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Introduction
On 17 March 2020, the Companies (Amendment) Bill, 2020 was laid before the parliament by the finance ministry. This bill sought to bring various changes in Companies Act, but one the major changes that are being introduced through this amendment bill are pertaining to overseas listing of securities of Indian Companies. The change has not been brought in a hurry, but after detailed enquiry and research upon the same that has been conducted for years to answer the question of whether Indian companies can list directly to foreign jurisdictions. After due consideration, of all the factors and benefits and disadvantages of each side the change has been brought through the bill. This article will discuss the changes that have been brought through Companies (Amendment) Bill, 2020 in respect of overseas listing of securities of Indian companies and the reasons for bringing the change. The article will also discuss the benefits of amendment along with the positive impact it shall have on Indian companies.
Overseas Listing of Indian Companies
The Companies (Amendment) Bill, 2020 has enabled the Indian companies to list directly on overseas stock exchanges. At present Indian companies could raise share capital from foreign equity capital markets only by way of issuing depository receipts. Thus, it can be said that the amendment has brought a change in the existing structure. However, the Government has been entrusted with the responsibility to decide upon the classes of public companies that can list overseas, along with the class of securities that can be listed by companies and stock exchanges where listing can be permitted. All these factors have to be decided upon by the government.
After the amendment comes into effect and operation the Indian Companies will have access to greatly expanding capital raising avenues. The companies will definitely have an alternate source of capital that is quite abundant in nature and other advantages will also flow from the change being brought to Company Law, the Indian companies will be valued better, they will receive a large number of investors who are willing to invest in the company, since as soon as the company is exposed to overseas stock exchanges it gets a chance to attract investors of diverse kind and nature. The companies will also be recognised as a brand globally, the companies can internationally expand themselves in an easier manner, since they have access to an alternate source of foreign currency.
It can be said that the Companies (Amendment) Bill, 2020 has not been brought in a hurry and in a sudden attempt to deal with problem of uplifting the economy. However, it has been enacted after due deliberation and research study. The change which allows Indian Companies to list securities directly to foreign jurisdictions, has been introduced on the basis of recommendations that were made by Expert Committee in a report that was prepared by it. The concerned report was published in December 2018. The Expert Committee had been duly constituted on the directions of Securities Exchange Board of India. The committee has supported the allowing of Indian companies to list securities in overseas stock exchanges, and also laid down the legal changes that are required to be made in order to facilitate the overseas listing in its report. The report also stated the steps that are required to be taken by Securities exchange board of India, Ministry of Finance, Reserve Bank of India and Ministry of Corporate affairs in order facilitate overseas listing, after the amendment has been made. The committee in its report did recognise that growth of Indian companies globally helps in economic growth of country.[1]
Understanding Overseas Listing
In the international stock exchanges, the companies have a wide variety of options on how to list the securities. Taking an example of the Stock Exchange of the United States of America, a company has an option of choosing how to list its securities. It can either make a public offering of shares to invite investors in America to purchase its shares or though means of direct listing, whereby a company, without raising capital, joins a stock exchange market. In this case the option that company will choose will depend on various factors including the circumstances which are prevailing then.
The amendment that is brought through the Companies (Amendment) Bill, 2020 permits the Indian companies to choose the jurisdiction in which they shall list their securities. The Indian companies may choose to list their securities in different jurisdictions at one time which means that companies can list securities to stock exchanges of different countries at the same time, this has been permitted by the amendment. However, the benefit of allowing companies to list securities in different jurisdictions at same time, is that the market risks can be distributed. When a company is listing its securities in various stock exchanges of the world, it becomes visible to greater number of investors, it increases the opportunities for the companies to grow further. [2]
Securities Exchange Board of India Expert Committee Report
The report prepared by committee also tried to lay down certain guidelines on development of a legal framework that would allow Indian companies to list their securities abroad in overseas stock exchanges. However, it cannot be denied that at present it is too early to deliberate on the framework that would regulate legally, the listing of securities of Indian companies in foreign jurisdictions.
There is a possibility that the allowing of overseas listing of securities by Company Law of India, may be misused for illegal activities and other wrongs such as for round tripping of funds. Thus, the committee recommended that Indian companies be allowed to list securities overseas in selected jurisdictions only and not anywhere in the world. Thus, the permitted jurisdictions need to be shortlisted by the Government on basis of various factors such as membership of nation in International organisations that govern listing of securities such as International Organisation of Securities Commission. The current notification by the Securities exchange board of India regarding jurisdictions permitted for listing of depository receipts may also be considered in the above case.
The Expert Committee also pointed out in its report that as soon as the Government allows overseas listing of securities, there will be a need of bringing a number of changes or amendments in foreign exchange laws in India. There will be a need to make amendments to Foreign Exchange Management rules, 2019, so that hurdles in respect of transfer and purchase of shares in overseas stock exchange markets can be eliminated, and enabling easer liquidity of capital. The Government also needs to determine the ways in which the Indian companies shall hold foreign exchange when they begin listing in overseas stock exchange markets. There will also be a need to lay down procedures with the aim of monitoring foreign investment in Indian companies which are listed in foreign jurisdictions. [3]
When Indian companies choose for overseas listing of shares in foreign jurisdiction then, it can increase compliance costs for the companies. When the companies operate in India then they have to maintain their accounts as per Indian accounting standards and accounting principles that are applicable in India, but when these companies list in foreign jurisdictions then they are also required to maintain their accounts according to accounting standards that are applicable locally in that foreign jurisdiction particularly. This leads to an increase in compliance costs for such companies.
