Mainland firms listing on IFSC may see split in liquidity

Companies listed on the domestic bourses that also choose to list on the GIFT IFSC exchanges could see a fragmentation of liquidity.

Foreign portfolio investors (FPIs) may prefer investing in shares listed on IFSC exchanges given the reduced currency risk and the potential tax exemption on capital gains from sale of shares, said experts. Eligible foreign investors which are not FPIs can also invest in companies listed on IFSC.

“Indian public companies can now choose to raise funds from both local markets in INR and foreign markets at IFSC in foreign currency, supporting their global aspirations. GIFT-IFSC’s regulatory framework enables transactions on stock exchanges in foreign currency, reducing currency risk and offering a secure and attractive investment climate,” said Tushar Sachade, Partner, Price Waterhouse & Co.

Potential market split

Industry observers believe that a dual listing could lead to a split in market capitalisation of Indian companies and impact liquidity for resident investors, while providing additional avenues for FPIs to invest.

“A dual listing could lead to the bifurcation of the Indian capital market into a market for domestic and international investors. This may be detrimental to the resident domestic investors unless adequate safeguards are put in place,” said Yashesh Ashar, Partner, Illume Advisory.

Ashar believes that resident investors should be allowed to invest, at least to the extent of the current LRS limits. According to him, clarity would be required in terms of parity in pricing norms, calculation of market capitalisation, promoter shareholdings, maintenance of liquidity in both the exchanges (specifically in mainland exchanges for retail investors) and swap of securities of one exchange for the other for foreign investors.

“Foreigners will have the choice of investing in shares listed on IFSC or on the mainland. Indian issuers can do a differential pricing for follow-on public offerings, and can potentially raise money at a higher valuation from foreign investors,” said V Balasubramaniam Managing Director and Chief Executive Officer of NSE IX (NSE International Exchange).

He believes that domestic liquidity will be protected to the extent that resident investors are not permitted to invest in companies listed on the IFSC exchanges.

Indian companies listed on the mainland bourses can list on the IFSC exchanges via follow-on public offerings, offers for sale or qualified institutional placements, subject to SEBI approval.

“This will be through a framework that will be based on the principles of the depository receipt mechanism. So, a part of the shares will be held in the Indian depository and part will be in the IFSC depository,” said Balasubramaniam.

A working group report titled ‘Direct Listing of Listed Indian Companies on IFSC Exchanges’ had suggested that the equity shares of Indian companies listed on IFSC exchanges be held directly by the shareholders in their Demat accounts maintained with the depository in IFSC.

In the case of offer for sale, the shares will be transferred from the entities’ demat account in domestic India to the shareholders’ demat account in IFSC.

“If foreign investors are not able to find good secondary market liquidity for the shares listed on the IFSC, they will have the ability to transfer the shares from the IFSC depository to the Indian depository and sell the shares in the Indian domestic market,” Balasubramaniam said.

COMMENT NOW