Mint Explainer: What is direct overseas listing and how will it benefit firms?

There are two key reasons why Indian companies have been pushing for direct overseas listing: access to a large number of sophisticated investors and easier compliance rules. (Photo: iStockphoto)
There are two key reasons why Indian companies have been pushing for direct overseas listing: access to a large number of sophisticated investors and easier compliance rules. (Photo: iStockphoto)

Summary

  • Few institutional investors in India, such as mutual funds and insurance companies, are willing to bet big on loss-making companies like most Indian tech startups

The union government is planning to allow Indian companies to list overseas directly. Speaking at an event in Mumbai last week, finance minister Nirmala Sitharaman said the government has decided to allow companies to list at the International Financial Services Center (IFSC) GIFT City to start with before expending this to other countries.

What is a direct overseas listing?

Generally, companies incorporated and operating in a country are listed on local stock markets. However, some new-age companies require sophisticated investors who are willing to take big risks. The most popular destination for such companies has been the Nasdaq. Some also aim to list on the New York Stock Exchange (NYSE) and the London Stock Exchange, among others.

How would it benefit Indian companies?

There are two key reasons why Indian companies have been pushing for this: access to a large number of sophisticated investors and easier compliance rules.

The bulk of Indian startups are funded by venture capital and private equity. After a specified investment cycle, these funds seek to cash in and exit the company by listing it on stock exchanges. While some large companies such as Paytm and Zomato have managed to list in Mumbai, it may not be the best destination for small and mid-level startups. That's is because few institutional investors in India, such as mutual funds and insurance companies, are willing to bet big on loss-making companies. There is more demand for such companies overseas.

Also, to list in India, companies need to fulfill various conditions set by the Securities and Exchange Board of India (Sebi). These include meeting certain profitability criteria, extensive disclosure of company affairs, and mandatory reservation of some shares for retail investors.

Why has the government gone with GIFT City first?

Although IFSC is part of India, it is considered an off-shore jurisdiction for many purposes. Foreign funds can invest in GIFT City-listed companies directly in US dollars, thereby reducing their forex risk. For companies, GIFT City has various tax sops and easier compliance rules. Allowing GIFT City listings for Indian companies is the first step towards full overseas listings. 

Currently, Indian firms cannot directly list overseas -- they must list in Mumbai first. IT companies such as Infosys and lenders like HDFC Bank have followed this path, listing in India first before issuing so-called American Depository Receipts (ADRs) on the NYSE.

Is there a demand for overseas listings right now?

The government originally proposed to allow direct listing in 2019-20, when technology companies were booming, but this was postponed because of covid. Demand increased further during the pandemic, owing to low interest rates and ample liquidity. 

But now, the markets look different. the US interest rates have risen sharply investors' appetite for risk has dipped. In such a scenario, few Indian companies would be able to pull off a direct overseas listing. But if the government puts in place an enabling framework, companies can explore it once markets improve.

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