Indian regulators currently allow only listed firms to tap foreign stock markets, since they have control over such companies. While industry chambers and many corporates favour the move as it will help raise foreign capital, some experts and local stock exchanges are opposed to the proposal, which they feel affects development of local stock markets.
A presentation (on the proposal) was recently made to economic affairs secretary Arvind Mayaram. The government and Sebi are studying the proposal, an official familiar with the matter said. If concerns of money laundering and round-tripping are taken care of, there should not be much of a problem in permitting unlisted firms to raise money in the overseas equity market. But the issue needs to be examined in detail, he added.
Unlisted Indian companies were permitted to list overseas in the 1990s but this was changed in 2005. Sebi and the RBI have since endorsed this position barring unlisted firms from floating evening American depository receipts (ADRs) or global depository receipts (GDRs).
However, some unlisted companies have worked around this by creating overseas subsidiaries. MakeMyTrip.com which is not listed in India listed on the Nasdaq last year with a valuation of $1 billion. It first created a local subsidiary with a holding company in Mauritius. The subsidiary, in turn, raised funds from the US market.
But such corporate structuring becomes difficult and expensive for smaller companies.
According to PricewaterhouseCoopers, China was the worlds largest IPO market in 2011, with companies raising around 286 billion yuan. Despite stringent overseas listing norms, around 40 Chinese companies listed on Nasdaq last year. In comparison, only one Indian company, MakeMyTrip.com, got listed on Nasdaq in 2011. Indian firms including Sify and Rediff.com listed abroad earlier, but are not listed in India.
Our market typically prefers stable and traditional IPOs whereas new-age segments like e-commerce and bio-pharma have very long gestation periods to attain profitability. Hence, it becomes difficult to get the right valuation in the Indian market. Exchanges like Nasdaq are much more mature in valuing such companies, said an analyst.
Srei Infrastructure Finance CMD Hemant Kanoria said unlisted firms should be permitted to list abroad, especially since it would not have any adverse affect on Indian investors. There are in-built checks and balances, since such overseas listings always run the risk of failing, he said.
However, Prithvi Haldea, managing director at Prime Database and an expert in capital markets, is firmly opposed to the proposal. This would mean Sebi does not have any control over Indian unlisted companies dealing with overseas public money, he said. According to Haldea, the provision is prone to misuse and Indian regulators will not have any control if any wrongdoing comes to light. Sebi recently barred seven companies from issuing any shares or convertible instruments or alter their capital structure in any manner till further directions, after it detected evidence of manipulation in GDR issues.
When unlisted Indian companies have multiple avenues to raise foreign funding including FDI, private equity, venture capital and qualified foreign investment, why should they go abroad, Haldea wondered.
Another capital market expert, who did not want to be named, said only some specific sectors, which do not have investor appetite in India but are received well abroad, should be given such a permission. A blanket approval to unlisted companies across-the-board would ensure the closure of BSE and NSE, he said.