Section five of the Company Act, 2020 states the participation of Indian companies in foreign stock markets. The government recommended the amendment in 2020. The amendment came into practice on 30, October, 2023. The blog examines the legal concepts related to direct listings depository receipts, debt securities and direct listing. The value and performance of Indian companies in the international market benefit the home country with tax payment and reputation.
How do Indian companies participate in foreign stock exchanges?
Indian companies get listed in the foreign stock market through GDR and ADR. ADR is an American depository receipt, and GDR is a global depository receipt. The American financial institution collects the shares of the Indian company. The shares are similar to inventory in the bank. The American bank issues ADR to the value of the stocks. The ADR is the evidence to know that the Indian stocks are listed and traded over the counter in NASAQ. The depository bank offers a specific number of shares to the Indian company. The shares are valued in dollars after the NASDAQ listing. The value of ADR is split with multiple shares, one share or a fraction of shares. The investor from NASDAQ investing in an Indian company receives the dividend in dollars. The capital gain from foreign-listed Indian stock is in dollars. If the share of an Indian company is listed in other markets, the movement of the shares in the Indian market is monitored by the other foreign stock markets. The American investors look into the detailed financial information of the Indian companies. SEBI insist on publishing the audited financial result on the website 21 days before the annual general meeting. The Indian company should list the financial results of the subsidiary companies in either individual or consolidated format.
GDR allow Indian companies to list on different foreign stock exchanges. The Indian Companies collect funds from foreign investors through GDR. Rule 144A allows the other country shares to perform in the American market. Regulation S of the GDR trading allows non-American companies to participate in the European markets. The depository bank will provide one or multiple fractions of shares to one GDR. The proportion of GDR and shares is according to the appeal of the investors. The listing of one company shares in multiple stock exchanges pays way to arbitrage. Arbitrage is making money due to differences in the price at different stock exchanges. Because of arbitration, the multiple listings of one company are under the monitoring of international investors and market players.
The announcement from the central government says that certain public companies get direct access to foreign markets. The government allows certain domestic public listed companies to list on GIFT, IFSC, and Ahmedabad. The data from financial markets say that around 109 Indian companies raised 51, 847, 72 crore through foreign listing.
The direct listing of Indian companies in the international market without intermediates is the long-held desire of the Indian companies. On October 30 2023, the government implemented the rule. Indian companies participate in the foreign market through debt securities and listings. In 2020, the government attributed the law of direct listing to company law. The framework for the direct listing was under discussion by the Department of Economic Affairs and MCA. In July, Finance Minister, Nirmala Sitaraman announced the permit of direct listing of Indian companies in GIFT, IFSC. The direct listing would enhance the value of Indian companies and open access to global capital.
Mahendra Singh, partner of Economic law practice told the media that the listing of Indian companies is an opportunity to tap offshore markets and welcome foreign investors. Manan Lahoty, partner of Indus law says that the idea benefits the unlisted Indian companies. Apart from the notification, the detailed framework is mandatory. The notification from the government allows the ball to roll around the markets. The rules help the Indian companies to enter and become successful in this route.
Benefits of direct listing in foreign stock exchange:
- The direct listing would bring additional capital to the Indian companies.
- The participation of Indian company in foreign stock exchange improve the capital outflows.
- The currency conversion brings additional revenue to the Indian companies.
- The interest of foreign investors brings changes in corporate governance.
- The company management team improves the quality standards up to the mark of foreign companies.
- The participation of Indian companies improves the trade dealings and valuation of foreign currency.
- The Accounting standards of India are almost similar to the GAAP of the US. These similarities help the Indian companies to spend less time on the preparation of financial results for foreign investors.
- The companies get exemptions from compliances and legal formalities. The exemption helps to spend less time on legal operations.
The question from experts goes as to how foreign investors value Indian companies. The market movement and value decide the mutual benefits of direct listing in foreign stock exchanges. From November 2022 and January 2023, around 5,099 foreign companies were registered in India. MCA said there are around 3,291 foreign companies in India. Infosys is the first company from India on the international American stock market. Stock markets promote mutual business and investment.