The Indian government, effective 30th October 2023, has granted permission to certain Indian companies to directly list on foreign stock exchanges. This development came under the Companies (Amendment) Act, 2020 with a view to access global capital. Certain procedural requirements like prospectus, share capital, beneficial ownership requirements and failure to distribute dividends are exempted for certain classes of domestic public companies. These companies can now list their securities on foreign stock exchanges including the GIFT International Financial Services Centre (IFSC) in Ahmedabad, Gujrat.
Understanding IFSC in India
An International Financial Services Centre (IFSC) is a financial hub that caters to customers outside the jurisdiction of the domestic economy. The IFSC in India is regulated by the International Financial Services Centres Authority (IFSCA), a statutory authority that was established under the International Financial Services Centres Authority Act, 2019. Based in GIFT City, Gandhinagar in Gujarat, GIFT IFSC stands as the first IFSC in India. In IFSC, all transactions except administrative and statutory expenses must be conducted in foreign currency.
What is Direct Listing?
Direct listing offers a way for a company to list its shares on a foreign stock exchange without issuing new shares or attracting capital from investors. It is different from the traditional initial public offering (IPO), where a company sells a part of its shares to the public and raises funds from investors. Moreover, direct listing also differs from the depository receipt (DR) route, where a company issues its shares to a custodian bank, which then issues DRs to foreign investors. This enables the company to access a broader pool of investors, enhance its visibility and brand value and improve corporate governance and compliance standards.
Current Trend of Indian Companies Listing on Foreign Exchanges
At present, Indian companies use depository receipts, including American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) to list on foreign stock exchanges. To accomplish this, the companies entrust their shares to an Indian custodian who issues DRs to foreign investors. Between 2008 and 2018, 109 companies raised more than Rs 51,000 crore through ADRs/GDRs. However, post-2018, no Indian companies have pursued overseas listings via this route.
Benefits of Direct Foreign Listing
Direct foreign listing offers multiple advantages including access to a larger and more liquid market, opportunity to engage with a sophisticated investor base, savings on costs and time involved in the IPO or DR process, and improved corporate governance due to exposure to best practices and regulations of the foreign jurisdiction.
Challenges Involved in Direct Foreign Listing
While direct foreign listing has its benefits, it also comes with challenges. Compliance with foreign laws and rules, reported valuation discrepancies between global and Indian investors, exposure to foreign currency fluctuations and market volatility, potential conflicts with shareholders, regulators or tax authorities, and lack of clarity regarding which classes of public companies can use this route are among the challenges that need to be addressed.
UPSC Civil Services Examination: Previous Year Questions
In the UPSC Civil Services Exam held in 2019, one question posed was: Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly? The answer was Participatory Note.
In the 2020 examination, a question related to the Indian economy was posed as follows: ‘Commercial Paper’ is a short-term unsecured promissory note. ‘Certificate of Deposit’ is a long-term instrument issued by the Reserve Bank of India to a corporation. ‘Call Money’ is a short-term finance used for interbank transactions. ‘Zero-Coupon Bonds’ are the interest bearing short-term bonds issued by the Scheduled Commercial Banks to corporations – which statement(s) is/are correct? The correct answer was 1 and 3 only.