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Direct Listing in GIFT City: New Era for Indian Companies to Raise Capital Abroad

The Indian Government, through the enactment of Section 5 of the Companies (Amendment) Act, 2020, effective from October 30, 2023, has opened the path for Indian companies to list their equity shares on global exchanges directly. This significant development is accompanied by corresponding foreign exchange regulations, enabling public Indian companies to issue equity shares on approved international exchanges. This marks a new era in cross-border capital markets, as transactions on the International Financial Services Centre Authority (IFSCA) are set to facilitate the exchange of securities, commodities, and other financial instruments among entities in different countries.

GIFT City: The Hub for Global Investment

GIFT City is a strategic choice for companies considering direct listing over traditional exchanges like NSE/BSE. The appeal lies in a trifecta of advantages. GIFT City's International Financial Services Centre (IFSC) status opens avenues to a global investor base keen on emerging markets, enhancing demand, liquidity, and overall valuation.

Moreover, the process proves to be both cost and time-efficient, circumventing the complexities of traditional IPO preparations and eliminating intermediary fees from underwriters, bankers, and brokers. The regulatory flexibility within IFSC, governed by its authority and rules, offers an environment with lower capital requirements, tax incentives, and enhanced currency convertibility compared to domestic exchanges.

International listings typically have heightened trading volumes, fostering enhanced liquidity for a company's shares. Companies opting for listing on GIFT City's international exchanges stand to gain from various tax incentives extended by the Indian government. For instance, entities established in GIFT City's IFSC may secure a complete exemption from corporate income tax for 10 out of the initial 15 operational years. Presently, the Minimum Alternate Tax (MAT) rate for IFSC units stands at 9% of book profits, a reduction from the standard 18.5%. Additionally, importing goods for authorized business activities within the IFSC is exempt from customs duty.

It becomes indispensable for companies to safeguard the voting rights of their shareholders with the growing significance of corporate governance norms. According to Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024, and the Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2024, these rights must be exercised directly by the permissible holder or through their custodian, strictly following voting instructions from the said permissible holder. Additionally, companies have the flexibility to establish necessary arrangements with Indian Depository and Foreign Depository to ensure seamless compliance with a myriad of applicable laws.

Additionally, GIFT City's international exchanges are a crucial platform for Indian companies to navigate and mitigate foreign exchange risks through sophisticated tools. The statistics speak volumes, with a remarkable 71% increase in trading volume recorded on GIFT City's international exchanges in the first half of 2023 compared to the same period in 2022. This robust growth underscores the rising prominence of GIFT City as a preferred destination for international financial activities.

GIFT City has also introduced trading options contracts on major foreign currencies, equipping companies with advanced instruments to adeptly manage their forex exposure. GIFT City emerges as a hub of innovation and opportunity, offering businesses unparalleled avenues for global financial engagement ultimately promoting cross-border transactions.

Potential Benefits and Opportunities for Indian Companies

Direct listing allows Indian companies to optimize costs and enhance value, quantum, quality, and branding by accessing international capital markets, thereby reducing the cost of capital compared to domestic markets. It enables Indian companies to access numerous investment funds in the United States, thereby diversifying their capital-raising activities and ultimately increasing demand for shares. This listing is accompanied by advanced asset management infrastructure that allows companies to achieve more accurate valuations of their securities by using specialized industry knowledge and resources.

The improvement in ease of doing business within the IFSC is evident through the extension of trading hours, offering greater flexibility for market participants. The prolonged trading hours within IFSC serve as a notable initiative, particularly advantageous for Indian companies with global aspirations. The finance ministry acknowledges that this endeavour will contribute to improving brand visibility and facilitate a more efficient raising of equity capital. Such strategic measures reflect a commitment to fostering a conducive environment for businesses to thrive and engage seamlessly in global financial activities.

GIFT City's focus on sectors like fintech, aircraft leasing, and energy could attract specialised investors with extensive knowledge and long-term investment plans. The regulatory framework encourages innovation while allowing experimentation with new financial products and services. In terms of the dispute resolution system, disputes involving GIFT City companies and foreign entities usually fall under the jurisdiction of Indian courts.

