This article is written by Aswathy, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. The article has been edited by Aatima Bhatia (Associate, LawSikho) and Ruchika Mohapatra (Associate, LawSikho).

Introduction

Post the liberalisation and globalisation era, we saw a lot of businesses globalising their operations. We have witnessed a high level of internationalisation of businesses in the past few decades, and this includes companies raising funds from foreign capital markets by cross-listing on stock exchanges around the world. This has led to an integration of the global securities market and has facilitated cross-border access to capital markets. India, being one of the fastest-growing economies of the world, has experienced a high influx of foreign investors and market penetration by foreign companies. In the light of the same, India too has jumped on the bandwagon by opening up its financial markets to a certain extent, thereby allowing foreign companies to raise funds from India. This article shall deal with how a foreign company can raise funds from India and list their securities on Indian stock exchanges. 

How can a foreign company raise funds from India?

There are two ways in which a foreign company can raise funds from India. First is by incorporating and registering their company as per provisions of the Companies Act, 2013.  The second is by indirectly accessing the capital markets through the issue of Depository Receipts, which are then listed on stock exchanges, or by being acquired by a listed Special Purpose Acquisition Companies (SPAC) in India. A foreign company cannot directly list their securities on Indian stock exchanges, however, they are allowed to issue Indian Depository Receipts (IDRs) which they may then enlist. 

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A Depository Receipt (DR) is a negotiable certificate issued by a bank in a domestic country, which represents the ownership of the shares in companies from foreign countries. The DRs programme has allowed global companies to cross-list across countries. Cross-listing via the DRs route is more preferred to direct listing as it offers a much easier and flexible mechanism with less stringent regulations on foreign companies, as compared to the regulatory requirements for the direct listing. The Depository Receipts with denominations in Indian Rupee issued by a Domestic Depository in India are known as Indian Depository Receipts (IDRs). IDR has underlying ownership shares of the foreign company and therefore enables local investors to invest Indian Rupees in foreign companies with ease. The foreign company shall issue its shares to the Indian Depository. The Domestic Depository is one which is registered with the SEBI, and it is allowed to issue the IDR on behalf of the foreign company.

SPACs are another way of becoming a listed company in India, without actually going through the entirety of the process of listing. SPACs are essentially shell companies that are backed by sponsor companies who raise capital for the SPAC through an IPO. Post the IPO, the SPAC acquires a target company and therefore the target becomes a listed company without taking the traditional IPO route.  

The legal and regulatory regime governing IDR

The issue of IDR is regulated by the SEBI as well as the Companies Act 2013 and its allied rules and regulations. This includes provisions of Section 390 of the Companies Act 2013, applicable rules under the Companies (Registration of Foreign Companies) Rules, 2014 and the Companies (Issue of Indian Depository Receipt) Rules, 2004. Further, certain applicable rules of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 and the Guidelines issued by the Reserve Bank of India are also applicable to the issue of IDRs.

Eligibility for issuing IDR

The criteria laid down by the SEBI and RBI from time to time and the criteria laid down by the relevant rules and regulations must be met in order for a company to be eligible to issue IDR. These are as follows:

  1. Companies (Registration of Foreign Company) Rules, 2014

Rule 13 of these rules lay down the following eligibility criteria:

  • The pre-issue paid-up capital and free reserves of the company are at least USD 50 million and it must have a minimum average market capitalization of at least USD 100 million in its parent country for the three financial years preceding the issue.
  • The company must be continuously trading on a stock exchange in its home/parent country, that is the country of incorporation for a period of at least three financial years preceding the date of issuance of IDRs.
  • The foreign company must have a track record of distributable profits as specified in Section 123 of the Companies Act 2013, for a minimum period of three out of five immediately preceding years.
  • Must fulfil any other such eligibility criteria laid down by the Securities and Exchange Board of India (SEBI) on this behalf from time to time.
  1. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 

Regulation 97 of these SEBI regulations specify that for the issuance of IDR, the issuing company:

