Direct Listing of Securities in GIFT City: Exploring the Nuances

The Ministry of Finance recently allowed for the direct listing of securities by Indian companies on international exchanges. It follows that Indian companies can now offer equity shares directly to non-resident Indians as well. This is in line with the Government’s vision to make India an international hub for businesses. This will open new and better avenues for investments for Indian companies by giving them access to an alternate source of capital, a broader investment base, better valuation, facilitation of their international employee compensation, brand awareness and visibility, etc. Additionally, it will be an attractive proposition for foreign investors as they would have the option of participating in the value creation of one of the fastest-growing economies.

This article will briefly give an overview of the roadmap to the direct listing of securities on international exchanges via Stock Exchanges in the Gujarat International Finance Tec-City, popularly called the GIFT City, discuss the two recent rules and amendments passed for this purpose, and explore the gaps that need to be fixed.  

Roadmap to direct listing of securities on international exchanges

The Government’s move is facilitated by the setting up of the International Financial Services Centre Authority (IFSCA), which was established on April 27, 2020, under the IFSCA Act, 2019. This authority now assumes the responsibility of regulating industries in the International Financial Services Centres (IFSCs). The country’s first IFSC was set up in GIFT City. IFSCA now regulates the industries in the GIFT City, which was previously regulated by the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Pension Fund Regulatory and Development Authority (PFRDA), and the Insurance Regulatory and Development Authority of India (IRDAI). The main intention of establishing these IFSCs in India is to allow for a strong global connect and create opportunities to compete on a global level.

A roadmap to listing of securities on international exchanges was made as early as 2021 through the passing of the IFSCA (Issuance and Listing of Securities) Regulations, 2021 (ILS Regulations). Through the ILS Regulations, a thorough outline was created for the listing of different kinds of securities. It allowed for security instruments such as equity instruments through Initial Public Offer (IPO), Follow-on Public Offer (FPO); listing of specified securities by a start-up company or an SME company, secondary listing of specified securities, IPO of specified securities by a special purpose acquisition company; depository receipts; debt securities; and ESG debt securities. It further lays down the requirements for listing, such as the eligibility criteria, application, issue size, minimum subscription, type of allotment, lock-in, pricing, disclosure requirement, etc. Prior to this, Indian companies raised foreign funds through the issue of depository receipts listed outside or non-residents subscribed to issuances made in India or by way of borrowing overseas.

Regulatory changes

Although the ILS Regulations were in place, there were no enabling provisions to facilitate the listing of securities on international exchanges. In 2020, Section 23(3) was incorporated in the Companies Act, 2013 to enable companies to issue securities in permissible foreign jurisdictions or such other jurisdictions. This Section was notified on October 30, 2023. The Ministry of Corporate Affairs, on January 24, 2024, issued the Companies (Listing of equity shares in permissible jurisdiction) Rules, 2024, and certain amendments were made to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) on the same day. In the new NDI Rules, along with other additions and amendments, Schedule XI is added with the heading, “Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme”, which acts as the main scheme for direct listing of securities.

Through a series of amendments and new rules, public companies in India are now allowed to list and issue securities in IFSC in India on two stock exchanges namely – India International Exchange and NSE International Exchange.

Eligibility conditions

The aforementioned rules permit both listed and unlisted public companies to list their securities on international exchanges. This may be in the form of an IPO by the company or through an Offer for Sale (OFS) by the existing shareholders. There is a prohibition on certain categories of companies from offering shares on international exchanges, such as Nidhi companies, Section 8 companies, companies limited by guarantee and also having share capital, companies having a negative net worth, companies which have defaulted in payment of dues to any bank or public financial institution or non-convertible holder or any other secured creditor, companies which have made any application for winding up, and has defaulted in filing of an annual return or financial statements within the specified period.

Companies which engage in activities such as lottery business, gambling, chit funds, trading in transferable development rights, real estate business or construction of farmhouses, manufacturing of cigars, cheroots, cigarillos, and cigarettes, of tobacco or of tobacco substitutes, and activities which are not open to private sector investment will not be allowed to issue securities. In addition to this, the companies are also restricted to the sectoral caps as per Schedule I of the NDI Rules.

