Finance minister Nirmala Sitharaman’s assertion on Friday that domestic companies will “soon” be allowed to directly list their securities on overseas exchanges in specified jurisdictions is a big step towards expanding capital access opportunities for businesses, mainly because it removes the government’s ambivalence on the issue. After all, the decision was actually taken in May 2020, almost two years after a committee set up by the Securities and Exchange Board of India strongly recommended such an action. The Companies Act was also suitably amended to allow such listings, but there was radio silence from the authorities after that, raising concerns whether the government has developed cold feet. One hopes government officials have used the intervening period to iron out the creases to ensure such overseas listings actually take place. The hopes are high this time as some government officials have reportedly said that the detailed guidelines should be out “in weeks”.
The stage-gate process will involve an initial listing on the International Financial Services at the Gift City and then direct listing in seven or eight specified jurisdictions. The reasons why this should be allowed are many, one of them being that an offshore listing would make it easier for new-age companies to benchmark valuations. Indian stock exchanges and local investors have traditional views on profitability and growth, which often contradict the performance indicators that many new-age companies follow. Overseas listings are expected to enable companies to access specialised investor classes, who are better equipped to value these securities. There’s more. As global listing comes with better disclosure responsibilities, it in turn should benefit all investors. In any case, competing countries in the Asian region such as Malaysia and Vietnam allow such listing.
Another big advantage will be the bigger pool of foreign investors who are unwilling to register with Sebi due to far stricter guidelines, yet want to participate in India’s growth story. In addition, the comparatively relaxed guidelines when it comes to taxation for foreign investors will also come into play. Most importantly, the cost of direct listing is much lower as companies do not have to go through the rigmarole of hiring merchant or investment bankers for underwriting, as shown by Spotify’s listing on the NYSE in 2018. At the next stage, the government should allow foreign companies also the same facility. Apart from raising Brand India’s profile, Indian investors would benefit, too.
But several unanswered questions remain. For example, according to current provisions, income earned from transfer of shares of an unlisted Indian company listed on a foreign stock exchange would be subject to capital gains tax in India. The tax liability currently depends on fair market value (FMV) of the company, which may not be reliable due to overseas listing. The price at which shares would be issued on the foreign stock exchanges would be determined by the market forces in the respective jurisdiction, and hence, it is quite possible that the shares may be issued at a price which is less than the FMV of the shares, tax experts say. Also, the issue size needs to be in line with the Sebi panel’s suggestion that it should be at least `1,000 crore and allotment should be made to at least 200 investors to ensure adequate liquidity and reduce scope for manipulation. It’s obvious that the regulatory regime needs to be made more adaptive.