Direct Listing Of Securities Overseas: Implications For Indian Startups?

Introduction

India has emerged as a hub for emerging technologies and entrepreneurial ventures, with startups achieving unicorn status. The country has witnessed remarkable growth and innovation. To further facilitate the expansion of Indian startups globally, the Indian government has made a significant policy shift – allowing direct listing of securities overseas. This change in the regulatory framework has far-reaching implications for startups in India.

What Is The Current Way Of Listing?

Indian companies enter the overseas capital market via American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).

• ADR: It is a negotiable certificate through which an Indian Company can raise money from American Investors by selling its shares on the US Stock Exchanges. It is issued by an American Bank and denominated in US Dollars.  Some examples include Infosys ADR, ICICI Bank ADR, HDFC Bank ADR and Wipro ADR.
• GDR: It is a negotiable certificate issued by the depository banks, using which an Indian company can sell its shares in the global stock markets like Eurozone and Asian Exchanges. They are the London Stock Exchange, Luxembourg Stock Exchange, Tokyo Stock Exchange, and Shanghai Stock Exchange. Some examples include Reliance Industries Limited, State Bank of India, Axis Bank Limited, GAIL, Larsen and Toubro Limited and Mahindra and Mahindra Limited.

What Does Direct Overseas Listing Mean?

Direct Overseas Listing refers to the process by which companies can list their securities directly on foreign stock exchanges without being required to list on domestic exchanges like Bombay Stock Exchange (BSE) or National Stock Exchange (NSE). This would mean that Indian startups can choose to list their shares on international stock markets like the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotations (NASDAQ), London Stock Exchange, etc. bypassing the need for an Initial Public Offering (IPO) on domestic exchanges.

Direct listing also removes the requirement of a depository bank or intermediary as in the case of ADRs and GDRs. Here, the Indian company can offer their shares directly in the foreign markets instead of giving them to a foreign depository bank. With no intermediaries involved, there is a reduction in the overall transaction cost.

Current Regulatory Framework For Direct Overseas Listing

Indian companies looking to list their shares on foreign stock exchanges must first list on domestic exchanges and fulfil specific regulatory requirements. The process entails compliance with various regulations and disclosure norms. The Indian government's proposed change aims to simplify this process and provide startups greater flexibility in accessing international capital markets.

Chronology Of The Changes

SEBI Expert Committee made recommendations in December 2018 for a suitable framework for listing equity shares of Indian Companies on foreign stock exchanges and for companies incorporated outside India to list on Indian stock exchanges¹. It referred to a list of 10 permissible jurisdictions where Indian Companies can directly list their shares²:

• USA
• China
• Japan
• South Korea
• UK
• Hong Kong
• France
• Germany
• Canada
• Switzerland

In October 2019, SEBI issued a circular outlining the framework for the issue of depository receipts³.

In March 2020, the Government introduced the Companies (Amendment) Bill, 2020 in the Lok Sabha, which, amongst other changes to the Companies Act, 2013, brings in provisions that allow Indian companies to list their securities in foreign jurisdictions⁴.

On 28th July 2023, Finance Minister Nirmala Sitharaman, while speaking at an event to launch AMC Repo Clearing and Corporate Debt Market Development Fund (CDMDF) in Mumbai, mentioned that the government has given the final go-ahead for Indian companies to list directly on foreign exchanges as well as on the International Financial Services Centre (IFSC) bourse in Ahmedabad. 

GIFT IFSC has the presence of both BSE and NSE. GIFT Nifty is the rebranded version of SGX Nifty with a shift from the Singapore Exchange to the NSE International Exchange (NSE IX). Effective 03 July 2023, there has been a transition of contracts worth $7.5 billion from SGX Nifty to GIFT Nifty, which is available for 21 hours.

Advantages Of Direct Overseas Listing To Indian Startups

For Indian startups, direct overseas listing brings about several benefits:

1. Access To Global Capital: Direct listing on international stock exchanges opens up avenues for startups to raise capital from a broader and potentially more diverse set of investors.
2. Increased Visibility: Having a listing on international exchanges enhances a startup's visibility and credibility on the global stage, which in turn attracts potential customers, partners, and investors.
3. Better Valuations: Listing on established foreign exchanges results in higher valuations for Indian startups, reflecting investor confidence in their growth potential and technology innovation.
4. Reduced Regulatory Compliances: The streamlined process of direct overseas listing helps startups from the complexities and costs attached to a domestic IPO.

Future Prospects

This change allowing Indian Companies to have Direct Overseas Listing aligns with the country’s vision to make it a global startup hub. It will foster an innovation and entrepreneurship ecosystem, aligning it with ‘Digital India’ and ‘Startup India’ initiatives. The Indian startups will be encouraged to dream big and will be able to access the global markets.

Though it opens global avenues for startups, it becomes imperative to have a framework for corporate governance, investor protection, and regulatory oversight. Striking the right balance between promoting market growth and ensuring safeguards will be crucial to the success of this change. As the policy landscape evolves, Indian startups may be on a more level playing field with their international counterparts, driving innovation, economic growth, and cross-border collaboration.

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References:

1. Securities and Exchange Board of India <https://www.sebi.gov.in/media/press-releases/dec-2018/submission-of-report-of-the-expert-committee-for-listing-of-equity-shares-of-companies-incorporated-in-india-on-foreign-stock-exchanges-and-vice-versa_41220.html>
2. Ernst & Young <https://www.ey.com/en_in/financial-accounting-advisory-services/direct-listing-opening-overseas-opportunities-for-indian-companies>
3. Securities and Exchange Board of India (SEBI) <https://www.sebi.gov.in/legal/circulars/oct-2019/framework-for-issue-of-depository-receipts_44609.html>
4. Ministry of Corporate Affairs <https://www.mca.gov.in/Ministry/pdf/AmendmentAct_29092020.pdf>

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