Indian companies wanting to list on the international exchanges at GIFT IFSC may face a number of roadblocks.

The norms that were notified on Wednesday allow only the ‘permissible holder’ to invest, trade, or hold equity shares of Indian companies listed on international exchanges. The permissible holder is not a person resident in India.

“The regulations restrict resident Indians from owning stock that is listed on the IFSC exchange. This effectively may be interpreted to mean that this shareholding block is not capable of being transacted as ‘listed stock’,” said Vivek Gupta, Partner, KPMG India.

“Shares in the Indian company owned by resident investors will continue to remain unlisted, unlike in a typical overseas listing where resident shareholders can also own listed shares under FEMA regulations. This would impact the liquidity of such unlisted shares and resident shareholders will need to rely on an offer for sale to sell their shares to non-resident shareholders through the stock exchange,” added Vaibhav Gupta, Partner, Dhruva Advisors.

The impact

Companies with negative net worth are not allowed to list under this route. This could impact companies where a large part of the capital used to fund losses and operations has been raised in the form of convertibles such as convertible debentures which may not be counted towards net worth under the definition of company law.

“A lot of companies that are expected to list on IFSC would be new age companies that may have raised money through convertible instruments, and not direct equity. This is treated as liability for net worth computation as per the prevalent accounting principles. So, only companies that have raised capital in the form of equity or are profitable may be allowed to list,” said Dhruva Advisors’ Gupta.

It is not clear whether the companies planning to list under this scheme will be required to convert all their outstanding convertible instruments prior to listing, similar to the requirements under SEBI norms. “To the extent shares are continued to be held by residents, they would not be tradeable as such and so if all convertibles are required to be converted, it may impact capital structures of companies to that extent,” Gupta said.

FEMA provisions

The FEMA provisions now permit both unlisted and listed Indian companies to access international exchanges. The equity shares listed on international exchanges will be counted towards the foreign holding of the company.

“Existing listed companies will have to comply with SEBI norms. However, it is not clear whether reverse fungibility of shares listed on both domestic exchanges and at IFSC will be allowed. Some procedural aspects such as mode of payment and other conditions for remittance of proceeds to India are still subject to RBI clarifications that are awaited,” said Jaiman Patel, Partner, EY India.

Given that a nil rate of STT is applicable to transactions on IFSC stock exchanges, the concessional tax rates that apply to capital gains on companies listed on the Indian stock exchanges should be made applicable as well, said experts.

“Aspects such as taxation, convertible securities, promoter group, lock-in conditions, pricing norms, dual listings, ADR and GDR mechanism would need to be clarified whenever detailed guidelines are issued,” said Yashesh Ashar, Partner, Illume Advisory.

Once fully enabled, the overseas listing mechanism at GIFT IFSC is expected to boost Indian unlisted companies to directly raise funds from overseas investors in a cost-efficient manner, said experts.

* Companies with negative net worth not allowed to list under this route
* Clarity needed on reverse fungibility of shares listed on both domestic and IFSC exchanges
* Concessional tax rates on capital gains that apply to companies listed on domestic exchanges should extend to GIFT IFSC
*The FEMA provisions now permit both unlisted and listed Indian companies to access international exchanges.
Uphill task