The idea mooted by SEBI’s expert committee that promising Indian companies must be permitted to directly list on foreign bourses without issuing depository receipts, and that foreign companies must be able to do the same in India, is a bold one. The committee has not just made a case for such liberalisation, but also laid down the legislative changes required in the FEMA, Companies Act, SEBI’s investor protection rules and tax laws to smooth the path for it. To ensure that foreign listing is not used as a conduit for round-tripping, it will only be allowed to and from permissible jurisdictions with strong anti-money laundering laws. Only ‘high-quality’ companies with a minimum ₹1,000 crore issue size may be permitted this route. Should these proposals go through, they will allow India’s capital-hungry late-stage ventures to tap into new sources of foreign capital and obviate the need for them to take circuitous routes to access foreign funds. But while setting the ball rolling on this, it is imperative for Indian regulators to ensure that it doesn’t lead to a flight of quality businesses from the Indian bourses.
Direct foreign listing rules can certainly benefit India’s economy by way of greater visibility for Brand India, better competitiveness for local firms and more foreign capital to bankroll domestic activity, as the report states. But the benefits to individual companies appear to be far higher. New-age consumer ventures that skip an Indian IPO to seek a NASDAQ listing, for instance, may be in a position to access new categories of investors not registered in India, command higher valuations and sharply lower their costs of capital. They may also get to sidestep the high regulatory bar that SEBI sets, in terms of profit record and mandatory investor quotas, to list on India’s main board. Overall, the move seems designed to offer easier exits to both promoters and private equity investors with vintage investments in India’s booming unlisted space.
The idea of direct cross- border listing is in keeping with the spirit of liberalisation and enhances ease of doing business. But while mulling it, the regulators also need to introspect on why there is a demand for foreign listing from high quality businesses in India in the first place. With over 5,000 listed stocks, state-of-the-art trading platforms and a globally well-regarded regulator, India’s stock market is certainly far from nascent. In the last three years, with retail investors and pension funds raising their equity allocations, the equity cult has also begun to take wing. But while over a dozen Indian companies have chosen to list abroad through the ADR, GDR and other routes, only one foreign company has chosen to list in India through the IDR route in over a decade. If it is regulatory arbitrage and a high compliance burden that are leading to such skewed preferences, Indian regulators need to first fix this before liberalising rules for direct foreign listing.