Further, companies or their existing shareholders are not allowed to issue or offer shares where the director or promoter of the concerned company is debarred from accessing the capital market, is or are wilful defaulter(s) or fugitive economic offender(s). The companies which are under inspection or investigation under the provisions of the Companies Act, 2013, are also not permitted to list their securities.

Permissible holders under the 2024 amendment

The Scheme restrict persons resident in India from applying for the securities offered through direct listing on the international stock exchanges. There are no special restrictions for NRIs, and they are free to trade in such securities. Although all of these transactions are under the automatic route, some approvals by the Central Government are needed for citizens of neighbouring countries, who intend to buy shares from the companies listed on and through international stock exchanges.

The burden is on the issuing company to disclose these restrictions to the subscriber through the offer document. A permissible holder can hold or invest only up to 10% of the total paid-up equity capital on a fully diluted basis.

Price of issue or transfer of equity shares

For a company that is already listed in India, the issue price in the international stock exchange should not be less than the price applicable to the corresponding mode of issuance of such equity shares to domestic investors.

For an unlisted public company, the issue price should be determined by the book-building process as permitted by the international foreign exchange, and it should not be less than the fair market value as applicable under the Foreign Exchange Management Act, 1999.

Obligations of public Indian companies

The new amendments collectively impose certain obligations on the company which have to be followed before and after the listing of securities on the stock market. Accordingly, companies should ensure that the aggregate of equity shares which are, or which may be offered along with equity shares already held in India by persons resident outside India, do not exceed the sectoral caps under Schedule I to these NDI Rules.

In addition to that, the Direct Listing Scheme also stipulates that public Indian companies listing their securities on the international stock exchange should ensure compliance with all laws and regulations pertaining to issuance of equity shares such as the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, the Depositories Act, 1996, the Foreign Exchange Management Act,1999, the Prevention of Money-laundering Act, 2002, or the Companies Act, 2013.

Gaps to be addressed

The status of the public unlisted Indian companies which have listed their securities on international stock exchanges does not change despite the listing. As per Section 2(54) of the Companies Act, 2013, a listed company “means a company which has any of its securities listed on any recognised stock exchange”. The recognition of stock exchanges is as per Section 4 of the SCRA. Both the international stock exchanges are not recognised stock exchanges for this purpose. Despite listing their securities on a stock exchange, the unlisted companies are excluded from all the other obligations and compliances for listed companies as laid down in the Companies Act, 2013. A few of these obligations are in place to provide investor protection. Whether such a measure was taken to reduce the compliance requirements to encourage smaller and medium-sized companies to list their securities or whether there would be an amendment to the Companies Act, 2013, in the future, is unclear. However, it is essential to lay down some compliances to ensure investor protection.

Conclusion

Foreign investments, along with domestic investments also bring in other perks such as brand recognition, brand visibility, knowledge about global best practices, technological advances, etc. The direct listing of securities in international stock exchanges will not only aid big companies in raising foreign funds but will also encourage start-ups and MSMEs to look for foreign investment opportunities by allowing even unlisted companies to list their securities on international stock exchanges.  

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The status of the public unlisted Indian companies which have listed their securities on international stock exchanges does not change despite the listing. As per Section 2(54) of the Companies Act, 2013, a listed company “means a company which has any of its securities listed on any recognised stock exchange”. The recognition of stock exchanges is as per Section 4 of the SCRA. Both the international stock exchanges are not recognised stock exchanges for this purpose. Despite listing their securities on a stock exchange, the unlisted companies are excluded from all the other obligations and compliances for listed companies as laid down in the Companies Act, 2013. A few of these obligations are in place to provide investor protection. Whether such a measure was taken to reduce the compliance requirements to encourage smaller and medium-sized companies to list their securities or whether there would be an amendment to the Companies Act, 2013, in the future, is unclear. However, it is essential to lay down some compliances to ensure investor protection.

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