The Government, on 17 March 2020, introduced the Companies (Amendment) Bill, 2020 (Bill) in the Lok Sabha, which, among a series of changes to the Companies Act, 2013 (Companies Act), includes provisions that provide for Indian companies to list securities directly on overseas stock exchanges. The proposed amendment is enabling in nature. Determination of the classes of public companies that may list overseas, classes of securities that may be listed, and the jurisdictions and stock exchanges where listing may be undertaken, has been delegated to the Government. Allowing listing on overseas stock exchanges marks a departure from the existing regime, since Indian companies can currently only access foreign equity capital markets by issuing depository receipts.
The proposed amendments mark the first step towards greatly expanding the capital-raising avenues open to Indian companies. They follow a report published in December 2018 (Expert Report) by a committee constituted by the Securities and Exchange Board of India (SEBI), which advocated for the overseas listing of Indian companies (both listed and unlisted) and laid a blueprint for the legal changes this would necessitate. The introduction of the Bill shall be followed by a series of steps by various regulators to operationalise the overseas listing mechanism for Indian companies. As per a Government press release, the Ministry of Finance, in consultation with the Ministry of Corporate Affairs, the Reserve Bank of India (RBI) and SEBI has commenced working on a framework for this purpose.
Understanding overseas listing
International stock exchanges offer various routes through which securities may be listed. On the stock exchanges of the United States, for instance, a company may list its shares through a public offering, inviting American investors to subscribe to its shares, or through ‘direct listing’, by merely joining a stock exchange without raising capital. Which route a company opts for depends on its particular circumstances – a public offering carries substantial underwriting and other costs, for instance, but carries publicity and liquidity benefits.
Permitting Indian companies to list in this manner on overseas stock exchanges gives them access to a choice of jurisdictions from which capital may be raised, with varying costs of capital and listing conditions. It also offers the benefit of increased visibility and grants access to investor bases with a greater understanding of, and appetite for, niche businesses. Further, the Bill creates the opportunity for Indian companies to list their shares on stock exchanges of various jurisdictions at the same time, allowing them to distribute home market risks. While there are different models through which companies achieve such multiple listings internationally, the Government appears to be considering ‘cross-listing’, where the same company lists its shares on multiple stock exchanges.
The SEBI Expert Committee Paper
While it may be preliminary to speculate on the regulatory framework within which overseas listing would be made permissible, the Expert Report provides useful guidance on the considerations relevant to developing such a framework. Some of these are discussed briefly below:
- Jurisdictions where listing may be permitted: Due to concerns around the potential misuse of the overseas listing mechanism as a means for undertaking illicit activity (such as the round tripping of funds), the Expert Report recommends that listing only be made permissible on specified stock exchanges in select jurisdictions. Much like the jurisdictions where ‘masala’ bond issuances are permitted, these may be identified based on countries’ membership of international organisations that set standards for securities regulation (such as the International Organisation of Securities Commissions) and combatting money laundering (such as the Financial Action Task Force). SEBI’s recently notified list of permissible jurisdictions and stock exchanges for the listing of depository receipts also provides useful guidance as to jurisdictions and stock exchanges where overseas listing could likely be made permissible.
- Amendments to the existing foreign exchange regime: The Expert Report contemplates amendments to foreign exchange laws in India. For instance, amendments may be necessary to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (Non-debt Rules), which may be directed at (a) eliminating obstacles to the purchase and transfer of shares on overseas stock exchanges, thereby promoting greater capital account convertibility; and (b) addressing various technical concerns relating to foreign investment, such as the manner in which foreign currency is to be held by Indian companies listed overseas. However, the Expert Report recommends that existing sectoral restrictions on foreign investment continue to be applicable. While most companies shall remain unaffected by such sectoral restrictions, additional checks and balances may be put in place for companies operating in industries which come under the ‘government route’. Additionally, while foreign investment limits for companies listed in India are monitored through depositories, special procedures may be necessary to monitor foreign investment in companies which are listed in other jurisdictions.
- Compliance costs due to differing accounting standards: While Indian companies are required to prepare financial statements in accordance with the Indian Accounting Standards or the Indian Generally Accepted Accounting Principles, these are specific to India. Other jurisdictions may place divergent, simultaneously applicable, reporting requirements on Indian companies listing abroad, or require such Indian companies to present a reconciliation with locally applicable accounting standards, thereby increasing compliance costs associated with listing in such jurisdictions.