This is because the companies are incorporated in India, regardless of their international operations. Arbitration clauses are increasingly common in contracts involving GIFT City companies, allowing for neutral and efficient resolution of disputes outside of traditional court systems. G-IDRC, established in 2023, specifically aims to be a preferred arbitration centre for international disputes arising from GIFT City transactions. In toto, this framework fosters an efficient dispute resolution mechanism.

Risks and Considerations for Indian Companies

The direct listing of companies on the International Financial Services Centres Authority (IFSCA) presents several risks and considerations like the Securities Contracts (Regulation) Rules, 1957, which mandate listed companies to maintain a minimum public shareholding (MPS) of at least 25% of each kind of equity share. However, the IFSCA Regulations, LEAP Rules, and NDI Rules are silent on MPS requirements.

This ambiguity creates uncertainty for listed entities intending to list their shares in permitted jurisdictions, leading to questions about whether shares listed in permitted jurisdictions count towards public shareholding and if there are any limits on MPS holding in those jurisdictions. India International Exchange and NSE International Exchange are not recognized stock exchanges in terms of the Securities, Contracts (Regulation) Act, 1956, due to IFSCA being the regulatory body, which raises jurisdictional concerns.

These risks and considerations emphasize the need for thorough due diligence and a comprehensive understanding of the implications of direct listing on IFSC exchanges. The Report of the Working Group on Direct Listing of Listed Indian Companies on IFSC Exchanges provides further insights into the specific risks and risk mitigation strategies associated with this initiative.

A company will be subject to listing rules for both India and foreign jurisdictions in the case of dual primary listing. This may involve additional costs, disclosures, and reporting requirements. The companies in question must obtain RBI, SEBI, and IFSCA approval. The currency risk arising from listing and trading their shares in foreign currency might expose companies to fluctuations in exchange rates and in turn, affect the earnings and cash flow. While attracting global investors is a goal, the liquidity on GIFT City's exchanges may be lower than established international markets.

Moreover, attracting and retaining skilled professionals who understand the nuances of Indian and international regulations and financial markets could be challenging, especially in the initial stages. Furthermore, operating in a new financial hub might expose companies to novel cybersecurity threats and vulnerabilities that require additional security measures and expertise. Any unforeseen challenges or negative publicity associated with GIFT City could also indirectly impact the company's image.

International Practices

India could draw inspiration from international practices, especially those in the European Union's Euronext and the UK's London Stock Exchange. These could provide valuable insights and streamlined procedures for the Indian market. India can also adopt the best international practices, such as in the European Union's stock exchange, Euronext and the UK's stock exchange, the London Stock Exchange (LSE). In the European Stock Exchange system, the Euronext, a system of passporting is followed. Through passporting, all member states accept a prospectus once the issuer's home state approves it. This makes the listing of shares/securities a hassle-free and easy process.

The Euronext stock exchange also fosters a system of dual-listed companies. This refers to companies that are not only listed on Euronext but also in their domestic country. Thus, enabling the issued securities to reach the pan-Europe market effortlessly and cover a wider market base than usual. The 'fast path' procedure has enabled the listing of stocks on Euronext expeditiously and inexpensively. This procedure enables American companies to list their stocks on the US Securities Exchange for a listing on the Euronext stock exchange.

The London Stock Exchange (LSE) has a sub-market, the Alternative Investment Market (AIM), designed for small and medium-sized companies. AIM offers a quicker admission process, allowing companies that have traded their securities on the top tier or main board of a Designated Market for at least 18 months to seek admission without producing an Admission Document.

GIFT City emerges as a beacon for those seeking a streamlined, innovative, and investor-friendly financial ecosystem. The adoption of international best practices and ongoing regulatory developments will be crucial in addressing potential challenges and ensuring the continued success of direct listings on GIFT the the City's International Exchange. This strategic move attracts diverse investors and opens up better opportunities and liquidity, fostering an environment conducive to the ease of doing business.

While the move towards direct listing offers numerous benefits, such as better opportunities, improved liquidity, and ease of doing business, some risks and considerations demand thorough due diligence. However, the success of direct listing on GIFT City hinges on a balanced approach. The collaboration between stakeholders, proactive regulatory refinement, and continuous learning from international practices will be key to navigating this evolving landscape and ensuring its long-term viability.

Written By:
  • Anushree Srivastava and
  • Varuni Gawai

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