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Vaibhav Vijay Nishad and Tanishq Vijay Vargiya*
I. INTRODUCTION
The recent amendments issued by the Ministry of Corporate Affairs (“MCA”) and the Ministry of Finance (“MOF”) have marked a significant milestone in the realm of India’s corporate governance and international capital markets. India has witnessed a transformative shift in the landscape of Overseas Direct Listing (“ODL”) of Indian companies on foreign stock exchanges (“FSEs”) without the need to issue new shares or depository receipts. The journey towards ODL can be traced back to Section 5 of the Companies (Amendment) Act, 2020, notified by MCA on 30th October 2023. This amendment has enabled the provisions for ODL of public Indian companies on permitted FSEs.
In July 2023, MOF allowed the direct listing of listed and unlisted public Indian companies on stock exchanges in the International Financial Services Centre (“IFSC”), pursuant to which a working group committee in its report on 20th December 2023 recommended amendments to existing laws to facilitate such direct listing, subsequent to which the MCA and MOF notified permissible International stock exchanges within India for direct listing of Indian companies in FSEs.
In light of this remarkable step towards the ODL of Indian companies on FSEs, this post explores the future course of action to unlock progressive opportunities for Indian companies to diversify their capital sources. Part II of this post highlights the paramount importance of the commercial viability of direct listing, specifically assessed in the context of the United States (“US”) in Part III, and the United Kingdom (“UK”) in Part IV. Lastly, Part VI concludes with a way forward for Indian companies by providing recommendations on potential bilateral policies to curate a tailored regulatory landscape.
II. EXPANDING OPPORTUNITIES: THE ISSUE OF COMMERCIAL VIABILITY
The recent amendments and rules issued by the government for direct listing in IFSCA are perceived to be a welcome step that will boost foreign investment inflows and unlock new opportunities for Indian companies to raise funds. This move as the first step, reflects the government’s intention to expand ODL to other global stock exchanges in the future, However, undertaking such a step necessitates a careful consideration of the challenges currently impeding India's access to the global capital market, as well as those that may arise when direct listing on the world's leading stock exchanges is eventually permitted.
Currently, Indian companies can access the global capital market through depositories such as American Depository Receipts (“ADR”) or Global Depository Receipts (“GDR”), which are issued in dollar-deposited receipts and then listed on FSEs. The effectiveness of the Depository Route (“DR”) has declined in recent years due to issues of round tripping and raising false capital. Moreover, since 2018, none of the Indian companies have opted for DR to raise fresh capital. Several companies are also unwinding their DRs and delisting from FSEs, presenting an unappealing route to access foreign capital markets for Indian companies.
In the future, Indian companies may opt for direct listings to reap benefits such as enhanced valuations on par with global markets, access to foreign capital, and a diversified pool of capital. In light of these advantages, we opine that measures to expand ODL should continue to flourish. With the aim of providing Indian companies with progressive opportunities, the government should look beyond national boundaries by facilitating the direct listing of Indian companies on FSEs to diversify their capital resources.
The journey to enable such progressive opportunities presents numerous challenges for the government. Foremost among these is that the ODL of Indian companies in FSEs is only feasible if there is an accommodating and cost-effective regulatory environment in the foreign jurisdiction. This is particularly important in a market environment where substantial capital is already available to Indian companies through domestic listings. India has recently become the world’s fourth-largest global equity market, overtaking Hong Kong. This showcases the market’s dynamism and positive trajectory for future investments. When Indian companies opt for ODL, the foreign regulatory framework should support cost-effective listing norms and continuing obligations to ensure its commercial viability.
The government should initially focus on selecting FSEs in jurisdictions with regulatory landscapes similar to India’s. This would ensure better cooperation and will create a conducive environment for accommodating Indian companies. Presently, Securities and Exchange Board of India (“SEBI”) has listed ten such permissible FSEs. Examining the first choice FSEs for Indian companies, the leading stock exchanges of the US and UK take centre stage due to accessibility and possible policy cooperation with India.
This post hypothesizes a regulatory framework for Indian issuers intending to list in the US and the UK capital markets. We assess the potential for Indian companies to enjoy cost-effective compliances, facilitating the commercial viability of foreign listing. Further, we recommend the government’s future course of action to unlock global opportunities for the ODL of Indian companies.
