Capital play: Stand-alone overseas listing of India-based firms not a good idea
October 23, 2020 6:45 AM
If the government does allow this, it must mandate the domestic listing of such companies within, say, two-three years of their overseas listing.
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By Prithvi Haldea
Markets are now abuzz with the news that the government will soon allow domestic companies to list overseas, without either first listing in India or doing a simultaneous listing on an Indian exchange. Elated by this development would be those supposedly lobbying for this move—a large telecom company, a large insurance company and a number of technology and internet companies—most of which are loss-making enterprises, including several ‘unicorns’ (companies valued at more than $1 billion).
Presently, a company incorporated in India can list on foreign stock exchange only after it has first listed itself in India. To circumvent this, some Indian companies, incorporated an entity in a foreign jurisdiction, like Mauritius, which then completed only an overseas listing.
The rationale for the proposed stand-alone overseas listing has not been provided. However, various rationale forwarded by some experts/companies at various fora need to be debated. It enables access to global capital and mature market participants: In reality, Indian companies have had access to global capital since 1992 through the overseas listing of ADRs and GDRs; 259 companies such as Infosys, Wipro, ICICI and Reliance, have collectively raised Rs 1.39 lakh crore. Moreover, domestic listing does not mean only domestic investors; the field is wide open to 10,486 foreign portfolio investors (FPIs) registered with Sebi, thereby allowing global capital to come into Indian companies.
A few large foreign investors, not registered with Sebi, will not be consequential. It provides higher valuations: Indian IPOs allow for anchor investors, most of whom are foreign investors and are the ones who determine the valuations for IPOs. So, the company does get the right valuation from global players.
In any case, companies should not be overly worried about IPO valuations; only a fraction of the equity is offered in an IPO. The real valuations are obtained post-listing, and for good companies, these are typically much higher. Of course, private equity firms may not get to exit at the IPO stage at a possible high price.
No domestic appetite for large IPOs: It is claimed that the size of the IPO, if done only in India—given the requirement of minimum 10% public offer—shall be extremely large for the Indian market to absorb. This argument too is untenable. Significantly, and contrary to this belief, the data proves otherwise. In as many as 75 IPOs, subscriptions exceeded Rs 25,000 crore, out of which in 41, it was more than Rs 50,000 crore, and in fact, 12 collected more than Rs 1 lakh crore, including a PSU—Coal India which garnered Rs 2.34 lakh crore.
Split in trading volumes: This argument too is untrue; the size of all such offerings in most cases shall be pretty huge and hence shall not impact liquidity and price discovery.
Increased compliance costs: Given the size of these companies, the additional burden shall be minuscule. Other arguments: Some other arguments are also noteworthy. These include better benchmarking between peers, promoting best practices and better corporate governance and helping cross-border collaborations. But, the positive effect these can have on a company’s foreign operations can also be achieved by ADRs/GDRs.
Ease of doing business: On the shoulders of this motherhood argument, one cannot let everything pass the muster. All decisions should be weighed properly with their pros and cons.
So, why be a spectator in allowing only overseas investors and jurisdictions to get the benefit of India’s marquee companies? Domestic investors should be the focus. Domestic issuances shall also help in expanding our abysmally small retail investors base, and bring in their savings into our highly capital-starved economy. It will also reactivate our IPO market; from a high of Rs 81,500 crore in 2017-18, it went down to Rs 20,300 crore last year, and to only Rs 7,600 crore in the first seven months of the current fiscal. Capital formation will also counter the economic slowdown.
Our market width also needs an expansion, which shall surely reduce volatility too. Though we boast of over 9,000 listed companies, the largest in the world, only a few hundred of these are actively traded, making our markets very narrow and speculative. Lack of IPOs and increasing delistings, including by blue-chip MNCs, have only added to our woes.
A strong argument in favour of domestic listings also is our enviable capital market infrastructure and technology, better than many jurisdictions. NSE and BSE are leading the way with state-of-the-art IPO and trading/settlement processes and high-volume capability. Our IPO-to-listing-time is also now very minimal. Finally, domestic listings will allow for close-to-home oversight by the regulators as well as better market scrutiny. Otherwise, the foreign regulators and investors may be caught napping with little access to negative information on developments in India vis-a-vis these companies and bring a bad name to the India brand.
To make domestic offerings easier, the minimum public offer size for IPOs should be reduced to only 5%, if the market cap of the issuer is in excess of Rs 20,000 crore. This would still mean an IPO of at least Rs 1,000 crore, compared to Rs 400 crore allowed presently for a 10% offering). Incidentally, 86 of the 135 IPOs in last five years have been of less than Rs 1,000 crore each (that also answers the liquidity concerns). The company may then be required to bring the public float to 25% over the next 3-5 years.
Alternatively, companies should be asked to do a simultaneous listing, with a minimum 5% offering in India and a minimum 5% offering overseas, bringing the total to 10%. Over a period of 3-5 years, these companies should then be required to reach a total of 25% public float.
It may be recalled that a proactive Sebi, when confronted with the problem of a 25% offer leading to a huge IPO size, had relaxed the guidelines nearly two decades ago allowing companies to initially do only a 10% offering and then gradually take it to 25% in three years. Sebi had again proactively amended its regulations, which had allowed only profit-making companies to do IPOs, to allow loss-making companies as well, with the condition that Qualified Institutional Buyers should subscribe at least 75% of the IPO. In another move, Sebi had created a new platform for tech companies with several relaxations.
However, if the government still goes ahead with its decision to allow stand-alone overseas listing, various critical issues should be thought through.
The eligibility criteria should be clearly spelt out. Regulations should ensure the prevention of money laundering and tax evasions. Importantly, all disclosure-related Sebi regulations at both IPO stage, as well as post-listing, should be mandated, to bring greater transparency, especially as these are large companies. It may also be good to mandate a domestic listing of such companies, say within 2-3 years of their overseas listing.
Over 20 years ago, the venerable Uday Kotak had first made out a strong case for prevention of export of our capital market. I have been an avid supporter of the same. It is ‘proper’ to talk about liberalisation and globalisation. But it should not be at the expense of denying ourselves what is rightfully ours.
(Author is Founder-chairman, PRIME Database. Views are personal)