The 2020 Aatmanirbhar Bharat Abhiyan announced by the Union finance minister set in motion a long-awaited reform of allowing direct listing of securities by Indian public Companies in permissible foreign jurisdictions. This was a long-standing ask of Indian startups and companies as they wished to tap global pools of capital and increase liquidity for their shares.
The Ministry of Finance and Ministry of Corporate Affairs on January 24, 2024, announced two key amendments to Foreign Exchange Management Act (FEMA) and Companies Act, 2013, to facilitate this reform. Through this reform, Indian public companies (including unlisted companies) can offer their securities on permissible International Exchanges, these being the India International Exchange and NSE International Exchange in GIFT IFSC (GIFT International Financial Services Centre).
Red Carpet For Global Investors
A key benefit of this is the internationalisation of Indian equities, solving two key challenges:
1. Interface with Indian authorities
2. Currency conversion friction
Many global investors still view the process of investing in Indian equities as being fraught with friction, despite changes over the past few years. There exist several pre-conditions before they can begin to invest. A key precondition is the need to obtain a PAN (Indian tax ID). The reputation of the Indian tax authorities across the world remains unparalleled, fueling investor reluctance to get a PAN and expose themselves to the Indian tax authorities.
Though misplaced, this perception is deeply entrenched amongst several overseas compliance professionals who hold tremendous sway over investors. While this is changing over time, GIFT IFSC tackled this head-on by dispensing with the need to have a PAN to participate in that jurisdiction.
Furthermore, investors with no other sources of income in India besides income from GIFT IFSC do not have to file a tax return in India. The icing on the cake is the tax holiday for gains made from exchanges in GIFT IFSC. This level of tax treatment is unprecedented in recent times and will increase the attractiveness of securities listed on GIFT IFSC exchanges.
In addition to this, the ability to buy and sell in US Dollars will make accounting and asset allocation much simpler. The drag on returns created by currency conversion to and from Indian rupees doesn’t exist in GIFT IFSC, allowing it to compete with other global financial centres.
Direct listing also removes the tracking error that exists between ADRs/GDRs and Indian equities. Depository receipts are instruments traded on exchanges such as the NASDAQ, NYSE, etc which derive their value from underlying equities. This model results in tracking errors between the value of the equity and the Depository Receipt. Direct listing circumvents this framework and allows for direct participation.
GIFT IFSC: Gateway To Global Indian Equities
As an international financial centre, the thesis behind GIFT IFSC is to attract foreign investors. Thus, it logically follows that Indian residents as per FEMA are not allowed to participate in the listing in GIFT IFSC.
This entails a change in strategy for Indian companies, who can tap the domestic market via India and the international market from India and GIFT IFSC. For those who believe in a global story, there is no compunction to list in India and GIFT IFSC. An Indian company can choose its jurisdiction of listing and tap investors selectively.
Though this may not be how Indian startups presumed direct foreign listing would occur, it is a step forward. The framework under FEMA allows for more foreign jurisdictions to be allowed in the future, keeping the door open for direct listing on exchanges such as NASDAQ, NYSE, LSE, etc.
Many Indian startups who flipped overseas wishing to tap these exchanges now want to return to India to tap the local exchanges.
The Gateway to India is in Mumbai, but the gateway to global Indian equities is moving to GIFT IFSC.
Siddarth Pai is Founding Partner, 3one4 Capital. Views are personal, and do not represent the stand of this publication.
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