Submission to DPIIT, SEBI and MoF to allow listing of foreign headquartered start-ups on stock exchanges in India

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Submission to DPIIT, SEBI and MoF to allow listing of foreign headquartered start-ups on stock exchanges in India

Garima Prakash

@GarimaP

July 28, 2023

Public Policy

On July 24,2023, we wrote to the Securities Exchang Board of India (SEBI), Department for Promotion of Industry and Internal Trade (DPIIT) and Ministry of Finance (MoF) seeking their support in allowing foreign headquartered Indian-origin start-ups to list on stock exchanges in India.

Our representation highlighted the following:

SEBI's recommendations have not been implemented: the recommendations of SEBI’s Expert Committee on listing of equity shares of companies incorporated outside India on Indian stock exchanges given in 2018 have not yet been implemented.
Need for allowing Indian-origin start-ups to list on Indian stock exchanges: as this can be beneficial for:

For Indian investors: as they increasingly seek to diversify their investment portfolios. Investing in companies who may be incorporated overseas but cater to the market in India, can be a good fit as domestic investors would be investing in businesses familiar to them. The company’s verified disclosures as part of the listing process would further encourage direct and indirect stakeholders to invest in the company.
For India’s economy: it can facilitate the development of specialised investor clusters with valuation expertise specific to tech and internet companies. This will ultimately make Indian stock exchanges more attractive to tech and internet companies that are growing significantly in India and the world.
For start-ups: it can be a big facilitator for granting access to the Indian market and taking the advantage of credible corporate governance and regulatory framework governing India’s capital markets.

3. Impediments in the currently available options to access Indian capital market:

By transferring the overseas company’s domicile to India: In such cases, there can be significant tax liabilities for existing investors of the foreign company in India. For example, shares would be allotted in the Indian company at its current fair market value, which may be higher than what the investor would have paid at the time of initial investment in the foreign company. In this case, a significant tax liability would arise, even though there is no actual realisation in the market. Investors with a long-term investment outlook in the company may be ok to undertake this tax burden, unlike most of the private equity and venture capital investors that seek an early exit. Due to this, flipping the structure may not be a feasible option for foreign incorporated companies.
Inbound merger: A foreign entity could merge into an Indian entity following the process prescribed under the Companies Act, 2013, and then go for listing in India. However, there can be impediments on account of the laws of the foreign jurisdiction, such as, tax liabilities or lack of enabling provisions to allow outbound mergers. For example, Singapore has restrictions on outbound mergers. There may be other impediments, such as, need for approval of the merger in certain cases etc. All the above factors render this option infeasible.
Listing of foreign companies on stock exchanges in International Financial Services Centre (IFSC): there are restrictions on the amount of investment by retail investors on companies listed in stock exchanges on IFSC (up to USD 250000 per financial year can be remitted outside India as per the Liberalised Remittance Scheme). This can be an impediment for attracting investment from high-net worth individuals who would invest on a large scale. Ultimately, the focus of IFSC is to promote the financial services sector, and therefore start-ups in other sectors (such as e-commerce), incorporated outside India, would be hesitant to explore this option.

4. Industry survey

Through a short-survey and telephonic interviews with start-up founders, we have gathered insights regarding the extent to which Indian-origin start-ups have externalised structures, and therefore will consider raising equity capital through public listing in India, if the regulations are amended to allow so. The survey results show that:

Approximately 16.5% of Indian-origin start-ups have externalised legal structures which prevents them from doing a direct public listing on Indian stock exchanges.
All the above start-ups would consider raising equity capital through public listing in India, if the regulations are amended to allow for a direct listing.

5. Recommendation:

We requested the government to coordinate with SEBI, Reserve Bank of India and Ministry of Corporate Affairs for a comprehensive consultation paper inviting stakeholder comments on the various laws and regulations that need to be amended to enable foreign start-ups to directly list on stock exchanges in India.
There may be a need to set-up a task force, with participation from the relevant government departments, industry representatives and legal experts, to harmonise this effort across regulators and ministries. We requested the government to take this up.

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.

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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