategies to enhance regulatory frameworks while ultimately advocating for measures to facilitate smoother navigation of global capital markets for Indian firms.
2. ANALYSING THE IMPLICATIONS OF DIRECT LISTING
Prior to the change, American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) were the primary method used by Indian corporations to list their securities. Redeemable certificates known as DRs, which reflect the underlying shares of the corporation, are tradable on overseas exchanges. Businesses gave their shares to a foreign custodian bank, which was in charge of distributing DRs to overseas investors. The corporation was further burdened by this process with the charge of underwriter and financial institution. Owing to the involvement of many financial institutions, corporations were subject to the Securities and Exchange Board of India's stringent oversight (SEBI).
To improve the ease of doing business, the government set up a road map which was inaugurated with the establishment of International Financial Services Centre (IFSC) in GIFT City. The IFSCA (Issuance and Listing of Security) Regulations, 2021 (ILS) were passed as the following action., which provided a comprehensive framework for listing of various types of securities. The last and final step was the incorporation of Section 23(3) in the Companies Act, 2013 which will permit corporations to offer securities in other jurisdictions. Ultimately, permitting both listed and unlisted public companies to list their securities on foreign exchanges.
This initiative by the government definitely has its advantages like larger and more liquid market, wider and more sophisticated investor base, saving on the cost and time involved in IPOs, avoidance of dilution of ownership and control which usually results from the issue of new shares or DRs etc. At the same time, we also need to understand the added liability and responsibility on part of both, the government and the companies.
Under Direct listing, firstly, companies will have to comply with the laws and rules of foreign jurisdiction, which may differ from the Indian regulations. Secondly, It has to do with valuation disparities, whereby foreign investors might not place a company's worth at the same level as their domestic counterparts. This could cause distortions in pricing and market perception. This implies that a firm's value in international markets can be different from its valuation in India, which could have an effect on how investors see the company and the price at which its shares are traded. Thirdly, Companies that engage in direct foreign listings may see a direct impact on their share price and investment returns due to their susceptibility to currency changes and market volatility in foreign exchange markets. This means that a company's financial performance and the allure of its shares to investors can be greatly impacted by changes in currency exchange rates and market volatility. Lastly, there is a need for clarity regarding the eligibility criteria for public companies to utilize this pathway, the types of securities permissible for listing, the foreign jurisdictions and stock exchanges where listings are allowed, and the exemptions granted to these companies concerning procedural requirements.
While this initiative holds promising potential for India it also increases the responsibility of the government to implement appropriate regulation in order to ensure investor protection and market integrity. Simultaneously, it also becomes the liability of the companies accessing global capital markets directly, to ensure that regulatory oversight becomes crucial to safeguard against potential risks such as insider trading, market manipulation, and inadequate disclosure practices.
3.LACUNAES IN THE AMENDMENT
In the current notification there are various lacunas that need to be sufficiently addressed to ensure proper implementation of this amendment. Such as firstly, the status of public unlisted companies remains unclear. As per Section 2(54) of the Companies Act, a listed company “means a company which has any of its securities listed on any recognised stock exchange”. According to Section 4 of the Security Contracts (Regulation) Act, 1956, the foreign stock exchange notified under the amendment is not a recognised stock exchange. As a result, they are exempt from the laws and guidelines established by the Companies Act for listed public companies in India, even though they are listed on a foreign market. In the end, this could compromise investor protection.
Secondly, the potential for Indian businesses to immediately list their securities on foreign markets may make listing on IFSCA less alluring to certain businesses. The trading volumes and liquidity of shares listed under the IFSCA on Indian stock exchanges may decline as corporations choose to go straight to overseas markets in order to more readily reach a wider investor base. This change in listing preferences may have an impact on local investor interest in securities listed by the IFSCA as well as trade dynamics.
Lastly, implementation of certain recommendations made by the Working Group Report on Direct Listing of Listed Indian Companies on IFSC Exchanges on operational aspects such as
Minimum Public Shareholding (MPS) is still unclear. For listed firms, the SCRA stipulates a minimum public shareholding (MPS) threshold of 25%. Nevertheless, MPS criteria are not specifically addressed in the regulations governing the IFSCA and other pertinent legislation. Regarding whether shares listed in authorised jurisdictions would count towards MPS, this lack of clarity causes uncertainty for listed firms considering listing shares in such jurisdictions.
4.CONCLUSION
The Indian government's decision to allow direct listing of securities on foreign markets marks a significant milestone in the country's economic trajectory, there are several critical considerations and lacunas that must be addressed for its successful implementation. The initiative holds the promise of expanding access to global capital markets, diversifying investment opportunities, and strengthening India's position as a global financial hub. However, it also poses challenges such as regulatory uncertainties, potential dilution of domestic market participation, and ambiguity regarding compliance with existing regulations such as MPS requirements. Addressing these lacunas will require concerted efforts from regulatory authorities, policymakers, and market participants to ensure investor protection, market integrity, and sustainable growth in India's capital markets. As India ventures into cross-border listings, robust regulatory oversight remains imperative to mitigate risks and facilitate the seamless integration of Indian firms into global capital markets. This move will not only aid big companies in raising capital from foreign jurisdiction but also provide diverse investment opportunities to MSMEs and Start-up companies.
Currently, the government needs to address the existing lacunas in order to provide investor protection and ensure proper implementation of the recommendations made by the Woking Group Report to provide clarity on operational aspects.