The issue of direct overseas listing by Indian start-ups and companies has been hanging in balance for quite some time. In May 2020, the government announced its intention to allow companies to list overseas directly during the Atmanirbhar policy announcements.
The existing policy is that if an Indian company wants to list overseas, it has to first list in India. Infosys, in 1999, became the first Indian company to issue an American Depository Receipt (ADR) by listing on the NASDAQ after listing in India in 1993.
The tax structure for overseas listing, the issue of stock options to employees of the Indian company in India and overseas, and other regulatory issues have been clear for companies listed in India. Under the Companies Act, if a company is not listed in India, it will not be deemed to be a listed company. Under the Income-Tax Act, it requires listing in an Indian stock exchange to enjoys the benefits of a lower capital gains tax.
Remove Barriers
Indian companies should have the ability to list on any stock exchange, Indian or overseas, of their choice without cumbersome regulations. The reasons are very clear: Companies want to raise capital, and it could be capital from India, the United States, and the major exchanges in London or Tokyo. There's no reason why an Indian company should be deprived of access to such capital. Today there is 100% FDI in most sectors. FDI is overseas capital, then what is the difference in terms of ownership between an overseas listing and FDI? Yes there is a minor tax issue, as overseas trading is not subject to Indian tax but sale of the FDI investment could be. But then overseas listing is available for an existing listed company already.
The capital raised by these companies will be majorly spent in India, because their businesses are largely in India. As Akash Prakash of Amansa Capital wrote recently such overseas capital will be a big economic stimulus booster as it will be spent here
The government announcement in May 2020 raised hopes, but the grapevine is that there are tax issues, regulatory issues, etc. The government must remove such barriers. PM Narendra Modi has given India his Vision of Digital India, a large part of which is Start Up India and our Start Ups need this freedom to list anywhere.
The low capital gains in India will only apply for a company listed in India and for Indian investors who buy and sell its shares in the stock exchange. In case an Indian investor buys stocks of a company directly listed overseas, the tax statement is very different already.
Allow Foreign Capital as per FDI Policy
Many in India feel that it is not good to encourage Indian companies to directly list overseas as it is tantamount to export of value outside the country. This argument carries certain merit because if a company that gets its business majorly in India does not list and create value for its shareholders within India but chooses to list overseas, people who buy the stock overseas will get the value that the company generates. However, one cannot carry this argument too far. The people who buy the shares overseas will be buying it at market value, and it is as good as allowing foreign capital to come in and buy Indian companies. If Indian shareholders sell their stock overseas then they have to bring the capital back and pay a higher tax. A fair part of the capital of an India registered company will still remain here as an overseas listing can only be through Depository Receipts and unlisted stocks held locally today are subject to a higher tax.
Facilitate Growth
What India needs right now is a good, open regulatory system which encourages innovation, risk taking, investment and job creation, and facilitates the growth of the economy to $5 trillion by 2026. Barriers such as not allowing Indian companies to list directly overseas are unnecessarily holding up India’s growth.
It is true that India’s major stock exchanges have great depth and a lot of capital comes into it. But there's a large pool of global tech capital that will only invest in the US market, which is extremely liquid with more than $50 trillion in capitalisation. Then there are large pools of sovereign capital that will only invest in overseas markets.
Globally, interest rates are at an all-time low, valuations are at an all-time high and it is the best time for Indian companies to raise capital from whatever source that is available to them, at possibly the highest price.
Risk and Regulation
Many in India talk about the risk that the Indian start-up companies pose, because they do not make profit, and they do not have a cash flow—and because of these issues Indian investors are exposed to a greater risk.
This is why the Securities and Exchange Board of India (Sebi) has separate regulation for Initial Public Offerings (IPOs) of companies that do not make profits. However, there is no reason why the government should be hesitant if these companies (which do not make profits) raise capital from investors overseas, where there is higher risk threshold and a better understanding of the risk.
In the age of globalisation, and digital revolution, companies will compete sooner or later globally. If one looks at Southeast Asia, one can find large companies that have come up and use global capital to do business in many countries and become dominant. Indian start-ups and companies too must have access to global capital at the best price possible, which may allow them to grow globally faster. They should not be constrained as they are today. We should produce Global Champions.
The IPO market in India has turned buoyant, but the freedom to directly list anywhere is a valuable freedom that should be given to India’s young entrepreneurs.
FERA Hangover
We also need to look at why foreign capital of a certain category is hesitant to invest in India and why they ask many start-ups to domicile overseas and have a subsidiary in India. This is one of the reasons why the government may be hesitant, because it feels that whatever capital comes to such companies may go to their holding company overseas, who then could start a subsidiary and then get that subsidiary or the holding company listed overseas and take the capital out. Thereby, make India a country where only subsidiaries of multinational companies remain though started and managed by Indians.
This argument is valid, but based upon wrong premises. The basic reason why foreign investors ask Indian start-ups to domicile outside is the very stringent outdated regulations and controls by the Reserve Bank of India (RBI). Much of the RBI regulations over overseas investments in unlisted companies is based on the erstwhile draconian FERA control mindset. Further, the service by RBI to requests for approval is dismal. There are many complaints that RBI replies are very delayed, on some occasions they do not even bother to reply. But RBI has put in good regulations for overseas investments in listed stocks and needs to extend this to unlisted companies too.
India needs foreign exchange reforms, possibly a new law that is more liberal than the Foreign Exchange Management Act (FEMA) to remove unnecessary RBI control. Hopefully with over $620billion in reserves, RBI will ease up and be more liberal and principle based rather than have a control mindset. The good news is that RBI has put up a policy paper for public comments just this week, which promises greater liberalisation. But India also needs a new law in this area.
My personal preference is for Indian companies to list in India and then do an ADR; But the needs of start-up founders are very different, they are our future. As a country India needs to give its start-up founders the choice to play on the global stage and directly list in a country of their choice.
TV Mohandas Pai is Chairman, Aarin Capital and Manipal Global Education.
Views are personal and do not represent the stand of this publication.
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