Introduction
The Coronavirus pandemic prompted economies worldwide to formulate stimulus packages to boost economic growth. In sync with this global trend, the Government of India also announced measures aimed at supporting domestic companies in tackling their cash flow issues. One of these stimulus measures led to provisions for direct listing of securities by certain Indian companies in permissible foreign jurisdictions (included as part of the ‘Companies Act (Amendment) Act, 2020’ (the “Amendment Act”)).[i]
Background
The proposed ‘direct listing route’ was not a knee-jerk reaction to the post-pandemic liquidity crunch faced by Indian companies. Indian regulators had been toying with the idea of permitting direct listing as far back as June 2018, when an ‘Expert Committee’ was constituted by the Securities Exchange Board of India (“SEBI”), the Indian securities markets regulator, to assess the advantages in the overseas listing of Indian companies.
The proposal was discussed in depth by SEBI’s Expert Committee in its report of December 4, 2018 (the “SEBI Report”), which analysed the benefits of permitting Indian companies to list securities on foreign stock exchanges and foreign companies to list securities on Indian stock exchanges.
Amendments to Companies Act
Under the Companies Act, 2013 (the “Companies Act”), a ‘listed company’ is one that has any of its securities listed on any recognized stock exchange.[ii] The Companies Act (and the corresponding SEBI regulations) requires listed companies to comply with extensive compliance and disclosure obligations.
The Amendment Act re-defined ‘listed companies’ to provide for a statutory exemption to ‘such class of companies, which have listed or intend to list such class of securities, as may be prescribed in consultation with SEBI’ from the relevant provisions under the Companies Act pertaining to listed companies. The exemption is necessary since the listing of the Indian entity on the overseas stock exchange would require it to be governed by the disclosure requirements of the relevant foreign jurisdiction.
The Companies Act also specifies the modes by which a public or a private company may issue securities. In the case of a private company, securities may be issued by way of a rights issue/bonus issue/private placement. The Amendment Act introduces a new route for issuance of certain securities by certain classes of public companies for the purposes of listing on permitted stock exchanges in permissible foreign jurisdictions.
Permissible Jurisdictions
The Amendment Act does not specify the process of a proposed overseas listing, and the permissible jurisdictions where the securities are to be listed. However, the Amendment Act has empowered the Central Government to formulate rules for implementing the aforementioned provisions. As a corollary, while the Amendment Act provides statutory sanction for a direct overseas listing, the granular details of the process will be set out in the subordinate legislation(s).[iii]
Having mapped the access route to the overseas market, the SEBI Report provided a list of permissible jurisdictions and stock exchanges which included, in addition to the stock exchanges of developed economies such as the USA and the UK, the Shanghai Stock Exchange and the Shenzhen Stock Exchange. However, changes in the geopolitical landscape since the SEBI Report could prompt the Indian Government to exclude the Chinese stock exchanges as permissible jurisdictions. Such an approach would be consistent with the Indian Government’s approach at restricting fund inflows from India’s neighbours (introduced through the Press Note 3 of 2020 issued by the Department for Promotion of Industry and Internal Trade).
However, while finalizing the list of permissible jurisdictions, it would be reasonable to expect the Government of India to favour jurisdictions that have treaty obligations on information sharing and cooperation. In this respect, the SEBI Report recommends that every ‘permissible jurisdiction’ meets the following criteria:
is a member of the Board of International Organization of Securities Commissions (“IOSCO”), and has its securities market regulator either a signatory to IOSCO’s multilateral MOU, or a signatory to a bilateral MOU with SEBI for information-sharing arrangements;
is a member of the Financial Action Task Force (“FATF”); and
is not identified in the public statement of FATF as a jurisdiction linked with strategic anti-money laundering or combating the financing of terrorism deficiencies to which countermeasures apply, or a jurisdiction that has not made requisite progress in addressing the deficiencies or averse to an action plan developed with FATF to address the deficiencies.
In our assessment, the approach followed by the SEBI Report seems ideal, given that active cooperation with Indian authorities is necessary in the event of any investigations, and the list can be kept broad and fluid.
Changes to Other Regulatory Regimes
In its current avatar, the Amendment Act and the issuance of subordinate legislation(s) pursuant to it appear inadequate to meet the regulatory concerns. Other facets of Indian law still need scrutiny for every new transaction to meet set standards. Some of the key considerations essential to make direct overseas listing seamless are set out below:
Resolving Cross-Jurisdictional Conflicts: Indian-listed entities that are cross-listed overseas will be bound by the SEBI listing regulations as well as the applicable foreign listing regulations. As this could create regulatory conflicts, appropriate mechanisms to resolve such roadblocks need to be evolved.
SEBI’s Extra-Territorial Jurisdiction: Overseas price-manipulation in cross-listed securities may impact prices on domestic stock exchanges. This requires the strengthening of SEBI’s extra-territorial powers.
Expanding Securities Market Infrastructure: Listing of the same classes of securities in India and abroad requires the expansion of India’s securities market infrastructure to accommodate trading in multiple jurisdictions. For this, registrars in India may also be required to act through co-registrars or sub-registrars in another jurisdiction, with all identities being maintained in ‘master’ registers in India.
Foreign Exchange Management Regulations: The Indian foreign exchange management regulations do not specifically contemplate issuance of equity shares by a company incorporated in India that is listed on a stock exchange outside India to a person resident outside India. Accordingly, the regulatory framework is not clear on whether the entry routes, prohibited sectors, sectoral caps, and pricing restrictions are applicable to such transactions. The said regulations will therefore need appropriate amendments to establish clarity in going forward.
Tax Laws: According to the current taxation framework, income earned from a transfer of equity shares of an unlisted Indian company listed on a foreign stock exchange is subject to capital gains tax in India, as such shares, being shares of a company incorporated in India, are considered ‘capital assets situated in India’. Accordingly, the existing taxation laws might require amendments to ease the tax burden.
Impact of the Amendment
Once implemented, the Amendment Act is expected to give a fillip to fund-raising by companies incorporated in India. Hitherto, Indian companies seeking access to foreign markets have had to undertake issuance or listing of debt securities and depository receipts on overseas exchanges. The proposed direct overseas listing route will provide Indian companies with the option to access foreign capital at a lower cost, thereby aiding growth and economic development.
[i] The provisions of the Amendment Act are not effective as of date of writing.
[ii] S. 2 (52), Companies Act, 2013.
[iii] The provisions of subordinate legislation(s) have not been released as of the date of writing.
This article has been authored by Mr. Aman Bhatia and Mr. Dhruv Malhotra who are associates at J. Sagar Associates. This blog is a part of RSRR Excerpts from Experts Series, initiated to bring forth discussion by experts on contemporary legal issues.