Introduction
On July 28, 2023, the Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman announced the initiation of direct listing of Indian companies on GIFT-IFSC exchanges in the first phase. To operationalize this announcement, the Department of Economic Affairs (DEA) - Ministry of Finance has amended the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (FEMA (Non-Debt) Rule), and introduced the 'Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme' (FEMA Rule). Concurrently, the Ministry of Corporate Affairs (MCA) has released the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024 dated January 24, 2024 (MCA Rule).
This scheme will provide an avenue for public Indian companies, particularly those in the early stage, sunrise, and technology sectors, to tap into global capital markets beyond domestic exchanges. This is anticipated to enhance the valuation of Indian companies, aligning them with global standards of scale and performance. The scheme aims to facilitate increased foreign investment, unlock unprecedented growth prospects, and broaden the investor base.
We have summarized the important concepts and details as specified in the MCA and FEMA notifications in the form of a questionnaire, as given below:
What is the Direct Listing Scheme?
The Direct Listing Scheme provides an overarching framework for issuing and listing equity shares of public Indian companies on international exchanges. Prior to this, Indian companies were not allowed to issue or list equity shares abroad.
What are some of the important definitions introduced by the Ministry?
“Authority” means the International Financial Services Centre’s Authority established under section 4 of the International Financial Services Centre’s Authority Act, 2019 (50 of 2019).
“Permissible jurisdiction” means a jurisdiction specified in the First Schedule of the FEMA Rules. As per the First Schedule of the notification the Permissible Jurisdiction means the International Financial Services Centre in India and the Permitted Stock Exchange means India International Exchange and NSE International Exchange.
“Scheme” means the Direct Listing of Equity Shares of companies incorporated in India on International Exchanges Scheme made by the Central Government.
“International Exchange” shall mean permitted stock exchange in permissible jurisdictions which are listed at Schedule XI to the FEMA (Non-Debt) Rules. As per Schedule XI, the current International Financial Services Centre in India are India International Exchange, and the NSE International Exchange are under the regulatory oversight of the International Financial Securities Centre Authority (IFSCA).
“Listed Indian company" means an Indian company that has any of its equity instruments or debt instruments listed on a recognized stock exchange in India and an International Exchange
“GIFT-IFSC” is the maiden International Financial Services Centre of India that connects India with global opportunities that enable the Indian economy to connect with the global financial system and allow seamless and easy flow of global capital into India.
Which legislation oversees the direct listing of Indian companies' equity shares on international exchanges?
The direct listing of equity shares of Indian companies on international exchanges will be governed by the IFSCA Act, 2019, along with the Rules and Regulations notified thereunder, including the IFSCA (Issuance and Listing of Securities) Regulations, 2021 (ILS Regulations).
Which regulatory frameworks the IFSCA will establish?
The IFSCA will establish the regulatory framework for initial listing, disclosure requirements, continuous listing obligations, and other relevant aspects for companies seeking to list on international exchanges.
Which types of companies are eligible to list their shares on an international exchange under the Direct Listing Scheme?
The Scheme exclusively permits the issuance and listing of shares on an international exchange for public Indian companies. However, the Securities Exchange Board of India (SEBI) is in the process of formulating operational guidelines specifically for listed public Indian companies. Thus, currently, the framework permits unlisted public Indian companies to list their shares on an international exchange.
Whereas Private companies do not qualify for participation in the Scheme due to the restrictions imposed by the Companies Act, which prohibits them from inviting subscriptions from the public. Thus, if any private company intends to list its shares, then it will have to convert the private company into a public company.
Whether Indian companies listed on international exchanges need to follow domestic rules and regulations?
Yes. The Indian company that issues and lists its equity shares on international exchange shall ensure compliance with extant laws relating to the issuance of equity shares. This includes requirements prescribed in this Direct Listing Scheme, the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, the Depositories Act, 1996, the Foreign Exchange Management Act, 1999, the Prevention of Money-laundering Act, 2002 and the Companies Act, 2013 and rules and regulations made thereunder, as applicable.
Whether unlisted companies intending to list on international exchanges are required to list on domestic exchanges?
It is not obligatory for an unlisted public company aiming to list on international exchanges to simultaneously list on domestic exchanges. However, there are no constraints preventing such companies from choosing to list on both domestic and international exchanges. An unlisted public company seeking to list its equity shares on permitted stock exchanges in permissible jurisdictions, and also intending to list its equity shares with any recognized stock exchange as defined under clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), must ensure compliance with conditions specified by the Securities and Exchange Board of India.
What are the methods companies can use to offer shares when listing on permitted stock exchanges?
A company that intends to list shares on the International exchange can issue shares through:
Fresh issue of shares; and
Offer for sale by existing shareholders.
What are the basic conditions for listing on the permitted stock exchanges in permissible jurisdictions?
The basic conditions are:
An unlisted public company seeking to list on permitted stock exchanges must ensure that it does not meet any of the ineligibility criteria outlined in the FEMA and the MCA Rules.
The company must not have any partly paid-up shares.
Which Financial Reporting Standards are required to be followed by the company post-listing?
Post listing on any stock exchange in a permissible jurisdiction, the company must adhere to Indian Accounting Standards specified in the Annexure to the Companies (Indian Accounting Standards) Rules, 2015, for the preparation of financial statements. This requirement is in addition to any other accounting standards necessary for financial statement preparation.
Which companies are not eligible for listing on the permitted stock exchanges in permissible jurisdictions?
In the following cases, a company shall not be eligible for listing its equity shares:
It has been registered under Section 8 or declared as Nidhi under Section 406 of the Companies Act, 2013 (“Act”).
