This article has been written by Ronak Pattanaik, KIIT Law School, Odisha, and has been co-authored by Shriya Salini Routray from KIIT Law School, Odisha.

Introduction 

The Central Government (CG), through the Ministry of Finance and Ministry of Corporate Affairs, has brought about certain significant amendments to the capital market regime to enable the securities of companies to get listed on international exchanges. The initiative comes after previous efforts that led to the Companies (Amendment) Act 2020, which was passed on September 28, 2020. It provided for the direct listing of prescribed classes of securities of public companies on the stock exchanges in permissible foreign jurisdictions, subject to compliance with the provisions of the Indian Companies Act, 2013 and the Securities and Exchange Board of India Act 1992 (SEBI Act) and rules and regulations made thereunder. The amendment for this is made specifically by Section 23 of the Companies Act, 2013. However, so far there have been no regulations for such listing in any of the foreign jurisdictions, as a result of which the same can be raised to issue securities by companies in the form of depositary receipts (DRs) for the purpose of raising funds abroad. However, this process was very tightly regulated, and only a few companies ended up raising money this way. The DR holders have no voting rights vis-à-vis the equity shareholders. On 24th January, 2024, such changes were notified by the Ministry of Finance via Notification S.O. 332(E) amending the Foreign Exchange Management (Non-debt Instruments) Rules 2019 (NDI Rules).

Subsequently, the Ministry of Corporate Affairs (MCA) has notified the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024 (LEAP Rules). Both rules currently identify the International Financial Services Centre in India (GIFT City) as the permissible jurisdiction, along with India International Exchange and NSE International Exchange as permissible international stock exchanges. The regulatory changes are a crucial step in providing Indian companies with access to global capital markets and flexibility in raising funds. Through this blog, the author aims to address the regulatory aspects of listing the securities of a company on international exchanges.

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Listing of securities and mode of lisiting under direct lisiting scheme

The amendment introduced Schedule XI to the NDI Rules 2019. Schedule XI outlines the direct listing scheme, encompassing the framework for listing the equity shares of public Indian companies on international exchanges. It is quite evident that both the direct listing scheme as seen in Para 1 to Schedule XI and the LEAP Rules restrict the listing of classes of permissible securities to equity shares only. Hence, preference shares and debt instruments can’t be listed on international exchanges. The equity shares can be issued and listed either by the company or by the existing shareholder themselves on the international exchanges and it is a mandate that the equity shares must be in dematerialised form.

This limits the listing to only equity shares on international exchanges and restricts companies from listing preference shares or debt instruments, which may impede companies from effectively managing their finances and attract a diversified class of investors. Such restrictions can eventually reduce firms’ possibility to diversify their risk and may affect market liquidity. All in all, limiting the availability of some of the types of securities that can be issued leaves fewer options for companies looking to raise funds, hedge risk, or be listed abroad.

Compliances for permissible shareholders

Para 2 to Schedule XI defines a “permissible holder” as an individual holding equity shares in a public Indian company listed on an international exchange, excluding Indian residents. This implies that persons resident in India are not qualified to hold shares listed on international exchanges. Nevertheless, citizens or entities incorporated in countries that share a land border with India require the CG’s approval to hold shares listed on such exchanges. The permissible holder is required to adhere to the Foreign Portfolio Investment norms (FPI norms) outlined in Schedule II of the NDI Rules. The Indian company must disclose the compliances that need to be obliged by the holder in its offer document for the sake of investor awareness. Voting rights may be exercised directly by the permissible holder or their custodian, on instruction from the holder as stated under Paragraph 5 to Schedule XI. The investment allowed for the permissible holder is restricted to below 10% of the total paid-up equity capital on a fully diluted basis under FPI Norms.

Eligibility criterias for public Indian company 

Paragraph 3 to Schedule XI states certain conditions for public Indian companies to list their securities on international exchanges. Firstly, the company, its promoters, and its directors, or, in the case of equity shares offered by the existing shareholders, the shareholders themselves, are not debarred from accessing the capital market. Secondly, none of the promoters or directors are associated with a company that is debarred from accessing the capital market. Thirdly, a pre-requisite that the company, along with its promoters and directors, have obtained a standing of non-wilful defaulter as well as non-fugitive economic offender for the sake of safeguarding the interests of the investors and overall market stability. Fourthly, the entity is not subject to any inspection or investigation under the Companies Act 2013. Restrictions related to debarment do not apply to existing shareholders or entities previously debarred from accessing the capital market if the period of debarment is already over at the date of listing on international exchanges.

Offering of securities by the listed public Indian companies is also subject to certain norms, as framed by the Securities & Exchange Board of India (SEBI). LEAP Rules are primarily applicable to the unlisted public companies and to listed public companies, subject to the requisite that it has obliged with other regulations framed by SEBI. SEBI is yet to release any such norms to be complied by listed public companies. Both the listed as well as unlisted public Indian companies also have to comply with laws stated in Para 4 to Schedule XI to NDI Rules including but not limited to the Securities Contracts (Regulation) Act 1956 , the SEBI Act, and the Prevention of Money- Laundering Act 2002.

Rule 4 of LEAP Rules delineates that unlisted public companies without partly paid-up shares may issue equity shares for listing in permissible jurisdictions. This provision extends to facilitating the offer for sale of equity shares by existing shareholders. In adherence to this rule, an unlisted public company shall promptly submit the prospectus via e-Form LEAP-1 within seven days of finalisation, accompanied by the requisite fees, in the designated exchange. Following successful listing, the company is obligated to comply with Indian Accounting Standards, as stipulated in the Companies (Indian Accounting Standards) Rules 2015, along with any other pertinent standards.

Companies not eligible for listing

Rule 5 of the LEAP Rules lists out certain entities that are not eligible to offer their securities on permissible exchanges. These include companies registered under Section 8 or declared as “Nidhi,”  those limited by guarantee with share capital, entities with outstanding public deposits, those with a negative net worth, and companies that have defaulted in payment obligations to any public financial institution, non-convertible debenture holder, or secured creditors. Ineligibility also extends to companies involved in winding-up or insolvency proceedings and those failing to file annual returns or financial statements within the specified period.

Pricing of securities offered

Para 6 to Schedule XI to NDI rules addresses pricing considerations for the issuance of equity shares by listed companies or existing shareholders on the permissible Stock Exchange. In the case of an initial listing of equity shares by a public, unlisted Indian company on an international exchange, the price determination shall be as per the book-building process as allowed by the respective international exchange. The price set through this process should not be lower than the fair market value. Where the equity shares are listed on a recognised domestic exchange, the price of such equity shares should not be lower than the price applicable to a corresponding mode of issuance to domestic investors under the relevant laws. The pricing guidelines completely depend on whether the company is listed or is an unlisted public Indian company. In the case of the listed company, the price of the securities is fixed on the basis of bidding price and demand by the permissible holders.

Way forward

Both the LEAP and NDI rules permit listing of the equity shares on permissible stock exchanges in IFSC but remain silent on regulations regarding other international exchanges. It seems that the initiative was undertaken to contribute to the overall development and attractiveness of GIFT-IFSC as an international financial services center. The unified regulatory authority, the International Financial Services Centres Authority (IFSCA), has played a crucial role in creating a conducive regulatory environment for GIFT-IFSC, ensuring its alignment with global standards and facilitating the smooth flow of global capital into India. As SEBI finalises operational guidelines and companies explore the opportunity to list on international exchanges, the impact of this policy initiative on the Indian capital market will unfold, shaping the future dynamics of cross-border capital flows and global investment in Indian companies.

References

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