Explained: Direct listing of Indian firms on foreign stock exchanges

Direct listing of Indian firms
The government’s move to allow direct listing of Indian companies on foreign stock exchanges will open up new avenues for raising capital.

Direct listing of Indian firms on foreign bourses: Indian public companies may soon be able to directly list on foreign stock exchanges after the Ministry of Corporate Affairs on Tuesday activating a provision permitting such listings. The provision, part of the Companies Amendment Act 2020, allows certain public companies to issue specific securities for listing on select foreign exchanges. However, this will be allowed only in a few pre-approved stock exchanges in designated foreign jurisdictions.

The MCA is yet to specify which companies are eligible and which securities can be listed. The initiative will first launch at the International Finance Service Centre (IFSC) in Gift City, Gujarat. Furthermore, the MCA has not finalised the foreign jurisdictions for participation. Public companies, as defined by the Companies Act, do not restrict the transfer of shares, unlike private companies.

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Earlier, Finance Minister Nirmala Sitharaman mentioned that the project would kick off in IFSC at GIFT City. After successful execution there, the government may consider expanding. Emphasising the country’s economic development stage, she stated that financial sector regulations should focus on market development and investor protection.

Why direct listing of Indian firms on foreign exchanges

The government added this provision in response to long-standing industry demands. Companies like Infosys, HDFC, ICICI, and Dr Reddy’s have significantly benefited from foreign listing. The primary incentive for a company to list overseas is the broader capital pool and a diversified investor base. Such a move enhances a company’s visibility and standing. Given India’s stature as a startup hub, foreign listings can offer better valuations for tech enterprises, potentially invigorating India’s startup sector.

The MCA may also exempt companies looking for foreign listings from certain provisions of the Companies Act related to share issuance, capital, buybacks, and beneficiary interest disclosure. Yet, companies aspiring for overseas listings should sharpen their focus on corporate governance and management. Since trading in Gift City is dollar-denominated, foreign investors could save on hedging and currency conversion costs.

Historically, Indian firms could access foreign equity markets only through instruments like American Depository Receipts or Global Depository Receipts, or by listing debt securities on foreign markets. Post recommendations from the Securities and Exchange Board of India in 2018, a committee exploring direct listings of Indian firms on foreign exchanges was established.

For example, Infosys, one of the pioneers in foreign listings via NASDAQ, continues to offer equity through American Depositary Shares. Tata Motors and HDFC Bank also ventured into foreign exchanges in the past. Numerous other Indian enterprises are listed on overseas bourses.

The Union government eventually allowed Indian firms for direct global stock market listings. Unlike the traditional ADRs and GDRs, they can now list directly on major global exchanges without needing a foreign depository bank. Efforts are underway to develop the guidelines for such listings.

In direct listings, companies can join foreign stock exchanges without intermediaries. This approach eliminates the middlemen, reduces transaction costs, and promotes transparency. However, this method of overseas listing for Indian firms remains unimplemented.

Many Indian founders have traditionally registered their startups overseas due to easier capital acquisition, favourable valuations, and regulatory considerations. The MCA’s recent move might reduce this trend.

The initial proposal to allow Indian entities direct listings on foreign exchanges was suspended in 2020 due to domestic reservations and potential tax loss concerns. Some ruling party members also opposed the idea, fearing reduced regulatory oversight over these businesses.

Regulatory and governance issues 

Direct listing on foreign stock exchanges is a complex issue with a number of potential implications. The Indian government should consider establishing a dedicated regulatory body to oversee direct listings. This body could be responsible for developing and enforcing regulations, as well as providing guidance to companies and investors.

The government should also work with foreign exchanges to develop harmonised regulations for direct listings. This would help to ensure that Indian companies are subject to consistent regulatory standards, regardless of the exchange where they are listed. The government should provide financial incentives to companies to list on Indian exchanges. This could help to offset the potential diversion of capital away from Indian markets.

The government may need to provide Indian investors with access to foreign courts and tribunals for protection. It may also clarify the tax implications of direct listings to avoid uncertainty and ensure that Indian companies and investors are compliant with Indian tax laws.

Indian companies listed on foreign exchanges will be subject to the regulations of those institutions. It is important to ensure that these regulations are adequate and that Indian companies continue to maintain high standards of corporate governance.

The government may also encourage Indian companies to adopt voluntary corporate governance codes such as the National Voluntary Guidelines on Responsible Business Conduct. By doing this, the government can help ensure that Indian companies listed on foreign exchanges maintain high standards of corporate governance.