The ADR route has limitations, one of the main ones being the requirement for simultaneous registration in India. So far, only equity or equity-linked instruments of listed Indian companies have been allowed to be listed abroad. And tax inefficiencies and extensive regulatory requirements have made foreign company incorporation and subsequent overseas registration less of a choice. These shortcomings have given rise to several committees, documents and recommendations. But in vain.
That may change now.
The government is now ready to meet these challenges. Indian entrepreneurs will soon benefit from a more liberalized set of rules regarding overseas registrations – most importantly, a single registration path and a choice of instruments.
These changes are taken from a 2018 SEBI panel deliberations which revealed that stock quotes on foreign stock exchanges would benefit the economy by making it more competitive and boosting Brand India. And companies will have access to another source of capital, a larger investor base, better valuation, etc.
But, to truly achieve this liberalization, the Securities and Exchange Board of India, the Reserve Bank of India and the Central Board of Direct Taxes will need to meet, lawyers for BloombergQuint said.
In October last year, market regulator SEBI demanded that only listed companies be allowed to issue certificates of deposit abroad.
To frame an effective overseas registration framework, such inconsistencies will need to be addressed, Bhakta Patnaik, partner at Trilegal, told BloombergQuint. The double listing requirement is the reason why many Indian companies have avoided overseas listings, he added.
While the value would have already been obtained in the market with the deepest appreciation of the company and its activities, the other market could dilute that valuation, he added.
Besides mandatory registration in India, SEBI should also not insist on complex beneficial ownership disclosures, said Prashant Gupta, partner at Shardul Amarchand Mangaldas & Co., said.
An Indian entity listed abroad would be subject to two jurisdictions: India and the foreign country where these shares are listed. As such, the issuing company must comply with the beneficial ownership requirements of the host country or its stock exchanges with regard to shares listed abroad. Therefore, no additional Indian requirement should be made applicable, Gupta said.
Banking and tax changes
The RBI administers Indian foreign exchange transactions through the Foreign Exchange Management Act and various circulars. The central bank will also need to streamline regulations governing current and capital transactions, experts said.
The first would be to provide a level playing field for foreign and domestic investors wishing to invest in an Indian company listed abroad.
The RBI’s liberalized money transfer program prescribes a cap on Indian investments in foreign markets. Patnaik suggested the need to change the regime’s limits.
Assuming that the REIT’s current investment limits continue to apply, foreign investors can invest to this extent in stocks listed overseas, while Indian investors would be subject to the LRS limits, he said. -he declares. And so, the government should clarify that the LRS limits are not applicable to investments in Indian listed offshore companies, Patnaik added.
Second, the RBI will also need to amend the foreign exchange regulations to allow investments and recognize the market valuation obtained in international markets as fair value for the purposes of Indian regulations governing the transfer and issuance of securities regulations, experts said.
The third challenge that the RBI will face concerns the full convertibility of the capital account.
Juhi Singh of S&R pointed out that it was unclear how the issuance and trading of rupee denominated equity shares on foreign stock exchanges will be permitted in the absence of full capital account convertibility – conversion of financial assets premises in foreign financial assets without any limitation.
Various committees appointed by the RBI have issued reports examining the feasibility of implementing full capital account convertibility. The foreign exchange management law will need to undergo changes to allow this, she said.
Finally, how investments in Indian companies listed on the offshore will be treated in relation to FDI restrictions will need to be clarified.
Under the current state of the law, foreign exchange regulations are silent on the issue of overseas listing of Indian companies as well as the trading of their shares, said Atul Pandey, partner at Khaitan & Co. ” For example, say a company in a restricted FDI category lists its stocks overseas. Will the investment of foreigners in the capital of these companies be considered as FDI? These questions need to be answered, ”Pandey said.
The transfer of shares listed abroad is subject to capital gains tax. The Income Tax Act treats these shares as capital property located in India. The framework for foreign lists must also be fiscally efficient, the experts stressed.
There should be an easing of capital gains on the transfer of shares of Indian companies between non-residents. Any lack of relaxation would defeat the purpose of listing overseas, Pandey said.
“The levy of capital gains on the transfer of shares of Indian companies between two foreigners may make them unattractive compared to shares of foreign companies listed on the same platform. Preferably, such cases should be exempt from capital gains, ”he said.
Such relaxation is already applicable for certificates of deposit, he added.