In the late 1990s, it was possible for Indian unlisted companies to raise capital overseas and list on overseas stock exchanges without having a primary listing in India. Companies such as Rediff and Sify had taken advantage of this mechanism and listed on the US stock exchanges. However, a few years ago, this route was effectively blocked when the Government of India stipulated that a primary listing on an Indian stock exchange was a necessary pre-requisite to an Indian company listing overseas. This was to assuage fears of flight of listings to overseas exchanges and the possible exportation of the Indian capital markets.
However, a couple of weeks ago, the Government of India decided to reintroduce the mechanism that enables unlisted Indian companies to raise capital and list overseas without the requirement for a primary listing in India. This will increase the breadth of choices for unlisted Indian companies to raise capital.
The new scheme has been introduced on a temporary pilot basis for 2 years after which it will be reviewed. Moreover, the scheme is subject to several conditions, including the following:
- Listing is possible only on exchanges in IOSCO/FATF compliant jurisdiction or where SEBI has signed bilateral agreements;
- Copy of returns filed with exchange regulators must also be filed with SEBI for monitoring money laundering. SEBI’s disclosure requirements must be complied with in addition to that of the primary exchange abroad;
- Compliance with the FDI policy is required – which will mean the relevant sectoral caps, and other industry-based conditions must be satisfied;
- Proceeds may be utilized for retiring outstanding overseas debt or for operations abroad, including acquisitions, thereby granting some level of flexibility;
- If funds are not used abroad, they must be remitted to India within 15 days.
While most of the conditions are understandable, it is not clear how the requirement to comply with SEBI’s disclosure requirements will play out. In the past, when primary listings overseas were allowed, a copy of the prospectus / offer document was merely filed with SEBI for information purposes, and the disclosure requirements were consistent with the those of the exchanges where the securities were being listed. However, under the new dispensation, if the offer document requires compliance with SEBI’s disclosure regime, it remains to be seen whether SEBI will take on a greater role of review. One of the advantages of listing overseas may be to take advantage of regulatory arbitrage and opt for a jurisdiction that might be friendlier to listings and disclosures, but with extensive disclosure requirements, such advantages may be minimal if Indian securities regulations will anyway have to be complied with.