Listing overseas

Allowing companies to list directly in exchanges abroad opens up financing options better than debt or private equity.

The Centre’s decision to allow unlisted Indian companies to list in overseas exchanges without prior or simultaneous domestic listing will do little to attract significant dollar inflows. The Finance Ministry has mandated that capital raised through this route be used to repay foreign debts or fund operations (including acquisitions) abroad; unutilised amounts, if any, are to be remitted to India within 15 days. Even if this measure was conceived with the country’s current account deficit in mind, its significance should be assessed in the context of what overseas listing does for companies. By listing in markets that offer greater liquidity, companies seeking this route will get far better valuation for their stocks and is useful to that extent.

India’s markets suffer from a lack of both liquidity and depth. The top 10 stocks account for about 88 per cent of turnover and 83 per cent of free-float market capitalisation at the National Stock Exchange (NSE). There is also very little retail investor interest, which exacerbates the concentration of trades in just a few stocks. In such an environment, small but growing companies find it difficult to secure decent valuations on listing in Indian exchanges. This applies even to firms that have obtained early stage venture capital, in which investors would like exit options through the flotation of IPOs. While the NSE and Bombay Stock Exchange have specialised trading platforms for such small businesses, their daily turnover hardly amounts to Rs 5 crore. Compare this with the London Stock Exchange’s dedicated AIM sub-market, which has enabled over 3,000 relatively small firms to raise more than 60 billion pounds of capital. Even Nasdaq primarily serves companies with smaller levels of market capitalisation. The fact that the top 100 stocks in this exchange make up only a third of its total turnover reflects its depth and liquidity.

While permitting firms to list directly overseas opens up financing options better than debt or even private equity, the Finance Ministry has, however, limited this scheme to two years, after which it will be up for review. This is understandable, given that some companies had used the global depository receipt issue route as an avenue for money-laundering by selling their shares to associates abroad and channelling the proceeds back to India. Equally prudent is the decision to allow listing only on exchanges in jurisdictions that are part of the Financial Action Task Force/International Organisation of Securities Commissions. Since these exchanges are expected to adhere to minimum regulatory norms and enable exchange of information for combating money-laundering, it will ensure that listing is largely meant for the purposes of bona fide fund-raising.

Published on October 20, 2013
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