III. THE REGULATORY ENVIRONMENT IN UNITED STATES
The US has the world’s largest capital market, housing New York Stock Exchange (“NYSE”) and National Association of Securities Dealers Automated Quotations (“Nasdaq”). Its robust regulatory framework accommodates foreign companies by Foreign Private Issuers (“FPI”) category listing. Alternatively, foreign issuers can opt for the Emerging Growth Company (“EGC”) category listing under Title I of the Jumpstart Our Business Startups (“JOBS”) Act, 2012, offering tailored IPO procedures for emerging companies. A foreign company can also be simultaneously eligible for the FPI and EGC listing categories, benefiting from the streamlined compliances to flourish a cost-effective IPO in the US with a relaxed regulatory environment.
For a foreign company to qualify as an FPI, it must fulfil the criteria mentioned in Rule 405 of the Securities Act Rule, 1933, which lays down two tests for qualification of a company as an FPI. Firstly, under the securities ownership test, more than 50% of the voting securities of a company incorporated outside US must be held by non-US residents. Secondly, the directors, officers, assets and business management of a company must be operated outside the US. A company must pass one of these tests to qualify as an FPI.
Once designated as an FPI by the Securities and Exchange Commission (“SEC”), foreign companies enjoy relaxed listing rules. Unlike domestic issuers, FPIs are not obligated to submit quarterly report such as comprehensive financial reporting of business operations (Form 10-Q)[1] or mandatory Form 8-K current reports for information regarding any material development in day-to-day business of the company.[2]
A foreign company qualifying for FPI and EGC status can benefit from flexible SEC regulations. FPI seeking an EGC status must have revenue under one billion dollars in the recently concluded fiscal year.[3] EGCs enjoy a simplified IPO process, popularly known as the “IPO On-Ramp“, which provides a cost-effective mechanism for EGC and relaxed scrutiny for five years. The IPO on-ramp includes various exemptions, the most significant being Section 404 exemption.
A. Knocking the Doors of Wall Street
Indian companies intending for direct listing in the US can either pursue a primary listing or secondary listing of shares abroad. In primary listing, compliance with shareholding pattern of NYSE and Nasdaq is crucial. For NYSE, a domestic issuer or FPI must have at least 400 shareholders of 100 shares or more, a minimum of 1.1 million publicly held shares, and a market valuation of shares at $40 million. Nasdaq requires a similar threshold with a minimum 1.1 million publicly held shares.
The unlisted public companies intending for a primary listing in US can face issues in complying with the threshold of 1.1 million publicly held shares, as majority shares of an unlisted Indian company are generally held by its directors, promoters or their immediate family members. Consequently, the prospect of primary listing of Indian unlisted public companies in US stock exchanges becomes improbable.
The secondary listing of Indian companies in the US will be subject to the regulatory framework in FPI, as majority of its voting securities is primarily held by Indian residents. The Indian companies that are already listed on the National Stock Exchange and Bombay Stock Exchange are likely better prepared than their unlisted counterparts, having the know-how and financial resources to list on foreign exchanges.
While exemptions favour FPIs, the mandatory registration of securities for direct listing triggers significant regulatory scrutiny under Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”), which imposes stringent auditing and financial reporting e. Historically, companies have also struggled in complying with Section 404, as it is a high cash-burning regulatory compliance for US-listed companies, with companies on an average spending $1.4 million for mere auditing requirements under SOX.
Moreover, the SEC recently has adopted stringent compliances for FPIs to enhance investor protection, some of them which were exclusively reserved for domestic issuers are now also imposed on FPIs. The increased regulatory scrutiny by the SEC portrays the intention to align the compliances for FPIs and domestic issuers. The increased complications for FPIs are also reflected in statistics, with FPI offerings in the US falling from as high as 72 in 2021 to just 5 in 2023.
The SEC’s investigation regarding disclosures puts a significant regulatory burden on foreign companies. While FPIs can follow their home countries’ corporate governance norms, they must disclose material differences compared to domestic issuers (See here and here). SEC’s intention to align listing norms for domestic and foreign issuers has led to a back-and-forth regulatory scrutiny between FPIs and the SEC’s Division of Corporation Finance.
