Direct Overseas Listings: What Would An Efficient Framework Look Like?
Monitors displaying stock market information are seen through the window of the Nasdaq MarketSite in the Times Square neighborhood of New York, U.S. (Photographer: Michael Nagle/Bloomberg)

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

India Inc.’s access to foreign capital markets has been largely restricted to two routes. American Depository Receipts have been issued by companies like Infosys Ltd., Wipro Ltd. and ICICI Bank Ltd., while others like MakeMyTrip Ltd. have chosen to incorporate overseas and then list on the Nasdaq.

The ADR route has limitations, one big one being the requirement of simultaneous listing in India. Also so far, only equity or equity-linked instruments of listed Indian companies have been allowed to list overseas. And tax inefficiencies and extensive regulatory requirements have made overseas incorporation-subsequent foreign listing a path less chosen. These deficiencies have prompted several committees, papers and recommendations. But to little avail.

That may change now.

The government is now willing to address these challenges. Indian entrepreneurs will soon get a more liberalised set of rules regarding overseas listings—most importantly, a single listing route and a choice of instruments.

It recently moved amendments to the Companies Act, 2013, which will specify the class of companies and shares that will be allowed to access foreign markets. While the clause in the bill is mostly an enabling one, with details to follow in the regulations, there is a reference framework available..

These changes are drawn from a 2018 SEBI panel’s deliberations that found that equity listings on foreign stock exchanges will benefit the economy by making it more competitive and boosting Brand India. And companies will get access to alternate source of capital, broader investor base, better valuation, etc.

But, to truly achieve this liberalisation, the Securities and Exchange Board of India, the Reserve Bank of India and the Central Board of Direct Taxes will need to come together, lawyers BloombergQuint spoke with said.

  • SEBI will need to ease the mandatory India listing condition.
  • The RBI will need to relax norms relating to remittance of foreign exchange and valuation of securities.
  • And the tax department will need to provide an exemption from capital gains arising from transfer of shares in Indian companies by non-residents.

A Friendlier SEBI

In October last year, market regulator SEBI mandated that only listed companies will be permitted to issue depository receipts overseas.

To frame an effective overseas listing framework, such inconsistencies will need to be done away with, Bhakta Patnaik, partner at Trilegal, told BloombergQuint. The condition of dual listing is why many Indian companies have avoided overseas listings, he added.

Indian promoters want to avoid a split of the investors in two different markets resulting in lower liquidity, and thus a lesser value for the stock in both markets. Also, ongoing disclosure norms in two markets tend to increase compliance requirements and costs for companies.
Bhakta Patnaik, Partner, Trilegal

While the value would have already been obtained in the market with the deepest appreciation of the company and its business, the other market may dilute that valuation, he added.

Besides a mandatory India listing, SEBI must also not insist on complex beneficial ownership disclosures , Prashant Gupta, partner at Shardul Amarchand Mangaldas & Co., said.

An Indian entity listing abroad would be subjected to two jurisdictions—India and the foreign country where such shares are listed. As such, the issuer company will need to comply with the beneficial ownership requirements of the host country or its stock exchanges with respect to the shares listed overseas. Therefore, no additional Indian requirements should be made applicable, Gupta opined.

Banking And Fiscal Changes

The RBI administers foreign exchange transactions by Indians through the Foreign Exchange Management Act and various circulars. The central bank, too, will have to streamline regulations governing current and capital account transactions, experts pointed out.

First would be to provide a level-playing field to foreign and domestic investors who want to invest in an Indian company listed overseas.

RBI’s Liberalised Remittance Scheme prescribes a cap on investments by Indians in the overseas markets. Patnaik suggested a need for change in the limits under the scheme.

Assuming the current FPI investment limits continue to apply, foreign investors can invest to that extent in the overseas listed equity shares, while Indian investors would be subjected to the limits under the LRS, he said. And so, the government should clarify that the LRS limits are not applicable to investment in Indian companies listed offshore, Patnaik added.

Second, RBI will also need to amend foreign exchange regulations to permit investments and to recognise the market valuation obtained in the international markets as fair value for the purposes of Indian regulations which govern the transfer and issue of securities regulations, experts said.

The third challenge RBI will need to address relates to full capital account convertibility.

S&R’s Juhi Singh pointed out it’s unclear how the issuance and trading of rupee-denominated equity shares on foreign stock exchanges will be enabled in the absence of full capital account convertibility—conversion of local financial assets into foreign financial assets without any limitations.

Various committees appointed by the RBI have come out with reports examining feasibility of implementing full capital account convertibility. The Foreign Exchange Management Act will have to undergo amendments to enable this, she said.

The government will also have to amend the Foreign Exchange Management (Non-debt Instruments) Rules, as they currently do not provide for investment by a non-resident entity in shares of an Indian company listed on an overseas stock exchange.
Juhi Singh, Partner, S&R Associates

Finally, how investments in offshore listed India companies will be treated vis-a-vis FDI restrictions will need clarity.

As the law stands today, the foreign exchange regulations are silent on the issue of overseas listing of Indian companies as well as the trading of their shares, Atul Pandey, partner at Khaitan & Co., said. “For instance, lets say that a company in an FDI-restricted category lists its shares overseas. Will the investment by foreigners in the equity of such companies be considered as FDI ? Such questions must be answered,” Pandey said.

Tax Reliefs

Transfer of overseas listed equity shares attracts capital gains tax. The income tax law treats such shares as a capital asset situated in India. The framework for foreign listings needs to be tax efficient as well, experts pointed out.

There should be relaxation on capital gains on the transfer of shares of Indian companies between non-residents. Any absence of relaxation would defeat the purpose of overseas listing, Pandey said.

“Levy of capital gains on transfer of shares of Indian companies between two foreigners may make them unattractive compared to shares of foreign listed companies on the same platform. Preferably such cases should be made exempt from capital gains,” he said.

Such relaxation is already applicable for depository receipts, he added.

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