  • Must be listed in its home country.
  • Is not prohibited by any regulatory authority from issuing securities.
  • Has a track record of compliance with all securities market regulations and laws as applicable in its home country.
  1. Companies (Issue of Indian Depository Receipts) Rules, 2004 

Rule 4 of these rules further lays down eligibility criteria as follows:

  • The pre-issue paid-up capital and free reserves of the company should be atleast USD 100 million, and it must have an average turnover of USD 500 million during the three financial years preceding the issue.
  • The company has been making profits for a minimum of five years preceding the issue, and the dividend declared has not been less than 10% each year for that period.
  • The debt-equity ratio of the company is not more than 2:1 in the pre-issue stage.

Apart from the above, it is also required that the size of an IDR issue should not be less than Rs.50 crores.

Procedure for the issue of IDR 

  • Prior to the filing of the draft application, the company is required to obtain all required approvals as well as exemptions if any under the applicable laws relating to issuing of IDRs from the concerned authorities from the home country of the foreign company, ie. the Issuer Company.
  • After this, a draft application along with a due diligence report must be filed with the SEBI. This should be filed through the authorised Merchant Banker at least ninety days prior to the date of opening of the issue of IDRs. Within thirty days of filing, the SEBI may ask the Issuer Company to furnish any additional information. Once these are furnished, the SEBI is required to dispose of the application within a period of thirty days.
  • After SEBI grants in-principle approval to the issue, the Issuer Company is required to submit the issue fee to SEBI and the updated prospectus which incorporates all the changes suggested by SEBI must be filed with the SEBI as well as the Registrar of Companies (RoC). It is to be noted that while filing prospectus to the RoC, a copy of the SEBI approval, as well as the statement of fees paid to SEBI by the company, must be attached.
  • The Issuer Company must now appoint an overseas custodian bank and a Domestic Depository for the issue of IDRs.
  • All the underlying shares of the IDRs must be delivered to the Overseas Custodian Bank, and the Overseas Custodian Bank shall authorise the chosen domestic depository to issue IDRs via public offer.
  • Once this is done, the Issuer Company may now obtain the listing permission from one or more stock exchanges that have nationwide terminals in India for a listing of the IDRs.

Documents required for issuing IDR

There are certain very important documents that are required for the process of issue of Indian Depository Receipts. These are as follows:

  • Copy of the agreement entered into with the authorised Merchant Banker by the Issuer Company.
  • The due diligence certificate is to be submitted to SEBI by the authorised Merchant Banker.
  • The certificate stating the authenticity of the prospectus, issued by the authorised Merchant Banker.
  • The draft prospectus of the Issuer Company, to be filed with SEBI.
  • A document or instrument which defines the constitution of the Issuer Company.
  • A true and certified copy of the certificate of incorporation of the Issuer Company.
  • Copy of the agreement entered into by the Issuer Company with the Overseas Custodian Bank.
  • Copy of the agreement entered into by the Issuer Company with the Domestic Depository.
  • The copies of translated documents, of all documents of the company whose original versions are not in English. This copy must be certified to be true by key managerial personnel of the Issuer Company and it should also be attested by an authorized officer of the Indian office of the Embassy of the Issuer Company’s country.

Functioning of a SPAC

After a SPAC is formed, the sponsor conducts an IPO through which it raises capital in order to acquire an existing operational company. In certain cases, SPACs are also formed with the intent of acquiring a company that will be identified later, in a certain fixed time period of two years. Institutional investors are expected to identify the potential target and go ahead with the acquisition with the consent of the shareholders of the SPAC. Also known as blank-cheque companies, the SPAC post-acquisition takes on the identity of the target, and as a consequence, the previously unlisted target becomes a listed company. This method certainly does allow private companies to raise capital from the public more quickly and smoothly and without any procedural hassles.

