Dear Reader,
Recently, India became the fourth-largest stock market in the world as measured by market capitalisation, overtaking Hong Kong. Seventh on that list is the United Kingdom, a fall from the top ranks that must hurt. But the UK is keen on becoming attractive to issuers again and wants to become a choice place for listing. But in its effort to do so, it has taken a route that has alarmed fund managers.
The FT reported on February 9 that the International Corporate Governance Network, a grouping that includes fund managers that manage $77 trillion in money worldwide, has called for a rethink on proposals that can dilute the corporate governance framework applicable to UK-listed companies. Primary among these are dilution of rules relating to shareholder approval before significant transactions (such as acquisitions), related party transactions and a more ‘permissive approach’ to dual class share structures.
The ICGN notes that the difficulties faced by the UK in attracting listings are not unique to it and other European countries face a similar challenge. But rolling back corporate governance standards is not the answer to a problem. These are important lessons for India.
If IPOs constitute supply of new paper, then demand for it is driven by investors. And, sure we can say that in India, domestic investors have of late become as important as foreign investors, or even more influential because of the growing size of their SIP money entering the market via mutual funds. But what’s good for foreign investors is also good for domestic investors -- a strong corporate governance framework for listed companies to follow.
India has been one of the bright spots in the global market for IPOs. In 2023, India was the third largest market for IPOs at $6.6 billion, with China topping the list with $45.3 bn in funds raised and the US next with $24 bn in issuances (source: A PwC report). While the difference in size may seem huge, it’s not very surprising, considering the difference in the size of India’s economy versus the top two. And, in 2024, the number could grow to as high as $9 bn.
But size is not the point here. India has clearly become an attractive market for companies seeking to list. Even startups that were looking to list abroad some years ago have changed their mind and are listing locally. It’s not just that they have been given relaxations to list, but that it’s equally advantageous to be listed here. Domestic appetite for their paper has been healthy although their greed at getting higher valuations may have got the better of some of them. But that’s a different story.
News that Hyundai Motor India was considering an India listing, if it does happen, could be a turning point. Foreign-owned companies have, for long, avoided a domestic listing except for unavoidable reasons. India’s foreign exchange regulations are the reason why we have these many listed foreign-owned companies.
As Investment banker at Citi Udhay Furtado said, in an interview with Moneycontrol, “Also, 20 years ago, we would have been pitching for Indian companies to list in the US. But why would we need to do that if the market here has evolved and matured to this extent? And that’s part of the evolution of this market.” India’s heft as an economy, warts and all, and its projected growth rates are likely to make it a magnet for business.
Initially, companies that regard India as their main or home market are the natural catchment for listing. But that could change. An EY paper on listing at home or abroad sums it up well. On the point of listing abroad versus listing in the home market, it notes: “But a company can also be said to be at home in a market where people can best understand and evaluate its business model. As a result, the marketplace where many comparable companies are listed, which has sector-specific analyst expertise and which attracts investors in the sector, can also be regarded as a company’s home market.”
India may seem far away from a situation where it can attract companies in the region to list. But it does not seem an impossible event and it should aspire to reach this position. Having globally benchmarked best corporate governance standards can be a pillar that can make it possible, when other conditions fall in place.
Cheers,
Ravi Ananthanarayanan
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