Direct Listing on Foreign Exchanges: What does it mean for Indian Companies?

What’s in Today’s Article?

• Why in the News?
• Background
• How do Companies Currently List on Foreign Exchanges?
• How will Companies Benefit by Direct Foreign Listing?
• Challenges Involved in Direct Foreign Listing

Why in the News?

• The Union government recently permitted certain Indian companies to directly list on select foreign stock exchanges.

Background

• In July 2023, the Union Finance Minister had announced that the government had decided to enable listed and unlisted domestic companies to directly list their equity shares on the International Financial Services Centre (IFSC), Ahmedabad.
• In a notification issued earlier this week, the Ministry of Corporate Affairs (MCA) said the provision, which was announced in the Companies (Amendment) Bill, 2020, came into effect on October 30.
• The amendment empowered the central government to allow certain classes of public companies to list prescribed classes of securities in foreign jurisdictions.
• This essentially means certain classes of domestic public companies can be listed on prescribed foreign stock exchanges, including GIFT IFSC, Ahmedabad.

How do Companies Currently List on Foreign Exchanges?

• Currently, domestic listed companies depository receipts — use American Depository Receipts (ADR) or Global Depository Receipts (GDR) — to list in the overseas market.
  • A depositary receipt (DR) is a negotiable certificate issued by a bank.
  • It represents shares in a foreign company traded on a local stock exchange and gives investors the opportunity to hold shares in the equity of foreign countries.
  • It gives them an alternative to trading on an international market.
• Between 2008 and 2018, 109 companies raised more than Rs 51,000 crore through the ADRs/GDRs route. After 2018, none of the companies got listed overseas.

How will Companies Benefit by Direct Foreign Listing?

• With direct listing, domestic companies can tap foreign markets to raise funds.
• A direct listing abroad would help Indian companies attract a large and diverse pool of capital.
• It will also help improve corporate governance as well as the benefits of dollar-denominated trades which enables investors to save hedging and currency conversion costs.

Challenges Involved in Direct Foreign Listing:

• The two biggest challenges would be:
  • Will global investors provide the same valuations as that in India?
  • What would be the commercial benefits of these listings?
• Experts said that more clarity is needed on the following issues:
  • Which classes of public companies can use this route,
  • What are the classes of securities (such as equity, preference, etc.) which can be listed,
  • Which are the foreign jurisdictions and permitted stock exchanges where such companies can list,
  • What are the exemptions offered to such companies in terms of procedural compliances.

Q1) When did Bombay Stock Exchange start in India?

Established in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is Asia's first Stock Exchange and one of India's leading exchange groups and has played a prominent role in developing the Indian capital market.

Q2) What is a Hedge Fund in simple words?

A hedge fund is a pool of money that takes both short and long positions, buys and sells equities, initiates arbitrage, and trades bonds, currencies, convertible securities, commodities and derivative products to generate returns at reduced risk.

Source: Direct listing on foreign exchanges: What does it mean for Indian companies? | ET