Plan For Direct Overseas Listing of Indian Shares On Backburner
Passersby watch the live telecast of Prime Minister Narendra Modi’s address to the nation, on a screen outside Bombay Stock exchange, in Mumbai.

Plan For Direct Overseas Listing of Indian Shares On Backburner

The government's proposal to allow direct listing of Indian shares overseas may be a non-starter with the Department of Revenue refusing to grant any exemption on capital gains tax, two people familiar with the matter said.

The tax department is unwilling to provide an exemption from the levy arising from the transfer of shares of Indian companies by non-residents, the people said on the condition of anonymity.

A query emailed to the Ministry of Finance on Tuesday seeking a comment remained unanswered.

The income tax law treats overseas listed shares as a capital asset situated in India. Currently, transfer of shares by non-residents attracts a short-term capital gains rate of 30% or 40% depending on whether it is an individual or an entity, and a long-term capital gains rate of 20% plus surcharge. That may make shares of Indian companies listed overseas unattractive for foreign investors compared to shares of other overseas companies listed on the same exchange.

In March 2020, the Union Cabinet had approved direct overseas listing of shares of Indian companies to help them raise capital around the world. The tax treatment involved will be covered in the enabling provision in a manner similar to the listing of global and American depository receipts, Ingeti Srinivas, former corporate affairs secretary, had told reporters in Delhi.

Investors holding ADRs and GDRs don't pay capital gains tax if they do not convert them into equity shares.

A similar exemption, however, cannot be given for the proposal to list domestic stocks on foreign exchanges since depository receipts are foreign instruments traded on overseas exchanges, and not Indian shares, according to the second person cited earlier.

And even if Indian companies are able list overseas successfully, the revenue department will find it virtually impossible to collect any tax.

There is no mechanism for recovering tax from non-resident investors from trading in overseas stock exchanges, said Suresh Swamy, partner at Price Waterhouse & Co LLP. Taxation ideally should be similar to ADR/GDRs listed overseas, he said. But given its stand on indirect overseas transfer, Swamy said, India will find it difficult grant an exemption on direct overseas transfer.

Legally, either there is an exemption or not, the second person quoted earlier said. The plan is shelved for now and it will probably become clear in the next budget if there is a way around it procedurally, the person said.

Punit Shah, partner at Dhruva Advisors, agreed.

"If you are holding shares which are listed overseas and you have to sell those being an Indian resident, global income is taxable in India," Shah told BloombergQuint. "If a non-resident is holding shares of Indian companies that are listed overseas, even that is taxable at the rate of 20%. There is no way you can avoid those taxes."

I don't think government will give an exemption because then you are giving preference to listing overseas rather than in India ... [and] listing in India attracts at least 10% tax. I don't think [that] would be the government's intention.
Punit Shah, Partner, Dhruva Advisors said.

At present, Indian shares listed on domestic exchanges attract a long-term capital gains tax at 10% and a short-term levy at a higher 15%.

According to the first person cited earlier, the Department of Revenue is also of the view that an exemption from tax may lead to companies shifting from domestic stock exchanges. And business of stockbrokers will also get impacted, the person said.

The proposal, now being looked into by the Department of Economic Affairs to explore if there is a way around procedurally, may require a slew of changes that are unlikely to be concluded in the current fiscal, the second person cited earlier said.

Indian companies access foreign equity markets only through the depository receipts. Only listed Indian firms can list overseas.

In June 2018, the market regulator set up an expert panel to examine direct listing of equity shares of companies incorporated in India on foreign stock exchanges and of companies incorporated outside India on exchanges in the nation.

The panel had suggested permitting the listing of companies on specified stock exchanges in permissible jurisdictions like a member of Financial Action Task Force or any other jurisdiction notified by the central government in consultation with Securities and Exchange Board of India.

After Cabinet approval in March 2020, the government amended the company law in September last year to say that it will specify the class of companies and shares that will be allowed to access foreign markets. The specific rules on this are yet to be notified.

Also read: Direct Overseas Listings: What Would An Efficient Framework Look Like?

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