Follow-on Submission to DPIIT and MOF on direct listing of foreign headquartered Indian start-ups in India

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Follow-on Submission to DPIIT and MOF on direct listing of foreign headquartered Indian start-ups in India

Garima Prakash

@GarimaP

August 18, 2023

Public Policy

In furtherance of our initial submission to Department for Promotion of Industry and Internal Trade (DPIIT) and the Ministry of Finance (MOF), we have submitted additional points to the government, to enable direct listing of foreign headquartered Indian-origin start-ups on stock exchanges in India.

This submission highlighted the following:

1. SEBI’s recommendations in 2018 and evolution of Indian capital market since then:

In 2018, SEBI’s Expert Committee issued a report on listing of equity shares of companies incorporated in India on foreign stock exchanges and of companies incorporated outside India on Indian stock exchanges. The report contains:

i. Detailed recommendations for introducing a framework for enabling foreign companies to list on Indian stock exchanges.

ii. A list of 10 permissible jurisdictions from where companies may be permitted to list their equity shares on Indian stock exchanges.

iii. Further, it identifies and recommends specific amendments required under various Indian laws such as SEBI regulations, FEMA, Companies Act, 2013 etc. to enable listing of equity shares of foreign companies in India.

These recommendations have not yet been implemented. The Indian capital market landscape has evolved materially since 2018 and has made listing in India an attractive and viable option for start-ups and investors, led by the following changes - increase in trading volumes, greater investor participation – both institutional and non-institutional, increase in initial and follow-on issuances. Therefore, now is the right time to implement SEBI’s recommendations on this topic.

2. Global precendent

a. USA: Non-US entities are allowed to undertake primary listing on the New York Stock Exchange (NYSE).

i. The ‘US Shareholder Test’ and three-pronged ‘Business Contacts Test’ are used to determine nexus between foreign entities and the US economy (in terms of shareholding, location of assets, key personnel etc.).

ii. In the event there is sufficient nexus, the foreign entity must list as a domestic issuer of securities. If not, the foreign entity may elect to list on the NYSE either as per domestic standards or as a foreign private issuer.

iii. Thresholds for foreign private issuers (in terms of pre-tax incomes, revenues and global market capitalisation) are more stringent. For instance, a domestic US entity seeking an IPO must have at least 400 holders of 100 shares or more and at least 1.1 million publicly held shares. On the other hand, a ‘foreign private issuer’ must have at least 5,000 holders of 100 shares or more and at least 2.5 million publicly held shares worldwide.

iv. Among other things, foreign private issuers are required to register their securities with the Securities and Exchange Commission (SEC) and comply with corporate governance standards as per NYSE’s listed company manual. Notably, foreign private issuers must publicly disclose any significant ways in which their corporate governance practices differ from those followed by domestic companies under the NYSE listing standards.

b. Hong Kong: Foreign companies can list on the Stock Exchange of Hong Kong Ltd. (HKEX).

i. They must demonstrate that their jurisdiction of incorporation has shareholder protection standards that are at least equivalent to those provided in Hong Kong.

ii. If this cannot be demonstrated, then they must amend their constitutional documents to provide the required standards of shareholder protection.

iii. The securities regulators of the foreign company’s jurisdiction of incorporation and that of its place of central management and control, must be a full signatory to the International Organisation of Securities Commissions’ (IOSCO) Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information; or must have a bilateral agreement with Hong Kong’s Securities and Futures Commission (SFC) to provide for mutual assistance and information.

3. Regulatory Changes needed for Direct Listing: The following laws and regulations would need to be amended:

i. Companies Act, 2013.

ii. Foreign Exchange Management Act, 1999 (FEMA) and the rules and regulations thereunder:

Foreign Exchange Management (Deposits) Regulations, 2016 (Deposits Regulations).
Foreign Exchange Management (Overseas Investment) Rules, 2022 (OI Rules).
Foreign Exchange Management (Overseas Investment) Regulations, 2022 (OI Regulations).
Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 (Capital Account Regulations).
Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules).
Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (NDI Regulations).

iii. SEBI Regulations:

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations).
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations).
SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations).
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST Regulations).
SEBI (Buy-Back of Securities) Regulations, 2018 (Buy-back Regulations).
SEBI (Delisting of Equity Shares) Regulations, 2021 (Delisting Regulations).

4. Recommendation: Set up an Expert Task Force

We request the government to consider our inputs and set-up an expert task force, with participation from the relevant government departments, regulators, industry representatives and legal experts, to recommend a comprehensive set of measures to make direct listing an attractive option for Indian origin foreign start-ups to consider. The task force may also recommend the eligibility criteria for the start-ups to participate in direct listing, viz. nexus with India in terms of customers/ user in India, revenues in India, physical presence in India, citizenship of the founders and key management personnel etc.

If this topic is of interest to you and you would like to share your views with us, kindly write to us at garima@nasscom.in and policy@nasscom.in.

SEBI listing IPO Startups flipping

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Garima Prakash

Manager, Public Policy and Government Affairs

Reach out to me for all things policy about e-commerce, international trade, export controls, start-ups and fintech