As per the report of Expert Committee, there are many provisions that need to be complied with, by Indian companies for making a public issue of their shares, such as issue of prospectus, in this case some requirements may be similar to those applicable in foreign jurisdictions but some requirements may differ between jurisdictions. Thus, the report suggested that companies which list overseas must be exempted from applicability of these provisions. The report seeks to give an exemption to companies to ensure ease of doing business.
When the Government allows for overseas listing of shares then problems regarding taxation may arise. Thus, the report has tried to resolve the taxation questions as well. It has been realised that the capital gains received from transfer of shares of Indian companies, from a non-resident to another non-resident, be taxed in India since the income is being generated from capital assets that are located in Indian territory. But this can discourage the foreign investors from subscribing to Indian companies’ shares, thus report recommends that an exemption be granted to Indian companies listing in overseas stock exchanges from such taxation forms. [4]
The Companies Amendment Bill, 2020 which allowed companies to list in foreign jurisdictions directly is just one step towards allowing the companies to overseas listing. The Government has to come up with many steps in the future. There are thus many challenges that are required to be addressed and structural changes are required to be made to facilitate the same. The Expert Committee report also recommended the concerns that need to be considered in order to facilitate smooth and effective listing of securities in foreign jurisdictions. These considerations as pointed out by Expert committee can be laid down as below.
- The companies which choose to list in overseas stock exchanges also need to make arrangements to the effect that the shares of company despite being traded in different jurisdictions are identical to each other in a functional and fundamental manner which means that these shares must be inter-transferable between shareholders that operate in one jurisdictions with those who operate in another stock exchange. At the same time, it cannot be ignored that when the shareholders are spread over different countries of the world then it will become difficult for Indian companies to hold annual general meetings. In this case the companies, in order to take care of all the shareholders who are spread in different jurisdictions, need to build an effective communication network to connect all the shareholders across different nations and construct an effective mechanism that facilitates, voting on an online portal. This online portal also needs to be built in a way that it is accessible by all shareholders in differing regions in a fundamentally similar manner.
- The Indian companies have to comply with the regulations of Securities exchange board of India and when they trade in foreign jurisdictions they also have to comply with the provisions as laid down by regulatory authority of that country or jurisdiction, this may give rise to a situation where regulations of securities exchange board of India may be in direct conflict with regulations as applicable in foreign jurisdictions. Thus, the government also needs to resolve such issues since it has allowed Indian companies to list directly in overseas stock exchanges.
- When the Indian companies are being allowed list overseas, and if any company commits any wrongful act in another country’s stock exchanges, then it can also have an impact of securities market of India since everything is then interlinked to each other. Thus, to curb such practices Securities Exchange Board of India also needs to be given an extra-territorial application or jurisdiction so that it can efficiently monitor activities of Indian companies overseas that may have impact on domestic stock exchanges as well. The government needs to give a careful consideration to these factors.
- When securities will be dealt in India as well as abroad then there will be a need for Indian securities exchange market to improve and increase its infrastructure so that the Indian companies can seamlessly trade in multiple jurisdictions at one time and shares can be transferred across different jurisdictions easily. The stock brokers in India also need to equip themselves with sufficient knowledge and skill, so that they can increase their international presence.[5]
These were the pointers laid down in the report by Expert committee that need to be considered by Government and need to be given due attention, so that Indian companies can effectively trade on overseas stock exchanges after Companies (Amendment) Bill, 2020 is enacted.
Conclusion
It is very important for a country to help in growth of its companies to facilitate economic growth. Thus, the Expert Committee in its report recommended that Indian companies be allowed to list securities on overseas stock exchanges directly. This will allow the companies to expand globally as now they can get investors from different countries all over the world. Thus, as a reaction to Expert Committee’s report Companies (Amendment) Bill, 2020 was introduced. However, many structural changes are still required to be made in order to facilitate overseas listing of securities. The Government needs to consider all these factors and build a structure that will allow seamless listing of securities of Indian companies abroad, and easy transfer of shares across different jurisdictions.
References:
[1] Gautham Srinivas, India: Overseas Listing Of Indian Companies, Mondaq (13 May 2020), https://www.mondaq.com/india/shareholders/932794/overseas-listing-of-indian-companies.
[2] Sai Saket Rachakonda, Overseas Listing of Indian Companies, Lexology (16 April 2020), https://www.lexology.com/library/detail.aspx?g=4f065ad3-dfa1-4454-b673-06e407f2b767.
[3]Rounak Jain, Indian firms can now directly list in foreign markets – there are a few more big changes to Companies Act, Business Insider (19 May 2020), https://www.businessinsider.in/business/corporates/news/indian-firms-can-now-directly-list-in-foreign-markets-there-are-a-few-more-big-changes-to-companies-act/articleshow/75785648.cms.
[4] Rajesh Thakkar, Overseas listing of Indian firms: Two steps forward, many more needed, The Economic Times (13 June 2020), https://economictimes.indiatimes.com/markets/stocks/news/overseas-listing-of-indian-firms-two-steps-forward-many-more-needed/articleshow/76354507.
[5]Karunjit Singh, Govt constitutes Company Law Committee to improve ease of doing business, The Economic Times (18 September 2019), https://economictimes.indiatimes.com/news/economy/policy/govt-constitutes-company-law-committee-to-improve-ease-of-doing-business/articleshow/71188848.cms.
