MUMBAI: The government’s policy intent to allow Indian companies to list overseas without simultaneous India listing while opens up more avenues for tech companies to raise funds, it would be a non-starter without the necessary regulatory clarifications, said legal experts.
Historically, due to the existing legal framework, Indian entities have used offshore routes like Mauritius to list on overseas exchanges like NASDAQ, NYSE among others by creating parent companies in tax friendly jurisdictions. Apart from that, Indian entities are allowed to access foreign capital through the American Depository Receipts (ADR) or Global Depository Receipts (GDR) route.
"While tech companies would be the key beneficiaries, some other companies with significant US exposure, in terms of customers or employees such as IT services, healthcare, or global business models in commodities, chemicals etc. could look at foreign listings. Even telecom tower companies could look at this," said Anuj Kapoor, managing director and head of investment banking at UBS India.
The cabinet had approved this proposal in March this year. The idea has roots in a Securities and Exchange Board of India (Sebi) panel's recommendations in December 2018. The panel had suggested that taking listing Indian companies abroad would require simultaneous easing of provisions of taxation and foreign exchange management act (FEMA) among others.
The FEMA regulations need to be tweaked to allow issuance of shares to persons resident outside India and receipt and retention of amounts received in foreign currency accounts overseas, Further tax laws both relating to capital gains arising on transfer of equity shares and also the rules relating to valuation of shares require changes.
“The announcement so far looks to be more of policy intent till the time the associated regulatory amendments and clarifications are not announced in areas including FEMA regulations and tax laws," said Sai Venkateshwaran, partner and head, CFO Advisory, KPMG in India.
Kapoor of UBS also said the government and regulators will need to do substantial work on fine tuning the ecosystem and changing laws like Companies Act, FEMA, Sebi rules and taxation for necessary takeoff.
The other big hurdle is lack of a fully convertible rupee, it is so far allowed only the International Financial Services Centre (IFSC) at Gift City in Gujarat.
Given the intricacies involved, this measure while beneficial for Indian companies in accessing foreign capital, will require close coordination between Indian regulators like Sebi and their foreign counterparts. RBI's views on capital convertibility will also have a huge bearing on the success of this move," said Arka Mookerjee, partner at law firm J Sagar Associates.
According to Dipti Lavya Swain, corporate M&A lawyer and partner at HSA Advocates, the other important factor for tech companies would be permissible jurisdictions. Sebi discussion paper had suggested 10 permissible jurisdictions which have strong anti-money laundering laws such as US, UK China, Japan, Hong Kong, South Korea, Switzerland, France, Germany, Canada
"Which jurisdictions will be allowed for overseas listing for Indian companies and what are overall tax impacts of the overseas listing process will be key factors that companies will consider before adopting such process, versus what is allowed under the existing regime, in order to determine the success of this change, said Lavya.
Venkateshwaran of KPMG said for an immediate take-off, government could look at ADR and GDR in phase one.
"The government could look at first notifying the listing of ADR/ GDR instruments without simultaneous or prior India listing as the framework for such instruments already exists. The listing of equity shares can be taken up in the next phase by the government once the other regulatory changes are made," said Venkateshwaran.