It is a company limited by guarantee and also has share capital.
It has any outstanding deposits accepted from the public as per Chapter V of the Act and rules made thereunder.
It has a negative net worth;
has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holder or any other secured creditor. (provided that this shall not apply if the company had made good the default and a period of two years had elapsed since the date of making good the default).
It has made any application for winding-up under the Act or for resolution or winding-up under the Insolvency and Bankruptcy Code, 2016 (31 of 2016), and in case any proceedings against the company for winding-up under the Act or for resolution or winding-up under the Insolvency and Bankruptcy Code, 2016 (31 of 2016) is pending.
It has defaulted in filing of an annual return under Section 92 or a financial statement under Section 137 of the Act within the specified period.
In which form the unlisted public company is required to file the prospectus with the MCA?
The unlisted public company shall file with the MCA the prospectus in e-Form LEAP-1 specified in the MCA Rule along with the fees within a period of seven days after the same has been filed in the permitted exchange.
What are the conditions as per the FEMA (Non-Debt) Rule for Issue and Listing on International Exchanges?
A public Indian company may issue equity shares or offer equity shares of existing shareholders, subject to the following conditions:
It must comply with all the necessary rules and regulations as specified in the ILS Regulation.
It should be subject to prohibited activities, and sectoral caps prescribed in paragraphs 2 and 3 of Schedule I to the FEMA (Non-Debt) Rule;
The shares to be issued by the public Indian company or offered by its existing shareholders on an International Exchange shall be in dematerialized form and rank pari passu with equity shares listed on a recognized stock exchange in India.
Provided that the prior Government approval, wherever applicable, shall be obtained.
Who is a permissible holder as per the FEMA (Non-Debt) Rule?
As per FEMA (Non-Debt) Rule:
A permissible holder is a holder of equity shares of the company that are listed on the International Exchange, including its beneficial owner. In accordance with this provision, individuals who hold citizenship in a country that shares a land border with India, entities incorporated in such a country, or entities with beneficial owners from such a country, are mandated to seek approval from the Central Government before acquiring equity shares in a public Indian company.
A permissible holder may purchase or sell equity shares of an Indian company listed on an international exchange subject to the limit specified for foreign portfolio investment under the FEMA Non-Debt Rule.
Note:
For the above-mentioned purposes, a permissible holder is not a person resident in India.
The permissible holder, including its beneficial owner, shall be responsible for ensuring compliance with this requirement. The public Indian company, in its offer document, by whatever name called in the permissible jurisdiction, shall make a disclosure to this effect.
What is the eligibility condition for a public Indian company or its existing holders to issue or offer equity shares on an International Exchange?
A public Indian company or its existing holders is eligible to issue or offer equity shares in permissible jurisdictions only if the following conditions are met:
The public Indian company, its promoters, promoter group, directors, or selling shareholders are not debarred from accessing the capital market by the appropriate regulator.
None of the promoters or directors of the public Indian company serves as a promoter or director of any other Indian company which is debarred from accessing the capital market by the appropriate regulator.
The public Indian company, its promoters, or directors are not classified as wilful defaulters.
The public Indian company is not under inspection or investigation under the provisions of the Companies Act, 2013.
None of its promoters or directors is designated as a fugitive economic offender.
A person/ company who was debarred in the past by the Government or the appropriate regulator and the period of debarment is already over as of the date of listing of its equity shares on the International Exchange(s) will not be subject to this above condition(s).
How will voting rights be exercised for the shares which are listed on the International Exchange?
The public Indian companies having their equity shares listed on the International Exchange shall ensure that the voting rights on such equity shares shall be exercised directly by the permissible holder or through their custodian pursuant to voting instruction only from such permissible holder.
How pricing will be determined for the shares that are listed on the International Exchange?
Where equity shares are issued by a listed company or offered by the existing shareholders of equity shares listed on the recognized stock exchange in India, the same shall be issued at a price, not less than the price applicable to a corresponding mode of issuance of such equity shares to domestic investors under the applicable laws.
In case of initial listing of equity shares by a public unlisted Indian company on the International Exchange, the price of issue or transfer of equity shares shall be determined by a book-building process as permitted by the said International Exchange and shall not be less than the fair market value under applicable rules or regulations under the Foreign Exchange Management Act, 1999. Provided that subsequent issuances or transfers of shares for additional listings post-initial listing will adhere to pricing norms of the International Exchange and the permissible jurisdiction.
Conclusion
The public Indian companies will now have the flexibility to access both markets – the domestic market for capital raising in Indian Rupees (INR) and the international market for capital raising in foreign currency from global investors. This initiative is especially advantageous for Indian companies with global aspirations, providing them with opportunities to expand their presence in other markets.
Moreover, unlisted Indian public companies that meet the necessary regulatory requirements are authorized to issue and list their equity shares on permitted international exchanges. Additionally, the Securities and Exchange Board of India (SEBI) is currently in the process of formulating operational guidelines specifically for listed Indian public companies.
Note: As of today, the IFSCA is in the process of formulating the rules and necessary regulations for the direct listing of equity shares of Indian companies on international exchanges. Therefore, a comprehensive framework has not yet been established.
*The notifications from the Ministry of Corporate Affairs (MCA) and the Ministry of Finance can be accessed through the following links:
MCA Notification:
Ministry of Finance Notification:
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Authored by:
Aravind Palavesam (Associate | Transaction Advisory – Legal & Compliance)
Drashti Savla (Principal Associate | Transaction Advisory – Legal & Compliance)
In case any clarification is required, please reach us at drashti@constellationblu.com