Direct Listing Of Share Of Indian Companies Overseas Through IFSC GIFT City

INTRODUCTION

Until now, Indian companies were not permitted to list their shares directly on overseas markets, and instead use depository receipts (American Depository Receipts or Global Depository Receipts) to do so.

Indian businesses will be given the "flexibility to access both markets domestic market for raising capital in INR and the international market at IFSC for raising capital in foreign currency from the global investors". According to the Finance Ministry, the decision will especially help Indian businesses that want to grow internationally and seek for ways to become more visible in other markets.

PROVISIONS

Enabling provision for direct listing of prescribed class of securities on permitted stock exchanges in permissible foreign jurisdictions was inserted vide Companies (Amendment) Act, 2020 in Section 23 (3) of Companies Act, 2013 ('CA, 2013'), that deals with permissible modes of issue of securities, vide notification dated September 28, 2020 and made effective from October 30, 2023. Thereafter, the Ministry of Corporate Affairs ('MCA') notified Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024 ('LEAP Rules') effective from January 24, 2024. As listing of shares abroad will result in raising funds from persons resident outside India, Ministry of Finance ('MoF') notified FEMA (Non-Debt Instruments) Amendment Rules, 2024 amending FEMA (Non-Debt Instruments) Rules, 2019 ('NDI Rules') with effect from January 24, 2024.

SEBI is also expected to roll out the operational guidelines for listed companies to list their equity shares on permitted stock exchanges.

Note:

• Permissible Jurisdiction: means International Financial Services Centre in India.
• Permitted Stock Exchange: (1) India International Exchange (2) NSE International Exchange.

MODE OF LISTING

Companies can raise the funds either by issuing fresh capital or by offering the existing shares. In the latter case, the existing shareholders tender their shares. Both the methods are allowed under LEAP Rules & NDI Rules for listing the equity shares on permissible stock exchanges.

NDI Rules prohibits certain sectors for investment, meaning the company engaged in prohibited sector is not allowed to raise foreign funds. The same conditions are applicable in case of listing in IFSC by way of fresh issuance/offer for sale. E.g. Nidhi Company is a prohibited sector and therefore the Nidhi Company cannot list its equity share in IFSC. Further, Schedule I to NDI Rules prescribes sectoral caps which are required to be complied by the Indian Public Company at the time of direct listing. Refer Cap on Foreign Funds for further details.

COMPANIES INELIGIBLE UNDER LEAP RULES

LEAP Rules are applicable to both unlisted public companies and listed public companies, however the eligibility criteria under LEAP Rules are applicable to unlisted public companies only. Rule 5 of LEAP Rules provides that the following companies shall not be eligible for listing the equity shares in IFSC;

1. has been registered under section 8 or declared as Nidhi under section 406 of the Act;
2. is a company limited by guarantee and also having share capital;
3. has any outstanding deposits accepted from the public as per Chapter V of the Act and rules made thereunder;
4. has a negative net worth;

Explanation - For the purposes of this clause, the expression "net worth" shall have the same meaning as assigned to it under clause (57) of section 2 of the Act;

5. has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holder or any other secured creditor:

Provided that this clause shall not apply if the company had made good the default and a period of two years had lapsed since the date of making good the default;

6. has made any application for winding-up under the Act or for resolution or winding-up under the Insolvency and Bankruptcy Code, 2016 (31 of 2016) and in case any proceedings against the company for winding-up under the Act or for resolution or winding-up under the Insolvency and Bankruptcy Code, 2016 (31 of 2016) is pending;
7. has defaulted in filing of an annual return under section 92 or financial statement under section 137 of the Act within the specified period.

COMPANIES INELIGIBLE UNDER NDI RULES

NDI Rules provides the eligibility criteria for direct listing. Para 3(1) & 3(3) is applicable to unlisted public companies and para 3(1) & 3(2) is applicable to listed companies. The eligibility conditions are based on the type of issuance i.e. fresh issuance or offer for sale. In case of fresh issuance, the following companies are ineligible, if:

1. the public Indian company, any of its promoters, promoter group or directors or selling shareholders are debarred from accessing the capital market by the appropriate regulator;
2. promoters or directors of the public Indian company is a promoter or director of any other Indian company which is debarred from accessing the capital market by the appropriate regulator;
3. the public Indian company or any of its promoters or directors is a wilful defaulter;
4. the public Indian company is under inspection or investigation under the provisions of the Companies Act, 2013 (18 of 2013);
5. promoters or directors is a fugitive economic offender.

The following companies are ineligible, in case of offer for sale by existing shareholders, if:

1. the public Indian company or the holder offering equity shares are debarred from accessing the capital market by the appropriate regulator;
2. promoters or directors of the public Indian company is a promoter or director of any other Indian company, listed or otherwise, which is debarred from accessing the capital market by the appropriate regulator;
3. the public Indian company or the holder offering equity shares is a wilful defaulter;
4. the public Indian company is under inspection or investigation under the provisions of the Companies Act, 2013;
5. the promoters or directors of the public Indian company or the holder offering equity shares is a fugitive economic offender

Here "wilful defaulter" means a person who is categorised as a wilful defaulter by any bank or financial institution or consortium thereof, in accordance with the guidelines on wilful defaulters issued by the Reserve Bank of India, and

"fugitive economic offender" shall have the same meaning as assigned to it under clause (f) of sub-section (1) of section 2 of the Fugitive Economic Offenders Act, 2018 (17 of 2018);

COMPANIES INELIGIBLE UNDER IFSC REGULATIONS

Companies incorporated in India/IFSC/foreign jurisdiction are allowed to list in Gift City i.e. permitted jurisdiction, however, the issuer, any of its promoters, promoter group, controlling shareholders, directors or selling shareholders should not be

1. debarred from accessing the capital market; or
2. a wilful defaulter; or
3. a fugitive economic offender

PERMISSIBLE HOLDER

NDI Rules provides the eligibility criteria for the permissible holders of equity shares listed on permissible stock exchanges. Any Person Resident Outside India ('PROI') can be a permissible holder. Thus, an Indian resident cannot hold such shares, however a non-resident Indian can hold such shares (FAQ no. 15 & 16). The said conditions are also applicable to a beneficial owner.

