We were published in IFLR writing an article on ‘Indian exchanges need to create path for foreign IPOs’.
Since the mid-1990s, Indian companies have listed American depository receipts (ADRs) and global depository receipts (GDRs) in London, Luxembourg and New York but now, the trend has started to change with global companies listing on Indian stock exchanges to tap the country for funds.
In India, the regulatory landscape of IPOs is governed by the Securities and Exchange Board of India (SEBI) and entities looking to list on stock exchanges need to comply with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) among others. The stock exchanges can also have their own listing requirements which companies looking to list will need to comply with. Since foreign companies are not allowed to list on Indian equity markets, IDR (Indian depository receipts) are a possible medium for local investors to buy the shares of these foreign companies.
Through a dynamic regulatory framework, robust domestic market and large investor base, the Indian stock market stands out globally with strong growth in IPO volume. However, nearly the entire equity market capitalisation, exceeding $3 trillion, is dominated by domestically incorporated companies. To achieve the objective of cultivating the markets and providing local investors with broad choices, it is important to encourage foreign companies to list in India as a secondary listing option.
Essential requirements of IDRs
Below are the requirements that need to be met for foreign companies looking to list IDRs.
- The company’s pre-issue paid-up capital and free reserves are at least $ 50 million and it has a minimum average market capitalisation (during the last three years) in its parent country of at least $ 100 million;
- It has been continuously trading on a stock exchange in its parent or home country (the country of incorporation) for at least three immediately preceding years;
- It has a track record of distributable profits for at least three out of the preceding five years;
- The issuing company shall appoint an overseas custodian bank, a domestic depository, and a merchant banker for issuing IDRs. The company may appoint underwriters registered with SEBI for this purpose. It shall deliver the underlying equity shares to an overseas custodian bank, which will authorise the domestic depository to issue IDRs. Additionally, the company must obtain in-principle listing permission from one or more stock exchanges with nationwide trading terminals in India
Barriers to overcome
A number of challenges are making it difficult for India to attract foreign IPOs. Existing listing requirements on Indian stock exchanges may need to be revised to accommodate the unique characteristics and regulatory frameworks of foreign companies. Firstly, the eligibility criteria for IDR listings is more difficult for foreign companies than domestic ones. Another challenge is the uncertainty surrounding the returns investors can make on IDRs There are taxation issues for investors to consider, such as whether their income from IDRs would be exempted from capital gains tax. They also need to be aware of risks that may arise from simultaneous trading of shares in India, London and other markets.
The regulations concerning cross-border offerings include issues related to jurisdiction, regulatory oversight, investor protection and enforcement mechanisms. Collaboration with regulatory authorities in the home countries of foreign issuers would be essential to facilitate information exchange, regulatory oversight and enforcement actions.
Naturally, when foreign listing regulations were introduced, they were rolled out conservatively to test the waters, however, to heighten the investment activity in the Indian market and to offer more choices to investors, it’s time to encourage such listings in India. A re-evaluation and liberalisation of these guidelines are in order, with appropriate safeguards.
In a recent development in March, SEBI decided to approve foreign portfolio investments exemptions from additional disclosure requirements, as well as easing of rules around IPOs and also permitted significant non-individual shareholders to contribute to minimum promoters contribution without being labelled as promoters.
Through simple amendments to the SEBI Guidelines and Companies Act, SEBI aims to make India more attractive as a significant secondary listing market by the foreign companies.
Until now, Indian companies have been able to access international markets through GDRs and ADRs but foreign companies haven’t had too many options. An exciting development is that the government and SEBI have started to work hand in hand on it to create a framework that will encourage and enable foreign companies to list on Indian stock exchanges as secondary listing options. Enabling this measure will result in a win-win scenario for companies, investors and government alike.
Read the article on IFLR HERE.
