Home / Opinion / Views /  Madam Nirmala Sitharaman: Let tech start-ups list overseas directly

Way back in the early ’90s, just after India had opened up for foreign investment, the finance ministry received a proposal from a company that wanted to sell bonds with a maturity of 100 years overseas. It took a good deal of persuasion to get the finance ministry officials to approve it. Since the proposed bonds were like a perpetual issue, with payments extending over decades, their chief concern was its treatment on the country’s external data front. So that had to be assuaged.

Information technology bellwether Infosys’s pitch back in the early 2000s for changing the rules for its American Depositary Receipts or ADRs is unlikely to have been as much of a challenge. The India story then was all about the information technology sector. A sensitive government was in office. It promptly directed bureaucrats to lower the barriers. (Shares of non-American companies trade on US stock exchanges like regular shares through ADRs.)

Once again, a constellation of Indian startups is at the government’s door—with an even stronger case for listing their shares directly on exchanges overseas. What will Nirmala Sitharaman do?

The list of unicorns with a valuation of over $1 billion– well over 70 at last count—has been growing impressively; Prime Minister Narendra Modi has acknowledged their ideas and innovation prowess. Founders of many have written to his office to say India must allow direct overseas listing of shares by Indian companies.

The time is ripe for this. The bets are off for now on China, whose education technology and technology companies attracted billions of dollars until the Xi Jinping regime launched a crackdown last year. Influential investors, including George Soros, have trimmed their exposure to these companies. Chinese ADRs are now “uninvestable", one of the world’s largest hedge funds has said. This loss of global investor appetite for these stocks has freed up investible resources that Indian startups want to tap. Global investors are sitting on piles of cash and looking for good returns outside China. Letting startups list overseas directly could be a significant reform with which Sitharaman can resuscitate the dulling growth story.

The startup founders have a compelling case. It’s hard to argue against Indian startups gaining access to low-cost global capital and, in the process, the ability to build global brands and be competitive. An expert committee in late 2018 had endorsed direct listing overseas of shares by Indian companies and the listing of foreign companies on Indian stock exchanges. The committee believed that these reforms would boost brand India and enable local companies to build a broader investor base and benefit from better valuations.

Of course, acting on the recommendations will require some heavy lifting: The Foreign Exchange Management Act will have to be amended; the Companies Act, which already has an enabling provision, will need minor tweaks. As will some of the Sebi rules. Finally, how capital gains will be taxed has to be clarified.

What might be giving Sitharaman cold feet? First, the record flows of private equity, venture capital, and a red-hot Indian primary market only slightly weaken the case. The fact is that listing overseas, especially in the US, means complying with the gold standard of best practices in corporate governance and disclosures.

The nationalist argument that the Indian stock markets should not be exported is a sham, given a handful of Indian companies have listed on the Nasdaq or have ADRs or Global Depository Receipts (GDRs). One reason for this is that cases of round-tripping illegal money by some companies that had issued GDRs in the past have made regulators wary. When a few companies violate rules, the state’s default response in India is to slam the door shut. Violations or lapses of those firms are no justification for denying the direct overseas listing option for startups en masse.

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