SPACs in India : opportunities and legal framework 

A typical De-SPAC transaction would entail the merger of the SPAC and the target entity. This requires compliance with Section 234 of the Companies Act 2013, subject to the NCLT’s sanctioning of the scheme of merger, as well as the  Foreign Exchange Management (Cross Border Merger) Regulations, 2018. Obtaining NCLT’s approval will certainly be a crucial part of the process, especially considering that a shell company would be acquiring a foreign company which would result in the foreign company directly listing on stock exchanges. The existing regulatory framework in India for SPACs is not one that is favourable or supportive. Considering the fact that companies are required to commence operation within a year of incorporation, delay in identifying a target could potentially result in the company being struck off completely. Further, the SEBI’s eligibility criteria for listing companies is not one that accommodates a SPAC, as it lays down fiscal requirements of profits, assets and net worth that such companies are expected to have. Shell companies will clearly not have such figures and this poses a very real challenge. 

However, considering how the SPAC trend is really catching on around the world and seeing how it could potentially drive the growth for Indian startups, the Securities Exchange Board of India (SEBI) is currently working on putting together a framework for regulating SPACs. This is proposed to include a minimum threshold for the listing of a SPAC, as well as specific listing guidelines. SPACs can certainly prove to be a key player in enabling global market integration in the near future. 

Case studies 

Standard Chartered’s IDR

The first-ever IDR issued was that of Standard Chartered Plc. Though market regulator SEBI originally proposed the notion of IDRs in 2000, it was not until 2010 that Standard Chartered Plc launched the first, and so far only, IDR. There was an issue of around 240 million IDRs where every ten IDRs represented one share of Standard Chartered. The issue price was fixed at Rs.104. The IDR issue was subscribed 2.2 times at the Bombay Stock Exchange whereas, at the National Stock Exchange, it was subscribed 1.53 times. However, ten years down the line, Standard Chartered had to take the decision to delist the IDRs. The IDR issue in itself faced certain risks, such as interest rate risk that comes with using short term borrowing to fund a long term asset as well as the currency risk due to strengthening of the US Dollar as against foreign currencies. There was also a multitude of tax issues. After the SEBI notified its circular disallowing redemption after one year, the Standard Chartered IDR had fallen by almost 20% and this posed a concern during redemption. Another facet was that even though the purpose of IDR was to broaden the investor base in India, this did not happen in reality. A majority of the investors were Foreign Institutional Investors (FIIs). They invested in bulk as in India, as they were able to access the shares of the company via IDR at a lower rate as compared to the rates in London. Experts made the observation that restrictions around fungibility that affected liquidity, unfavourable tax and trade regime led to the “unhappy ending” of this endeavour by Standard Chartered Plc.

ReNew Power’s SPAC deal in the US

ReNew Power, based in Gurgaon, is one of the largest renewable energy companies in India and operates across 18 states in India. In February 2021, RMG Acquisition Group, a US-based blank cheque firm was set up by the RMG Group for the purpose of listing ReNew Power on NASDAQ.  The value of the transaction was around $8 billion. This was one of the biggest overseas listings of an Indian company through the SPAC route. The combined company “RNW” is proposed to be publicly listed post-closing of the transaction. Although this deal has so far been well received in India as well as the U.S, it is yet to be seen as to what challenges could come up post-closing. 

Conclusion

There are a variety of reasons due to which India could not attract any other foreign companies to raise funds through the IDR route. These are restrictions on fungibility, tax issues, entry barriers and most importantly lack of awareness and popularity of IDRs around the world. The biggest concern continues to be with regards to the tax liability while redeeming IDRs into underlying equity shares as there are no specific tax provisions for the same. However, in the recent past, we have seen more and more foreign investment coming to India, as we continue to move towards becoming a global manufacturing and retail hub. With the required changes being brought about to the regulatory regime and by providing clarity on tax-related issues, there is still hope that the SEBI shall revive and popularise IDRs once again. Similarly, it is crucial that the legal regime in India also recognise and accommodate SPACs. Along with providing a fostering environment, this will also afford protection to investors. Further,  start-ups are major drivers of today’s economy, and this will certainly open up a new pathway for raising capital to propel their growth. 

References 

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