Privately held Indian companies now have a two year window (which begun on 11 October 2013) to raise capital by directly listing on overseas markets without first listing in India. Despite the scheme being limited to International Organization of Securities Commission or Financial Action Task Force compliant jurisdictions, or those with which the Securities & Exchange Board of India (SEBI) has signed bilateral agreements, this marks a return to the Indian position in the 1990s and early 2000s. When the regulation changed in 2005, Indian companies had to satisfy the criteria of simultaneous or prior listing in India in order to undertake fund-raising abroad.
The recent regulatory shift reflects an understanding that Indian companies face an increased need to look internationally for growth. The changes were introduced when there was a drought in the Indian IPO market and a large current account deficit facing the Indian economy. While companies do face certain restrictions when seeking offshore listings, including restrictions on the use of capital raised for retiring outstanding overseas debt or for overseas operations, the need to comply with the FDI policy and the requirement to remit unutilised listing proceeds back to India within 15 days, the changes are a welcome advantage for private Indian companies.
Allowing Indian companies to raise capital in international markets opens up opportunities for such companies at a time when the domestic market is constrained. Private Indian companies who list abroad will be able to limit their exposure to the regulatory uncertainty in the Indian economy, as India faces the possibility of a new political and economic framework pursuant to the May 2014 elections. Investors in foreign-listed Indian companies will also face less exposure to the fluctuating Indian currency, which has posed great risks to investors. For example, the rupee went from 42 to a dollar in 2007 to 62 to a dollar in 2014! This large deterioration in the rupee encouraged many investors to put their money elsewhere.
Indian companies are now able to list on specialised exchanges that cater to specific sectors. This enables higher growth companies in sectors like technologies and e-commerce to access risk capital not available in India and to connect with investors who better understand and appreciate their businesses. Such Indian companies will be able to receive more attractive valuations than in the domestic Indian market. For example, the Indian company Snapdeal is currently seeking a listing in the US, which it deems to be a more mature market for technology-driven companies and a market that is better exposed to investors.
In addition to the availability of fresh capital, offshore jurisdictions provide greater infrastructure and stable regulatory and political climates for investing companies. In light of such strong competition from foreign markets and the possibility of the Indian capital market being exported overseas, the SEBI would be pressured to operate more efficiently and to reduce transaction costs. New measures are likely to be seen from the SEBI as it seeks to retain the confidence of domestic companies to encourage them to stay onshore.
In the meantime, while the scheme will be subject to review after two years, this window period will likely see an increase in home-grown Indian companies seeking listings on attractive exchanges, which include, among others, the US, London and Singapore.