While FPI listing in the US may be difficult, Indian companies qualifying for both FPI + EGC listing categories can list via the IPO on-ramp mechanism. Such a company can be an EGC as long as it fulfils the criteria or till the fifth anniversary of the IPO pricing dates. Indian companies can save on Section 404 compliance costs and benefit from the EGC IPO On-ramp procedure. In the meantime, they can also prepare for future regulatory changes after the EGC status dissolves.
B. The US Chapter: Summarised
It’s clear from the preceding discussion that Indian companies qualifying for FPI listings may face significant compliance burdens. Consequently, Indian issuers under FPI may deem listing in the US undesirable due to its high compliance costs. While Indian companies meeting FPI eligibility criteria may have liquidity to bear increased compliance costs in the US, opting for an ODL with high US compliance costs appears impractical, given the expanding investor base and ample liquidity in the Indian capital market.
The specialised IPO on-ramp mechanism, specifically designed to meet the cost-effective compliance mechanism for listing and relief from high-cost compliances, like Section 404, may benefit the Indian companies to diversify their aspirations of gaining access to global opportunities, with reasonable cost of listing in the US. We opine that an Indian issuer, qualifying for FPI + EGC category can see this prospect of listing in the US positively.
While FPI+EGC listing of Indian companies has its benefits, such companies still need to comply with dual compliances under Indian and the US regulations. Rule 3 of the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024, allows ODL of listed public companies, provided they adhere to the rules and guidelines set by the SEBI. Therefore, an Indian issuer looking to list on FSEs will face simultaneous regulatory scrutiny from SEBI and the foreign jurisdiction’s regulatory authority. This dual compliance burden may discourage Indian companies from listing in the US or other FSEs.
To reduce this dual compliance burden, the government needs to implement measures to facilitate regulatory cooperation with foreign regulators. This cooperation could involve creating tailored regulations that reduce overlapping compliance requirements and offering relaxation in one jurisdiction regarding duplicate regulations in both jurisdictions. Such steps would help establish a conducive and cost-effective ODL environment for Indian companies aiming to list on FSEs. A classic example of such an arrangement is Multijurisdictional Disclosure System, a reciprocal initiative between the SEC and Canadian Securities Administrators. This system allows Canadian companies to satisfy disclosure requirements in both Canada and the United States by adhering to their home country’s disclosure regulations. Additionally, it enables the securities regulator in the issuer’s home country to exclusively handle the review of these disclosures.
Efforts to establish such an arrangement require high levels of cooperation between the SEC and SEBI. As more Indian companies look towards Nasdaq and the NYSE for capital, developing this mechanism will be crucial for creating a cost-effective and efficient regulatory environment for Indian companies deciding to list on US capital markets. This cooperation would streamline compliance processes, reduce redundancy, and support the growth and international expansion of Indian businesses.
IV. THE REGULATORY ENVIRONMENT IN THE UNITED KINGDOM
London Stock Exchange (“LSE”) is another attractive global capital market for international issuers. The LSE has two categories of market, i.e., Main Market and Alternative Investment Market (“AIM”), the main market is further divided into Main Market Standard Segment (“Standard Listing”) and Main Market Premium Segment (“Premium Listing”).
A. Main Market
The three principal regulations of Financial Conduct Authority (“FCA”) governing listing in LSE are Listing Rules (“LR”), Prospectus Regulation Rules (“PRR”) and Disclosure Guidance and Transparency Rules (“DTR”). Non-UK issuers are designated the status of “overseas companies” under LR, and “third country issuers” under PRR and DTR.
At the outset, foreign issuers from third countries must select their home state, which is crucial for deciding the competent authority for the prospectus approval procedure. Prospectus drawn according to the home country legislation may also be employed for listing in LSE. FCA scrutinizes the third-country issuers’ prospectus by comparing them with those required under PRR, Prospectus Regulation and Financial Services and Markets Act, 2000. The approval is granted based on the satisfaction of disclosures’ meeting the international standards set by these legislations. This procedure is popularly known as the “passporting of prospectus”.
An overseas company planning for premium listing generally follows the same listing norms and continuing obligations as that of the UK issuer, barring only few exemptions related to disclosure requirements under DTR 5 (vote holder and issuer notification rules).[4] Even after these exemptions’, the significant scrutiny under DTR 7.2 (UK Corporate governance statement) continues to apply.
