[By Akshat Dangayach]
The author is a student at the National Law School of India University, Bangalore.
In September of this year, the Government of India notified the Companies (Amendment) Act, 2020 in the official gazette. The move, which has been welcomed by corporations across the spectrum, comes in consonance with the recent series of reforms in response to the growing economic inconsistency in the country, especially in light of the COVID-19 pandemic’s devastating impact on commerce and industry. The amendment has introduced several key changes in the company law regime of the country with the aim of improving the ease of doing business and relaxing regulatory restrictions to a significant extent.
This paper focuses on the amendment made to Section 23 of the Companies Act, 2013. The amended Section 23, by way of the addition of Sections 23(3) and 23(4), permits a certain class of public companies incorporated in India to issue a particular class of securities for the purposes of listing on permitted stock exchanges in permissible foreign jurisdictions.
The move is sure to provide impetus to Indian start-ups and established corporates alike to raise capital through foreign investors. In the larger scheme of things, the initiative will also provide the necessary infrastructure for the integration of the Indian corporate landscape with the global capital market.
In the context of this development, this piece seeks to argue that despite the various benefits of the development allowing the direct listing of Indian corporations in foreign jurisdictions, there are still a series of challenges in the Indian corporate regulatory framework which need to be adequately tackled before Indian companies are effectively able to reap the intended benefits of the policy advancements.
Benefits of access to global capital markets for companies
Before delving into a detailed analysis of the newly added provisions, it is pertinent to briefly contextualize the discussion by developing an understanding of the multiple routes available to corporations for raising capital through cross-border listing. There are primarily two ways in which companies can generate capital from overseas listing, besides opting for an Initial Public Offering in a foreign market: direct listing and indirect listing.
A direct listing is when a corporation converts its existing ownership into stock and subsequently offers equity directly to the general public via a stock exchange. On the other hand, an indirect listing is executed through depository receipts (DR). Under this mechanism, the corporation is required to issue its securities to depository intermediaries (traditionally banks) and underwriters incorporated in a foreign jurisdiction which, in turn, issue DRs to investors in their jurisdiction.
Prior to the latest amendment, the Indian regulatory framework only allowed for such indirect listing predominantly in the form of listing of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). In addition to this, corporations were also permitted to issue debt securities in the form of foreign currency convertible bonds and foreign currency exchangeable bonds on stock exchanges. While certain companies (such as Wipro and Infosys) do employ these mechanisms, there exist several hurdles that companies have to go through in order to take this route. In fact, due to allegations of malpractice and market manipulation, SEBI banned around 20 companies from using DRs to raise capital in the year 2017. Further, such actions are often under strict scrutiny from the regulators, given the lack of transparency involved in the indirect listing process.. Such regulatory restrictions, coupled with the overhead costs in the form of charges levied by underwriters and financial institutions, dramatically disincentivised Indian corporations from taking this route. On the other hand, direct listing provides regulators and corporations with a more transparent mechanism for transactions and an easier method of tracking said transactions, thereby streamlining the process of inviting foreign investment.
In light of these concerns, SEBI constituted a high-level expert committee in 2018 to formulate a report and suggest policy changes to pave the way for cross-border direct listing of equity shares of companies incorporated in India. The 2020 amendment to Section 23 of the Companies Act comes in response to the report submitted by this committee which firmly advocated direct listing.
The Road Ahead: Institutional Challenges and Hurdles
However, despite the obvious benefits of the introduction of the new regime for Indian corporations, there are still a number of institutional inconsistencies and hurdles that must be resolved in order for companies looking to get directly listed abroad to realise the actual potential of these benefits. Primarily, the Indian regulatory and legal framework needs to be considerably overhauled to assist the cross-border functioning of corporations.
For starters, under the present state of affairs, companies will have to comply with the laws and regulations of two distinct jurisdictions. For instance, companies seeking to list abroad will have to comply with the regulatory requirements of beneficial ownership and disclosure of the foreign stock exchange. Similarly, the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 impose strict requirements on how Indian companies may hold foreign currency. This will inevitably translate into drastically increased compliance costs, especially given that SEBI might also impose certain additional requirements as it has an extra-territorial jurisdiction as per the ruling in SEBI v. PAN Asia Advisors Ltd. and Anr. While this particular issue is ostensibly quite intuitive in nature, it merits some attention and might even require SEBI to substantially modify its own regulations to bring them in line with that of major foreign jurisdictions or even to relax some of its requirements for companies seeking to list abroad.
Additionally, the Reserve Bank of India’s (“RBI”) Liberalised Remittance Scheme places restrictions on investments made by Indian residents on assets abroad. If these restrictions are not reconsidered, it would severely limit Indian investors from investing in Indian companies and put them at a considerable disadvantage relative to foreign investors. Further, the RBI must also address concerns regarding how equity shares that are rupee-denominated will be marketable in stock exchanges that are premised on other currencies. So far, the RBI has not released any guidelines in this regard.
The transfer of equity shares is also bound to attract capital gains tax liability because the shares, under the current framework, will be regarded as assets located in India. What this effectively means is that an Indian company will have to incur tax liability even when its foreign listed equity is transferred between two foreign residents. As of now, there has been no clarity regarding any exemption from such tax liability despite the recommendations of the expert committee.
Lastly, there are also concerns that allowing cross-border listing will take away quality listings (for instance, Jio Platforms) from the Indian market and thereby lead to severe distress on an already polarized Indian equity market. Therefore, this is also something that policy-makers will have to address, perhaps by providing incentives to companies that list in India.
In light of these issues, it can be confidently said that the legal developments allowing for direct listing of Indian companies in foreign jurisdictions is not yet a feasible option for most nascent companies. The burden of the regulatory inconsistencies would substantially overweigh the availability of the opportunities that foreign listing may potentially provide. Therefore, without an accompanying overhaul of the regulatory framework, the newly added provisions may not be able to realise their actual potential.