[By Anand Vardhan & Piyush Raj Jain]
The authors are students of Gujarat National Law University.
Introduction
The Ministry of Corporate Affairs has enforced section 5 of The Companies (Amendment) Act, 2020, through a notification dated 30th October, 2023 . This has led to an addition to section 23 of The Companies Act 2013 . It is a welcome move as it seeks to boom the Indian Economy by opening the routes for Indian Companies to raise funds by directly listing their equity on foreign stock exchanges and also opening a million-dollar Indian market for foreign Investors. There is a need for diversification of investors across the Indian economy given ongoing evolution and internationalization of capital market across the globe.
As foreign competitiveness being the need of the hour for our corporate culture, this post analyzes the earlier regime, present amendment and its analysis along with our suggestions for the proposed framework by uncovering the lacunae in the proposal and the regulatory framework needed to address such lacunae.
Earlier regime
Under the existing framework, if an Indian company wished to access the global market to list its equity capital, it can only get listed through the American Depository Receipts (ADR) and Global Depository Receipts (GDR). These depository receipts acted as a security certificate representing a certain number of a share of a company of other country, not listed on stock exchange of that country, which can be purchased by investors. Further, an Indian company can directly list its debt securities on foreign stock exchange through Foreign Currency Convertible Bonds (FCCB), also known as masala bonds, and foreign currency exchangeable bonds, which are issued by companies in currencies other than the domestic currency of the company issuing it.
Present Amendment
The new provision allows direct listing of the public companies registered in India on foreign stock exchanges as permitted by the government. The added provision also empowers Central Government to exempt certain classes of public companies from following the procedural requirement prescribed in the Companies Act to get listed on the stock exchange, which may include declaration by beneficiary to the company share, filing return of significant beneficial owners of the company, punishment on non-payment of dividend etc.
Analysis
Implications
One of the most important implications and benefits which this amendment would provide to Indian Companies, especially startups is the option of a new jurisdiction to raise funds. Further, this will also help the companies in increasing their valuation. The option for companies incorporated in India to list their shares on Foreign Exchanges will enhance and diversify their sources and pool of capital as well as provide them with a larger and diverse base of investors. This will help the Indian Companies to trade their securities in major currencies across the world, like Euro, Dollar, or Renminbi.
As discussed earlier, for raising funds overseas in the earlier regime, ADR and GDR were used to list in the foreign exchanges, but it required a complex procedure even a complex restructuring such as externalization, but this amendment may do away with any such requirements by providing an alternate route to raise funds overseas. Further, this will even allow companies incorporated in India to access foreign funds at a lower cost. In the earlier regime, Indian companies had to invest cost and time for accounting in Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) for ADR and GDR respectively, but the direct listing will allow Indian companies to prepare accounts in Indian Accounting Standards (IndAS) only which will help them to reduce the cost and time involved as IndAS is now globally accepted.
The implications that this amendment will have on the Indian Economy are threefold, i.e., it will lead to the spreading of the strength of the “India” brand across the globe. Along with it, the amendment will also lead to boost competitiveness for Indian Companies which will further lead to boost efficiency and growth for Indian Economy.
This amendment to the Companies Act will also contribute to the development of a clear and advanced legal regime for reverse-flipping the holding structure of companies incorporated in India by allowing the shifting of such holdings’ domicile to India.
Lacunae
There are certain lacunae concerning the amendment. These need to be clarified by the MCA at the earliest through detailed rules and regulations so that the companies incorporated in India can get the benefits of listing in a foreign exchange and explore the foreign market.
Certain points which need to be clarified by MCA at the earliest are that which kind of securities can be listed in the foreign exchanges, in which foreign exchanges could the listing be done and by which class of companies it can be done.
The amendment even talks about the power of the Central Government to exempt any class of public companies from procedural requirements under the Companies Act, but it doesn’t talk about what kind of exemptions and the procedure to give those exemptions along with the eligibility of the companies to avail those exemptions.