- Listing-related provisions of the Companies Act: While some of the stipulations pertaining to the listing of shares under the Companies Act (such as the issuance of a prospectus) may be common across jurisdictions, many others are likely to differ between jurisdictions. Accordingly, the Expert Report suggests that companies listing overseas be exempted from the applicability of such provisions. Notably, the Bill contains enabling provisions, allowing such exemptions to be provided for.
- Applicability of capital gains tax: Capital gains on the transfer of shares of Indian companies between non-residents may be taxed in India, as they constitute ‘capital assets situated in India’. This may make Indian shares appear unattractive to investors on overseas stock exchanges vis-à-vis their foreign counterparts. Trading in depository receipts issued abroad has been exempted from such taxation, and the Expert Report recommends consulting with the revenue department to extend similar exemptions to trading in Indian shares listed on foreign stock exchanges as well.
The amendments, brought in by the Government, are the first of many steps towards allowing Indian companies to list overseas. The Expert Report maps some of the key concerns and structural changes that lie ahead (which have been set out above), each of which, if addressed, will contribute immensely to the effective implementation of overseas listing. Even accounting for these, however, a move of such enormity shall throw up several teething problems that will need to be resolved over time. Some of the key considerations, both practical and legal, that may be essential to make overseas listing seamless are briefly discussed below:
- Placing shares and shareholders at an equal pedestal: Indian entities looking to list overseas, particularly those looking to cross-list, must ensure that (a) shares are fungible; and (b) homogeneity is maintained in the rights available to all shareholders, irrespective of requirements of the jurisdiction(s) where the company’s shares are listed. Regardless of where these shares are listed, a company’s shares represent an identical interest in the company, and accordingly, shares traded in one jurisdiction must effectively be interchangeable with those traded on another. This may necessitate that a company’s shares abide with all laws applicable to it worldwide, or that the company create mechanisms by which different classes of shares are traded in separate jurisdictions but remain functionally identical. Further, the wide geographical spread of a company’s shareholders would make it particularly difficult for a company to convene its shareholders for a meeting. Therefore, companies will have to facilitate equal access for all shareholders by ensuring that the e-voting mechanism is made more robust and, since e-voting mechanisms are jurisdiction specific, is synchronised across all jurisdictions where a company lists its shares. Companies shall also have to ensure effective communication world-wide, for instance, by making shareholder presentations in all jurisdictions where they are listed.
- Multiplicity of listing laws: India-listed entities which are cross-listed overseas shall simultaneously be bound by SEBI-prescribed regulations and those of the foreign jurisdiction where they list, necessitating substantial co-ordination between Indian and foreign listing requirements. Occasionally, situations of outright conflict may arise between these two sets of laws. Mechanisms to resolve such situations must be evolved, which may require swift regulatory action, including changes to extant Indian securities laws.
- Strengthening SEBI’s extra-territorial jurisdiction: Many securities-related wrong-doings in one jurisdiction where a company is listed may affect all other jurisdictions where it is listed. Price-manipulation in a cross-listed company’s securities abroad, for instance, may also impact prices of the security on domestic stock exchanges. This necessitates that the extra-territorial applicability of SEBI’s powers be strengthened, for it to effectively monitor activities occurring outside India. SEBI has previously faced such concerns, when it uncovered a series of cases of manipulations in the global depository receipts (GDRs) issued by Indian companies. The Supreme Court, in this regard, held that SEBI has extra-territorial jurisdiction, given that shares underlying such GDRs are traded in the Indian securities market. Granting SEBI powers to regulate securities entirely listed abroad, however, shall mark a quantum leap in such direction.
- Expanding securities market infrastructure: Particularly where the same class of securities is listed in India and abroad, India’s securities market infrastructure may have to be expanded to accommodate trading in multiple jurisdictions. In order to ensure that shares can seamlessly be transferred across jurisdictions, for instance, it may be necessary to create ‘links’ between the central depositories in each such jurisdiction. We understand, for instance, that the United States-based Depository Trust Company and the Canada-based Canadian Depository for Securities Limited have a link in the form of participant accounts in one another, allowing for seamless trade of shares between USA and Canada. Registrars registered in India may also be required to act through co-registrars or sub-registrars registered in another jurisdiction, with ‘master’ registers being maintained in India. With a likely increase in cross-border trading, Indian stock-brokers are also likely to increase their international presence by setting up operations in other jurisdictions or entering into tie-ups with foreign brokerages.