Amendments to the Companies Act, 2013 are directed towards enhancing the ease of doing business and providing access to global capital.
On 4 March 2020, the Union Cabinet approved the Companies (Second Amendment) Bill, 2019 to amend the Companies Act, 2013. These included 72 changes in 65 sections of the Act. Once these enabling provisions are enacted into law, Indian companies will be able to directly list on certain foreign stock exchanges.
At present, Indian companies can access the overseas equity markets only through depository receipts (e.g. American Depository Receipts or Global Depository Receipts regime) or by listing their debt securities (such as, foreign currency convertible bonds, masala bonds, etc.) on foreign markets.
These enabling provisions are all directed towards enhancing the ease of doing business and providing access to global capital.
In December 2018, the Securities and Exchange Board of India (SEBI) Expert Committee made recommendations for a suitable framework for listing equity shares incorporated in India on foreign stock exchanges and companies incorporated outside India on Indian stock exchanges. It referred to a list of 10 permissible jurisdictions and specified stock exchanges. These include the US, China, Japan, South Korea, the UK, Hong Kong, France, Germany, Canada and Switzerland.
Further, in October 2019, SEBI also issued a circular outlining the framework for issue of depository receipts.
Historically, many companies might have chosen to incorporate overseas with an intention to list directly on foreign exchanges. The proposed amendments now encourage companies to incorporate domestically and reduce their regulatory burden. Additionally, existing unlisted Indian companies, who may prefer listing only on overseas stock exchanges ( for instance, companies focusing on technology or innovation), may seek to further their readiness for listing.
While the details of the Indian framework for enabling such direct listing is awaited (to be finalized by the Ministry of Finance in consultation with the Ministry of Corporate Affairs, Reserve Bank of India and SEBI), it typically takes a company 18-24 months to prepare for the listing and the time is ripe now. Such enterprise-wide preparations need to include factors such as which market, strategy, governance, quality of financial information a company needs to be ready for public market scrutiny and long-term success. It also requires companies to enhance the existing systems, processes, taxation and compliances while preparing for an IPO.
Most of the overseas stock exchanges including the ones in the US, Singapore and London do permit or accept International Financial Reporting Standards (IFRS) as a framework for financial reporting. They instead focus on internal control over financial reporting. The markets in the US provide certain relaxation for emerging growth companies which are typically those with a turnover of less than US$1 billion.
Overseas listing is expected to increase the competitiveness of Indian companies in terms of access to deeper and diversified pools of capital, lower cost of capital, broader investor base, better valuations and in turn, boost the India brand globally. It may also facilitate better benchmarking between peers, promote best practices and cross-border collaboration.
The article is co-authored by Veenit Surana, Director, Financial Accounting Advisory Services (FAAS), EY India.