Where a holder is a citizen of a country which shares land border with India, or an entity incorporated in such a country, or an entity whose beneficial owner is from such a country, they can hold equity shares of such a Indian Public company only with the approval of the Central Government.

To ensure that the investor is aware above the conditions of the permissible holders, the Indian company is required to indicate the same in its offer document issued while raising funds in Gift City.

Voting rights on such equity shares will be exercised directly by the permissible holder or through their custodian pursuant to voting instruction only from such permissible holder.

INVESTMENT LIMIT FOR PERMISSIBLE HOLDER

NDI Rules provides that a permissible holder can invest up to the limits prescribed for foreign portfolio investors.

"Foreign portfolio investment" means any investment made by a person resident outside India through equity instruments where such investment is less than 10% of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10% of the paid-up value of each series of equity instrument of a listed Indian company – Rule 2(t) of FEM (Non-debt Instruments) Rules, 2019 and para 2.1.20 of FDI Policy dated 15-10-2020.

That means a permissible holder can invest less than 10% of the equity share capital on a fully diluted basis of the public Indian Company.

SECTORAL CAP ON FOREIGN FUNDS

NDI Rules provides the sectoral caps, i.e. the maximum foreign investment permissible in a particular sector. The said conditions are to be complied in case of listing on permitted stock exchanges as well since, listing on IFSC will result in raising funds from PROI. Accordingly, amounts offered to PROI in permissible jurisdiction along with equity shares held in India by PROI should be compliant of the sectoral cap. The aggregate amount held by PROI should not exceed the limits prescribed.

NDI Rules provides the two entry routes such as:

• "Automatic route" means the entry route through which investment by a person resident outside India does not require the prior approval of the Reserve Bank or the Central Government.
• "Government route" means the entry route through which investment by a person resident outside India requires prior Government approval and foreign investment received under this route shall be in accordance with the conditions stipulated by the Government in its approval.

Wherever Government approval is required under Schedule I, the same shall be obtained while raising funds from permitted foreign exchange. Eg. in case of Defence, foreign investment up to 49% is permitted under automatic route, beyond 49% government route, therefore a company engaged in Defence can raise only up to 49% under automatic route from permitted stock exchanges and beyond 49 % after obtaining requisite approval.

PRICING OF EQUITY SHARES

LEAP Rules does not prescribe any pricing conditions. However Para 6 of Schedule XI to Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2024 provides for pricing of equity shares to be listed on the permitted stock exchange

1. In case shares are issued by a listed company or offered by the existing shareholders of equity shares listed: - price shall not be less than the price applicable to a corresponding mode of issuance of such equity shares to domestic investors under the applicable laws.
2. In case fresh issue of shares by a public unlisted Indian company on the International Exchange: - the price of issue or transfer of equity shares shall be determined by a book- building process as permitted by the said International Exchange and shall not be less than the fair market value under applicable rules or regulations under the Foreign Exchange Management Act, 1999.

OTHER ACTIONABLE

Pursuant to Rule 4 of LEAP Rules, 2024 the unlisted public company is required to file the prospectus in form LEAP-1 with ROC within a period of seven days after the same has been finalised and filed in the permitted exchange.

Post listing, the company will be required to prepare the financial statements as per Ind AS in addition to any other accounting standard, if applicable

TAX INCENTIVES AVAILABLE TO PERMISSIBLE HOLDERS

GIFT-IFSC is a tax neutral financial centre, which aims to compete with hubs like Singapore as it provides fiscal incentives and an easier regulatory environment.

As per Section 47(viiab) of the Income-tax Act read with Notification dated 5th March, 2020 provides that any transfer of capital assets by a non-resident on a recognised stock exchange located in any IFSC is not treated as transfer provided the consideration is paid or payable in foreign currency.

STATUS AFTER LISTING

Both India International Exchange and NSE International Exchange are not recognised stock exchanges in terms of aforesaid provisions as IFSCA is the regulatory body. Further, clause (c) of Rule 2A of the Companies (Specifications of Definitions Details) Rules, 2014 ('SDD Rules') provides that -

Public companies which have not listed their equity shares on a recognized stock exchange but whose equity shares are listed on a stock exchange in a jurisdiction as specified in sub-section (3) of section 23 of the Act shall not be considered as listed company.

Therefore, the status of an unlisted public company will not change upon direct listing and consequently, the additional compliances as applicable to a listed company under CA, 2013 will not apply to such company.

However, every Indian company getting its securities listed on stock exchanges in IFSC will be required to comply with Chapter XI of the IFSC Regulations dealing with listing obligations and disclosure requirements, as applicable.

CONCLUSION

The initiative is quite encouraging and will benefit India Inc. in fundraising however, the ineligibility on account of pending inspection/investigation needs to be revisited. The requirements post listing, as per IFSC Regulations are also numerous, several of them being on similar lines as provided under Listing Regulations.