Listing is a significant milestone in the lifecycle of a company. It often serves as a major catalyst for growth by providing access to capital and by raising the profile of the company, apart from helping investors and employees unlock the value of their holdings in the firm. One of the most important decisions in the initial public offering (IPO) journey is the choice of market for its listing. Typically, entrepreneurs turn to home bourses for listing their entities. But that’s changing now. As India progresses on its growth trajectory, several entrepreneurs are actively considering listing companies in overseas capital markets.

That said, listing overseas has not been an easy task. Sample this stumbling block: courtesy a 2005 amendment to the Indian regulations, a prior or simultaneous listing in India was a pre-requisite for an overseas listing. The companies that were listed before 2005, such as Rediff and Sify, were able to use direct overseas listing route and didn’t need a prior or simultaneous listing in India.

But the situation didn’t last long. Perhaps prompted by a not-so-encouraging market condition, volatile currency and the current account deficit, the Ministry of Finance on September 27, 2013 allowed unlisted firms to list abroad without a prior or simultaneous listing in India.

A step in right direction According to the notification, unlisted Indian companies can list on the overseas markets that are compliant with the International Organisation of Securities Commissions (IOSCO) and the Financial Action Task Force (FATF) or where market regulator Sebi has signed bilateral agreements (IOSCO regulates securities and futures markets, while FATF tackles money laundering and terrorist financing). That gives unlisted Indian companies a choice of over 100 jurisdictions including the US and the UK, Singapore and Hong Kong.

This is a step in the right direction. Initially, this scheme will run on a pilot basis for two years. The Government and regulators will then review its impact. This could mean that the rule repose may be temporary and not a long-term structural change. Still, companies should be encouraged to take advantage of the window available to list overseas without listing in India.

The changes Now, before listing abroad companies need to file with Sebi a copy of the return they submit to the proposed exchange or regulators, and comply with the market watchdog’s disclosure requirements, in addition to that of the primary exchange. The requirement to comply with Sebi’s disclosure requirements raises a question. Do companies need to follow ICDR (Issue of Capital and Disclosure Requirements) guidelines, including restatement of Indian GAAP financial statements?

In the past, when primary listings on overseas bourses were allowed, companies could merely file a copy of the prospectus or offer document with Sebi and ensured that the disclosure requirements were consistent with those of the exchanges where 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 the market regulator will take on a greater role of review. Some may argue that Sebi’s participation in this process is not really warranted, as Indian investors are not going to participate in the company’s public issue outside India.

One of the advantages of overseas direct listing is to take advantage of meeting regulatory requirements of only one stock exchange or regulator. However, the current guidelines show the advantage, if any, would be minimal, especially when disclosure requirements are not aligned and reporting frameworks are different, and could possibly be burdensome to maintain disclosure requirements as per two regulatory regimes.

Fund use, FDI rules The new rules also mention that capital raised abroad may be utilised 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 and deposited with the designated bank.

On November 8, 2013, an RBI circular on the relaxed norms also stated that such an amount brought into India shall be utilised for eligible purposes. One would expect more clarity on the use of funds for domestic purposes as to what is covered under eligible purposes. This condition is expected to ease the pressure on the rupee demand for foreign currency denominated transactions.

The RBI circular has also provided some broad guidelines and clarifications.

For one, it says issuing the American depositary receipts (ADR) or global depository receipts (GDR) would be subject to sectoral cap, entry route, minimum capitalisation norms, pricing norms and so on, as per the foreign direct investment (FDI) rules.

Further, the number of underlying equity shares offered for issuance of ADRs and GDRs, to be kept with the local custodian, shall be determined upfront, and the ratio of ADRs/GDRs to equity shares shall be decided upfront based on applicable FDI pricing norms of equity shares of the unlisted company.

Will they roll back? Many unlisted mid-sized firms that were planning to list in the Indian market may explore this alternative of overseas listing, after considering their readiness to comply with the regulatory requirements and cost structures for the overseas markets. Some private equity investors, who have been unable to exit their investments partly due to poor domestic market sentiments, may also evaluate overseas listing of their portfolio companies.

However, a key concern in the minds of many is whether there will be a rollback of sorts, as it happened in 2005. As the window is kept open by the government for only two years as of now, ‘what next’ is the biggest question.

(The author is Partner and Head, Accounting Advisory Services, KPMG India.)

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