The other lacunae that revolve around these amendments are will the investors give the valuation same to the company listed on foreign exchange same as that they would have provided in India and also what will be the commercial benefits of the listing of a company incorporated in India on a Foreign Exchange.
There are other legal challenges, mainly related to the disparities between the compliances required by the companies in the Indian regime vis-à-vis the securities regime of the overseas countries where the company intend to be listed.
The implementation of the amendment will also require the amendments to the current legal regime governing the listing of securities on stock exchanges and foreign exchanges, namely FEMA, Companies Act and SEBI Regulations.
Suggestions for Proposed Framework
In order to do away with the above-discussed lacunae, the MCA could take its route through the following proposed frameworks.
The main question before the MCA being the criterion to choose the foreign jurisdictions in which the direct listing could be done by Indian companies. Our suggestion would be to adopt the criterion similar to that prescribed by the RBI for listing of masala bonds as the listing of these bonds is also done in overseas markets, i.e., (i)the permissible jurisdiction must have a treaty with India to cooperate in events of investigation and share the information of the same (ii) it must be a member of the Board of International Organization of Securities Commissions (IOSCO); (iii) it must be a signatory of IOSCO’s multilateral MoUs or bilateral MoUs with SEBI (iv) such a jurisdiction must be a member of Financial Action Task Force (FATF) & not a grey or black listed jurisdiction as per the FATF. Further, such jurisdiction must also have deep capital markets, high liquidity and strong listing conditions.
The relevant amendments which should be brought in the FEMA and the SEBI Regulations for the smooth implementation of the amendment should be done as earliest as possible. In this regard, the Part B to Schedule 1 of FEMA 20R, which would set out the regulatory framework for purchase by a person resident outside India of equity shares of a company incorporated in India listed on a foreign stock exchange should be introduced.
Accordingly, the relevant SEBI regulations must be amended and in case of variation in the compliance requirements in overseas jurisdictions, a comparative analysis of the provisions that are applicable in India along with compliance of the same applicable in such overseas Jurisdiction shall be made to do away with the problem of varied compliances in Indian regime vis-à-vis the securities regime of the overseas country. Further, to avoid conflict with compliances of foreign jurisdiction, a treaty obligation with that country and a road map can be laid down adhering to laws of both the countries to deal with all possible issues that can arise in future such as in event of investigation arising due to tax evasion, fraud, asset misappropriation, non-filing of documents, non-compliance with established procedure etc. For example, an Indian company listed on US stock exchange has to file financial statements with Securities and Exchange Commission (SEC) of United States and the same company will be required to file the same, but in different format and standards with Registrar of Companies in India, to avoid such conflicts sharing of data can be done between the two jurisdictions in a specified format as agreed by both of them.
For the tax-related regime about income from the securities listed on foreign exchanges, reference can be drawn from the income generated under the earlier ADR or GDR regime. For example, under current tax laws in India, if a non-resident transfers GDRs to another non-resident, then it will not be taxable as per section 47(vii)(a) of the Income Tax Act, 1961 thereby, relieving such person from any tax liability. Also, when income is generated from transfer of equity shares of an unlisted Indian company listed on a foreign stock exchange, then it is subject to capital gains tax because such shares are of a company incorporated in India. These examples can be taken as a reference to develop a tax regime for the income generated from the securities listed on foreign exchanges.
Conclusion
The new provision entails the need of the hour requiring a more liberalized approach in the global market to allow Indian companies to raise funds from foreign investors by doing away with the complex ADR and GDR regime. But to allow smooth inflow of foreign funds into the capital of Indian companies, there is a requirement of detailed guidelines by MCA on the kinds of securities that can be listed on foreign exchanges, kind of exemptions and procedure for giving such exemption to the class of companies by central government. There also exist legal challenges to implement the new provision requiring amendment to FEMA, Companies Act and SEBI Regulations. To overcome all these challenges and give effectiveness to the provision, the proposed framework must be adopted.
Thus, the new provision will surely spread the “India” brand globally which can be implemented smoothly by the roadmap provided by the proposed framework to address the lacunae ensuring a seamless transition to a more globalized and competitive landscape for Indian companies.