Home / Opinion / Columns /  The strange rush among Indian companies to list abroad

The listing of Zomato on Indian stock exchanges is a great milestone. After a relatively extended drought, it has brought back excitement in the initial public offer market. It instantly created hundreds or maybe thousands of overnight dollar millionaires. The company is now worth more than 1 trillion. Such wealth creation is the dream of capitalism. Its backstory is one of long hours of grunt work, sweating over every detail, and building a robust business brick by brick, or rather click by click. Hopefully, its wealth unlocking is a precursor to several other companies that are going public in the coming months. There is a veritable long list of unicorns waiting to fly and uncover more riches. Quite significantly, these companies are not just from the e-commerce or internet space, but from a variety of sectors, such as fintech, logistics, gaming, education, mobility, insurance and software-as-a-sevice. Newer players in fields like electric vehicles and hydrogen-based fuel cells might also be waiting in the wings. The prospects are promising, and it is hoped that a long bull run of the kind unleashed by the listing of Maruti in 2003 is in the offing. Companies that go public not only reward their founders with a pot of gold, but also give other investors a chance to participate in their growth. With India’s securities regulator having come of age, our stock market is in reasonably healthy shape as a vehicle for capital allocation, price discovery and wealth creation. Indeed, in the past decade, while bank deposits or insurance purchases by households have grown at single-digit rates, investment in equity and mutual funds has grown at 22% compounded annually. This growth accelerated during the pandemic, with a record number of demat accounts being opened. Still, there are only 25 million unique investors in equity, as against more than 700 million bank account holders. The potential for wealth creation through stock ownership, either directly or indirectly through mutual funds or pension products, is immense.

Yet, it seems that many startups would rather list overseas and not in India. About two dozen founders and private equity investors approached the Prime Minister, no less, to allow them to list abroad, even though these are home-grown and domiciled companies. Their logic is that they would get better valuations, as international bourses allow them access to a wider pool of investors. This seems odd, since India’s equity markets have been open—nay, welcoming—to foreign investors. There is virtually no bar on complete foreign ownership of shares of an Indian company across most sectors. But an Indian listing gives Indian residents a chance to participate in the listed company’s prosperity. As a rule, Indian residents do not have easy access to the stocks of foreign-listed companies. Unless we go for full capital account convertibility, that will not be possible. Such a move would have huge implications for the stability of India’s financial sector. Even its original proponents have retracted their recommendation. Opening up the capital account just to grant resident Indians access to foreign bourses would be like using a bazooka to kill an ant. Why not instead list here? Global investors have full access.

In the past several years, the pain and complexity of tax laws applicable to venture capitalists funding startups has mostly been left behind. The main challenge is always about distinguishing between business income and capital gains, not about creating tax distortions when multiple layers exist between private-equity parents and their subsidiaries. Much of this has been sorted out. Besides, India’s income tax rates are on par with South East Asian levels, so tax evasion or planning cannot be a reason to locate abroad. It is a matter of concern why so many startups, or their parent companies, are choosing to be domiciled abroad, in say Singapore or Delaware. Are there other elements of ease-of-doing-business in India apart from tax laws that are deterring companies from being domiciled here? The recent elimination of the rather-vindictive retrospective tax was a shot in the arm for investor friendliness.

FAANGs, those fabled internet tech stocks of America, have a combined market value of more than $3 trillion. Facebook, which owns WhatsApp, Google and Amazon together have more than 800 million users in India, and the income from their Indian operations is significant even if a tiny fraction of their global income. The data they collect on Indian users is intangible but potentially of high value.

However, none of the stratospheric market value of these companies is available to Indian residents, save a handful of high net-worth individuals. Investing in overseas stocks is a bridge too far. Is there a way for Indians to access that wealth? Certainly. Not by making listing compulsory in India, as was the case before 1978, but in some other way. A 2019 research paper titled List in India: Toward FDI 2.0 by Umesh Kudalkar of the Pune International Centre can serve as a good guide to explore this question.

Indian companies that want to feel the pulse of foreign investors can do so by issuing depository receipts or masala bonds. There is adequate two-way fungibility between those securities and a domestic listing. There is also now an option to enlist on an international exchange located in GIFT City, Gujarat. The bottom line is that wealth created in a market of 1.3 billion consumers should be readily accessible to those very consumers along with foreign investors.

Ajit Ranade is chief economist at Aditya Birla Group.

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