[By Pratyush Hari and Meghana Gudluru]
Pratyush is a student at Jindal Global Law School and Meghana is a student at Symbiosis Law School, Pune.
On 4th March 2020, the Union Cabinet announced that it approved an amendment to the Companies Act, 2013 (“the Act”) which would allow Indian companies to list on foreign stock exchanges. Soon after, the Companies (Amendment) Bill, 2020 was introduced in the Lok Sabha seeking to amend, inter alia Section 23 of the Act, which would allow for offshore listing by Indian companies.
Currently, the only way Indian companies can access foreign equity markets is through the American Depository Receipt (ADR) and Global Depository Receipt (GDR) regimes. Indian companies can also list their debt securities on foreign stock exchanges through ‘masala bonds’ (Rupee denominated bonds), foreign currency convertible bonds (FCCB), and foreign currency exchangeable bonds (FCEB).
Allowing direct offshore listing has been perceived to be a move that opens new doors of opportunity for Indian companies seeking to access global capital. However, certain aspects need to be considered in light of the regulatory changes surrounding the novel offshore listing framework. This post seeks to understand the background of the offshore listing framework and shed light on certain nuances of the framework that need further consideration.
SEBI Expert Committee Report
Recognizing the benefit behind Indian companies accessing global capital, the Securities and Exchange Board of India (“SEBI”) constituted an expert committee in 2018 to assess the viability of offshore listing for Indian companies. Additionally, the expert committee considered the listing of companies incorporated outside India on Indian stock exchanges.
In December 2018, the expert committee released a report (“Report”) that delved into the economic implications of allowing offshore listing by Indian companies along with changes required to existing regulation. Some of the major takeaways from the Report are discussed below.
The Report states that in the interest of security, offshore listing by Indian companies will only be allowed on certain pre-determined stock exchanges (“Permissible Jurisdictions”).
The Permissible Jurisdiction must be a member of the Board of International Organization of Securities Commissions (“IOSCO”), whose securities market regulator is either a signatory to the IOSCO’s multilateral memorandum of understanding or shares a relationship with SEBI for information sharing arrangements[i]. Moreover, the Permissible Jurisdiction must be a member of the Financial Action Task Force.
The Report emphasizes on stringent eligibility criteria for Permissible Jurisdictions. Presumably, to avoid potential misuse of this framework for illegal transactions like round-tripping of funds.
The list of Permissible Jurisdictions in the Report under Annexure C includes NASDAQ, New York Stock Exchange, London Stock Exchange, and Shanghai Stock Exchange, amongst others.
Changes to the Foreign Exchange Regime
At present, the foreign exchange regime does not consider the listing of equity shares by an Indian company on a foreign stock exchange. The Report contemplates changes to the erstwhile ‘FEMA 20R’ which was subsequently superseded by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”). Amongst these changes, the Report suggests the addition of ‘Part B’ to Schedule 1 of FEMA 20R, addressing the purchase of equity shares of an Indian company listed on a foreign stock exchange by a person resident outside India.
The equity shares of Indian companies listed abroad will, however, continue to be subjected to the Indian foreign exchange regime namely compliance with sectoral caps, entry routes, prohibited sectors, etc.
Companies Act & SEBI Compliance
According to the Report, Chapter III of the Act about prospectus and allotment of securities should not apply to the listing of equity shares of Indian companies on foreign stock exchanges.
Certain listing obligations like the issuance of a prospectus are broadly similar across most Permissible Jurisdictions. Indian companies directly listing abroad are likely to be subject to the listing obligations of that Permissible Jurisdiction. Consequently, subjecting these Indian companies to Chapter III of the Act may prove to be redundant. This seems to be the underlying objective behind rendering Chapter III inapplicable to companies directly listing abroad.
Additionally, Indian companies directly listing in Permissible Jurisdictions will not be subject to the rules and regulations laid down by SEBI. Such companies, however, will be bound by the listing framework of the Permissible Jurisdiction itself. On the other hand, listed Indian companies seeking to cross-list (list in India and abroad) will be bound by the listing framework in the Permissible Jurisdiction in addition to SEBI rules and regulations.
