[Paras is a student at National Law School of India University.]
Recently, the government notified that Section 5 of the Companies (Amendment) Act 2020 has come into force. This provision amended Section 23 of the Companies Act 2013 and allows public companies incorporated in India to list themselves directly at foreign stock exchanges. This provides companies with another alternative mechanism to cross-list themselves on foreign jurisdictions apart from the Global Depository Receipts or American Depository Receipts mechanism. To effectuate foreign direct listing, the government has also notified the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules 2024 (LEAP Rules) and the Foreign Exchange Management (Non-Debt Instruments) Amendment Rules 2024 (FEMA Amendment Rules).
These regulatory changes allow both listed and unlisted public companies to be directly listed on foreign stock exchanges. This post analyses the recent regulatory changes made to allow foreign direct listing and critiques the government’s move of allowing unlisted public companies to be directly listed on foreign stock exchanges.
Regulatory Changes and Distinction Between Non-Dual v/s Dual Foreign Listing
The government has made a host of regulatory changes to permit direct foreign listing for Indian companies. The origin of these regulatory changes is attributable to the SEBI Expert Committee Report on the desirability of allowing Indian companies to list on foreign stock exchanges and foreign companies to list on Indian stock exchanges. The report suggested allowing both Indian companies to list on foreign stock exchanges and foreign companies to list on Indian stock exchanges. It also suggested the regulatory changes needed to be incorporated to effectuate the same. Based on this, the government made suitable changes to Section 23 of the Companies Act 2013 to allow Indian companies to list on foreign stock exchanges but not allow foreign companies to list on Indian stock exchanges. The latter can only take recourse to the Indian Depository Receipts mechanism to list their securities in India. Similarly, the government notified the LEAP Rules and the FEMA Amendment Rules which delineate the procedure for listing on foreign stock exchanges and the eligibility criteria for Indian companies to list on foreign stock exchanges. Currently, the only permissible stock exchanges are the India International Exchange and the NSE International Exchange at the International Financial Services Centre in India.
Section 23(3) states that “[s]uch class of public companies may issue such class of securities for the purposes of listing on permitted stock exchanges … as may be prescribed”. Rule 3 of the LEAP Rules states that the rules apply to both unlisted public companies and listed public companies. This indicates a public company can either list its equity shares only on the foreign stock exchange or on both the domestic and foreign stock exchange. The former can be termed as non-dual foreign listing while the latter can be termed as dual listing.
Implications of Allowing Non-Dual Foreign Listing
While the allowance of listed public companies to cross-list themselves on permitted foreign exchanges is a welcome move, the allowance of unlisted public companies to directly list themselves on permitted foreign exchanges needs to be taken with a pinch of salt. The latter would allow non-dual foreign listing which would come with its own new set of challenges.
Non-dual foreign listing would have a detrimental impact on the rights of domestic shareholders of unlisted public companies in India. Traditionally, SEBI has no jurisdiction to govern unlisted public companies. This is also corroborated by the LEAP Rules which indicate that SEBI only has jurisdiction in case of listed public companies. The multiple regulations formulated by it such as the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 and the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 only apply to listed companies. These regulations impose a host of disclosure requirements on the companies to protect the interests of all the stakeholders, particularly the shareholders. Therefore, allowing unlisted public companies to list on foreign stock exchanges would allow these companies to raise capital from the public while circumventing the regulatory authority of SEBI. Additionally, the foreign jurisdiction where the shares of the unlisted public company would be listed might impose lower disclosure requirements on the foreign company. For example, in the USA (which can be classified as a permissible jurisdiction), foreign direct listing companies face significantly lower disclosure requirements. Therefore, the combined effect of these factors is that non-dual foreign listing significantly hampers the rights of the shareholders in terms of disclosure requirements. This is especially important since Rule 4(1) of the LEAP Rules allows both the issue of new equity shares and the offer for sale of shares by existing shareholders for listing in a foreign stock exchange. The issue of new equity shares would still be based on the consent of the majority of existing shareholders as a special resolution is needed under Section 62(1)(c) of the Companies Act 2013. However, the offer for sale of shares by even a few shareholders does not require the consent of other shareholders in case of a public company (since shares of a public company are freely transferable under the Companies Act 2013). This means that a small number of shareholders can list their shares on the foreign stock exchange to the detriment of the majority of other domestic shareholders. Further, this is coupled with the fact that non-dual listing creates information asymmetry between the domestic shareholders and the foreign shareholders as the latter still enjoys higher disclosures because of the foreign regulator, unlike the Indian shareholders where SEBI’s jurisdiction is removed. This issue would be absent in the case of dual listing as SEBI would already have jurisdiction over the listed public companies and these companies would be subject to higher disclosure requirements under the relevant SEBI regulations.
Non-dual listing would have also a poor impact on the macro-economic condition of India. Non-dual listing would allow unlisted public companies to list their equity shares on a foreign stock exchange to the detriment of the Indian stock exchanges. This has the potential of creating a large-scale movement of companies listing themselves on foreign stock exchanges as opposed to the Indian stock exchanges, leading to huge losses of business to the Indian stock exchanges. It is a common phenomenon that financial disclosure levels influence the listing decisions of companies. Therefore, lower disclosure requirements in foreign jurisdictions can incentivize companies to list directly on foreign stock exchanges as opposed to their Indian counterparts. Further, this would also indicate a larger negative sentiment for the Indian economy as a whole because companies might start preferring foreign stock exchanges to the Indian stock exchanges. This can create disrepute for the Indian stock market in the global economy and can create further volatility in the Indian stock market. Finally, it also has the potential of muting investor sentiment in India as a large chunk of Indian companies might start listing themselves only on foreign stock exchanges without giving an opportunity to the Indian public to invest in these companies. These concerns would be absent in the case of dual listing as the public companies would already be listed on the Indian stock exchanges.
Conclusion
In light of the detrimental impact of allowing unlisted public companies to list directly on foreign stock exchanges on investors and the Indian economy, it is recommended that the government prohibits these companies from listing directly on foreign stock exchanges. The current legal regime would allow instances of managerial opportunism to evade domestic regulations (such as the oversight of SEBI, a powerful watchdog) and engage in forum shopping. The unlisted public companies should be allowed to list themselves on foreign stock exchanges only after listing themselves on the Indian stock exchanges. This would not be a very huge cost for these unlisted public companies as they would also enjoy the immense benefits of cross-listing such as an alternate source of capital, a broader investor base, and a better valuation.