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Overseas listing is for the big boys

Lokeshwarri SK | Updated on June 03, 2020 Published on June 03, 2020

Smaller companies may not be able to garner resources for a foreign IPO

There is a buzz doing the rounds of late that Reliance Industries is all set to list its red-hot subsidiary, Jio Platforms, on Nasdaq by 2021. This is perhaps the next logical step for RIL that has been surprising the market with a series of swift stake sales in its subsidiary to marquee suitors ranging from Facebook and Silver Lake to General Atlantic.

It is quite certain that the red carpet will be rolled out for the company, as it makes its début on the US exchange. Many also expect that Jio Platforms will prep the ground for other Indian companies, especially tech and internet-based ones, to list their stocks in exchanges in the US, Hong Kong, China and Europe. This opening up of the primary market for Indian companies has been made possible by the Centre now allowing direct listing of securities of Indian companies in permissible foreign jurisdictions.

There is no doubt that this move will be welcomed by the larger unlisted players in the e-commerce and digital space. But it is doubtful if the smaller companies will have the wherewithal to use this opportunity. Also, the move is not conducive for the long-term development of the Indian equity market.

Nasdaq beckons

Indian companies are currently not permitted to directly list their equity shares on foreign stock exchanges. They can access overseas capital markets only through American Depository Receipts and Global Depository Receipts. There are a handful of ADRs and GDRs currently being traded on American and other exchanges, but this is not considered an optimal route since the investor has to bear foreign exchange risk, in most cases. Liquidity in most of these securities is also not good enough.

Indian tech and digital companies, especially the larger ones, are likely to be enthused by this opening of primary markets to include the US exchanges. This is due to two main reasons.

One, even as the domestic primary market has been in doldrums, the Nasdaq is booming with the price of stocks such as Apple at a new life-time high. With the digital and e-commerce companies relatively better placed to withstand the Covid-19 impact, investors have been making a beeline for these stocks. IPOs of Indian tech companies will find better market there.

Two, Indian equity investors are apathetic to e-commerce and internet-based companies that typically make losses in the initial years. They have been unable to fathom the method of valuation of these companies, which is based on future prospects, rather than current earnings, unlike investors in overseas exchanges.

For instance, Amazon.com made meagre to nil profits between 2012 and 2015, yet the stock price doubled in that period on US exchanges, as investors there believed in the potential of the company to disrupt retail trade. The stock price has appreciated seven-fold since then, as the company turned profitable. When Facebook listed in 2013, its EPS was $0.02 and PE ratio was 1,279 times earnings. The growth in earnings since then has helped moderate the PE ratio to 31 times.

Indian e-commerce companies such as Ola, Paytm and Oyo would be better off making an IPO overseas, for all these companies are consistently making losses. Reliance Jio is however expected to be the biggest beneficiary, with the company expected to seek listing on Nasdaq in 2021.

Not all rosy

While the larger and well-established digital players will clearly benefit, it may not be so easy for smaller players. These companies do not have the resources to make a primary offer or to meet compliance requirements of regular platforms.

The Institutional Trading Platform (ITP), launched in 2013 in India and targeted at these companies, evinced little response and was relaunched as Innovators Growth Platform in 2019 with further relaxations. It is doubtful if the smaller internet companies would be willing to approach overseas exchanges, just yet.

Also, the success of Indian stocks on foreign exchanges depends on the manner in which the business grows. Rediff.com that listed at close to $14 in 2002, hit a high of $25 in 2006, has since been moving down and currently trades close to nil value. Sify hit $375 in the dot-com boom but currently trades at less than a dollar.

What for investors, markets?

Indian investors are not going to lose out with companies opting to list overseas. All they need to do is to open an account with a domestic brokerage which has a tie-up with a broker in the foreign jurisdiction to buy stocks on overseas exchanges. Fund houses and other institutional investors can also do likewise.

The biggest loser from this move will be the Indian capital market. For long, we have been decrying the fact that there is lack of depth in Indian markets with the top 200 stocks accounting for almost all the turnover. There has been lack of quality new listing on Indian bourses in recent years, leading to larger investors chasing a handful of stocks, leading to a polarised market. The regulator and the Centre should have made more efforts to coax these new-age companies to list on Indian bourses and expand their offering.

Also, while SEBI’s expert committee, looking into direct overseas listing, had also suggested allowing foreign companies to list their stocks on domestic exchanges, no step has been taken in this regards.

The exchequer is also going to lose revenue that could have been earned through stamp duties, STT, capital gains tax and so on, if the securities were listed on Indian bourses.

Get set…

Despite the issues, it is obvious that the direct listing of Indian companies on foreign exchanges is going to roll out soon. Regulators should however take care that this route in not misused for money laundering, as seen in the GDR scams in companies such as Asahi Infrastructure and Projects and Cals Refineries. Permission should be given for listing only on those exchanges that are members of the board of IOSCO or those that have a bi-lateral agreement for information sharing with SEBI or are a member of the Financial Action Task Force.

Many amendments — in FEMA, Companies Act — need to be done before the first foreign IPO. Also, all ambiguity in taxation of these shares have to be dealt with, at the outset. We don’t want retrospective tax being slapped on investors transacting in these shares.

Published on June 03, 2020
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