Standard listing of shares is another option for the third country issuer, which involves compliance with the basic requirements under Consolidated Admissions and Reporting Directive and Transparency Disclosures of European Securities Market Authority. A third country issuer looking for a standard listing will have to comply with the basic listing norms and are free from extraordinary listing norms to be maintained for a premium listing. Therefore, an overseas companies looking to list in main market of LSE can find it more suitable to go for a standard listing, rather than a premium listing.
B. Alternative Investment Market ("AIM")
AIM is the market for small and medium size growth companies in LSE. It provides unique setup with growth potential to raise capital from highly knowledgeable and diversified investor base, with the international reputation that comes with listing on LSE. Foreign issuers listed in AIM Designated Market (“ADM”) are eligible for ‘fast track procedure’ of listing in AIM. A foreign issuer should be listed on an ADM for 18 months prior to AIM admission to the above benefit. After meeting the eligibility requirement, a company can simply list in AIM with pre-admission announcement, just twenty business days before admission, without the actual requirement of an AIM admission document.
C. Indian Companies Listing in London Stock Exchange
The prodigious barrier for Indian companies to list on LSE is the fact that India is not recognised as “third country issuer” by FCA. Indian companies are barred from regulatory relaxations available to other foreign companies incorporated in the third countries. Consequently, Indian issuers cannot avail the passporting of home countries’ prospectus in LSE. They are bound to face similar issues pertaining to continuing obligation under LR and DTR, as they cannot avail the benefit under the exemptions provided for the third issuer countries.
Thus, the Indian issuers should be prepared for increased compliance cost and regulatory scrutiny as a result of their exclusion from third country exemptions. Indian companies intending to list in AIM are in the same boat. India is not an ADM, thereby restricting Indian companies from swift and convenient listing with just a pre-admission announcement.
The government should take proactive measures to address potential regulatory challenges Indian issuers might face when seeking to list on the LSE. These measures should include detailed negotiations between Indian regulatory authorities and their counterparts in the UK to explore the possibility of India being designated as a third country issuer and an ADM. Additionally, establishing bilateral agreements or mutual recognition arrangements between the FCA and SEBI could significantly streamline the compliance process. Such agreements would reduce the dual compliance burden faced by entities operating under both the jurisdictions, lower associated costs, and extend to Indian companies the regulatory relaxations that issuers from recognized third countries currently enjoy.
V. CONCLUSION AND THE WAY FORWARD
In India’s ambition to become the third largest economy in the world, the Indian conglomerates are set to play a crucial role. The government should aim to harmonise the foreign regulatory environment, favour these companies and ensure their efficient direct listing in FSEs. In this post, the evaluation of framework for direct listing in the US and UK highlights pertinent challenges that could hinder India’s presence on the global exchanges. Owing to these distinct complications, India must engage in comprehensive dialogue and synergize with its international counterparts to cordially address these challenges.
In order to ensure the commercial viability of ODL, India should leverage fintech solutions to streamline the direct listing in FSEs and ensure transparency in the system. Moreover, SEBI should take the lead on establishing disclosure requirements of Indian prospectus in line with international standards. The highest standards of corporate governance should be encouraged to enhance investor confidence.
To conclude, a multifaceted approach encompassing regulatory reforms and international cooperation is indispensable for ODL of Indian companies to flourish. A proactive approach for collaborations can unlock the true extent of global opportunities and leverage direct listing of companies, driving sustainable economic growth and prosperity.
[1] General Rules and Regulations, Securities Exchange Act of 1934, SI 1934, r 13a-13(b)(2) 17 CFR Part 242.
[2] General Rules and Regulations, Securities Exchange Act of 1934, SI 1934, r 13a-11(b)(2) 17 CFR Part 242.
[3] Jumpstart Our Business Startups Act 2012, s 101; Securities Act 1933, s 2(a)(19); Securities Exchange Act 1934, s 3(a)(80).
[4] Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC [2004] OJ L 390 (Transparency Disclosures), arts 9, 9(2), 12(1), 12(2), 12(6), 13(1), 13a(1); Commission Directive 2007/14/EC of 8 March 2007 laying down detailed rules for the implementation of certain provisions of Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market [2007] OJ L 69 (Transparency Directive implementation directive), art 9.
*Vaibhav Vijay Nishad and Tanishq Vijay Vargiya are fourth-year students at the Gujarat National Law University.