The Report has addressed primary issues that arise while contemplating offshore listing such as regulatory changes, Permissible Jurisdictions, taxation etc. However, a regulatory change of such proportion is bound to uncover facets of the law that need further deliberation. Some of these legal aspects that need further thought are briefly discussed below.
Access to Indian Investors
Resident Indian investors are bound by a cap on investments in overseas assets which will include equities of Indian companies listed abroad.
Under RBI’s Liberalised Remittance Scheme (“LRS”), Indian residents are only allowed to remit $250,000 annually towards a foreign capital or current account transaction. While Indian residents would be subjected to the annual LRS cap, foreign investors are not subject to these monetary limits. They are however subject to restrictions on sectoral caps, entry routes, and prohibited sectors as prescribed by the NDI Rules. The difference in investment thresholds between Indian and foreign investors indicates a lopsided playing field.
The situation gives rise to the peculiar problem wherein Indian investors are barred from investing more than the LRS limit in a company incorporated and headquartered in India. RBI will have to intervene and clarify its stance on the issue in order to curb this irregularity. Presumably, this LRS cap will have to be done away in order to increase access to these equities for Indian investors[ii].
Uniformity of Shareholder Rights
For Indian companies seeking to cross-list their shares, it must be ensured that their equities represent the same rights entitlement to all shareholders, regardless of the jurisdiction. While Indian regulations do permit the issuance of shares with differential voting rights, the equities available to investors in the Permissible Jurisdiction must be interchangeable with those equities traded in India. Moreover, to prevent discrepancies in share price on different exchanges, SEBI must ensure that the shares are fungible between jurisdictions.
As a result of having shareholders in different jurisdictions, companies must strive to ensure all shareholders have adequate access to their rights, namely voting, dividends, and information. Mechanisms should be adopted where shareholders may exercise their voting rights virtually and have the same access to information that other shareholders would.
Moreover, multiple regulatory regimes governing the company in different jurisdictions may sprout corporate governance and compliance complications. For example, regulatory filings may have to be done in two formats thereby increasing compliance costs for companies. Instances of direct conflict between laws in different jurisdictions are bound to arise, which need to be met with the establishment of adequate mechanisms to deal with them.
Omission of GIFT city
The Gujarat International Finance-Tec City (“GIFT City”) established India’s first International Financial Services Centre (“IFSC”), which aims at incentivizing financial services for residents and non-residents. India International Exchange (“India INX”) is India’s first international exchange set up at GIFT City. By virtue of India INX being a subsidiary of BSE, it has received the requisite recognition from SEBI, which is an ordinary member of IOSCO.
The principles for identification as a Permissible Jurisdiction have been stipulated in the Report. A prima facie reading of the eligibility criteria suggests that GIFT City meets the stipulated requirements to be a Permissible Jurisdiction, but has surprisingly been omitted from Annexure C of the Report. However, GIFT City is mentioned as a domestic exchange where foreign companies may be listed.
The omission brings attention to an underlying set of concerns- Is India INX an exchange where only companies incorporated outside India may list? and if so, why? Is it possible for exchanges to seek review or clarification from SEBI as to why they have been excluded? Further clarity is needed on some of these ambiguities along with a cogent regulatory framework in order to address them effectively.
The move to allow offshore listing could not have come at a better time for India Inc. considering heightened global interest in Indian companies. Increased brand exposure, better valuations, and a deeper pool of capital are just some of the benefits Indian companies stand to reap. However, these benefits come at the cost of increased reporting requirements, stringent insider trading regulations, higher liability, and aggressive prosecution, especially in the United States.
Chinese companies like Alibaba and Baidu have significantly benefited from cross-listing on American exchanges. Cross-listing has helped them further their brand name on a global scale and diversify their shareholding across borders. A 2018 US Securities and Exchange Commission (“SEC”) report stated that Chinese companies cross-listed on American exchanges had a market capitalization amounting to $1.8 trillion in the US alone.
While the first steps towards allowing offshore listing have been taken, the framework will have to be dynamic in nature, evolving with ever-changing political and global landscapes. Indian companies have the distinct opportunity of capitalizing on China’s deteriorating relations with the West. Therefore, Indian regulators must strike while the iron is hot and refine regulations to facilitate a global pivot towards India Inc.