Financial regulators are in discussions with the Centre to permit shareholders of GIFT City listed companies to sell their shares in the secondary market, three people familiar with the development said. The plan is to attract public listings and improve liquidity at GIFT City exchanges that have struggled to attract Indian companies so far.
Currently, resident Indians can sell their shares in a company listed on GIFT City exchanges only through an offer for sale (OFS) – either at the time of an initial public offering, or after the IPO. Unlike in mainland exchanges, they are barred from selling in the secondary market; if they want to sell, they must participate in another OFS, a time-consuming process for smaller shareholders. Foreign exchange rules designed to prevent round-tripping of funds treat GIFT IFSC as an offshore jurisdiction, effectively barring resident Indians from the "permissible holder" status required to trade on its exchanges.
“The International Financial Services Centres Authority (IFSCA) and the Reserve Bank of India (RBI) are working to allow Indian shareholders to sell their stakes even after the company lists on GIFT City exchanges, after RBI finalizes it,” one of the three people cited above said on the condition of anonymity, adding the discussions are at an advanced stage.
First listing
The discussions come at a time when the first Indian company prepares to list on GIFT City, over two years since the route was opened for local firms. Easier secondary market sales will promise relief for promoters and early-stage backers who wish to trim holdings incrementally rather than through a time-consuming formal offering.
“Both the regulators are in advanced discussions,” the official added.
Emails sent to RBI and the IFSC Authority remained unanswered.
Only "permissible holders" can buy or sell equity shares of Indian public companies listed on IFSC exchanges, said Ketaki Mehta, partner, GIFT City at Cyril Amarchand Mangaldas. "Importantly, a permissible holder cannot be a person resident in India. Consequently, resident Indians, whether individuals or companies, are prohibited from purchasing or selling such shares on IFSC exchanges. Given this restriction, the only viable exit route available to resident Indian shareholders is through a structured OFS initiated by the company," Mehta added.
“Such relaxation can enhance liquidity by enabling deeper domestic participation and encourage more Indian companies to consider IFSC for listing as a viable alternative to domestic exchanges especially for raising foreign capital,” Mehta of Cyril Amarchand Mangaldas added.
Permissible holders
Shikhar Kacker of Khaitan and Co. said the 2024 Fema amendments allow only a “permissible holder” in IFSC exchanges, expressly excluding Indian residents. However, the RBI can frame rules for a policy change introduced by the government, said Kacker.
XED, which provides education programs to top executives, plans to raise $12 million through a dollar-based offering in GIFT City in the first of March, making it the first company to list in the international financial services centre. The company's shares will be traded on the NSE International Exchange and the India International Exchange in GIFT City.
To be sure, the potential change in regulation will not have any impact on XED's promoters John Kallelil and Meenu John, who are non-resident Indians. But XED does have existing investors who are resident Indians. And so, these investors as well as Indian investors in the companies who plan to list on GIFT City exchanges may face issues.
According to Abhishek Kaushik, chief executive of Global Horizons, the book-running lead managers to the XED issue, regulations prohibit “trade” of the securities by resident Indian investors on GIFT City exchanges. "A representation has also been made to allow trading through the liberalized remittance scheme (LRS) route. but this may take time," said Kaushik.
What happens if it kicks in?
The relaxation would certainly improve liquidity and make the platform more attractive, particularly for promoters and early investors seeking exit options, agreed Kacker of Khaitan and Co.
“However, listing decisions and the platform’s attractiveness to overseas investors will also depend on valuation dynamics and institutional investor participation. While removal would be a positive step, it may not, by itself, lead to a surge in listings,” Kacker said.
Trading freely in GIFT City exchanges by Indian residents is not allowed because the same money can be bought back to India, and can be construed as round-tripping experts say.
“A key issue is the potential risk of round-tripping, wherein funds originating in India could be routed offshore and subsequently reinvested into India in the guise of foreign capital, which is currently not permitted under the norms applicable to overseas portfolio investment route,” Mehta of Cyril Amarchand Mangaldas said.