After much anticipation, the expert committee for listing of equity shares of companies incorporated in India on foreign stock exchanges and of companies incorporated outside India on Indian stock exchanges constituted by SEBI, published its report on December 04, 2018. The committee was tasked with the responsibility to recommend a legal framework for implementing direct listing of equity shares of Indian companies on foreign exchanges and vice-versa .
The report highlights the economic advantages for stakeholders if companies incorporated in India directly list their equity shares on overseas exchanges and vice-versa . Further, the committee has also identified policy issues in the existing legal framework in India, recommended modifications to facilitate such listing and provided a list of 10 foreign jurisdictions that may be suitable for direct listing of Indian companies. However, it is to be noted that the report does not recommend allowing Indian companies to list directly on stock exchanges set up within the International Financial Services Centre (IFSC) in Gujarat International Financial Tec-City SEZ (GIFT City).
It can be observed that IFSC in GIFT City, is not uniformly recognised as foreign jurisdiction/overseas market. For instance, stock exchanges in IFSC, such as the India International Exchange Limited and the NSE International Exchange (NSE IFSC) are recognised as overseas exchanges where companies incorporated in India can list their debt securities such as masala bonds and foreign currency bonds to raise funds. However, the report has not recommended recognising such exchanges as foreign exchanges for dealing in equity shares of Indian companies.
Current Position of Law
Clause 7 of the SEBI (International Financial Services Centres) Guidelines, 2015 (IFSC Guidelines), has provided the types of securities that can be dealt with on the stock exchanges operating within IFSC (permissible securities). Under the IFSC guidelines, stocks exchanges established within IFSC in GIFT City may permit dealing in equity shares of companies incorporated outside India. In Chapter 3 of the report, the committee has also recommended that companies incorporated outside India should be permitted to list their equity shares on stock exchanges established within IFSC in GIFT City. Further, Clause 7 (vi) provides that SEBI has the authority to introduce other securities in the list of 'permissible securities' and from time to time, SEBI has introduced new categories such ‘commodity derivatives’ to expand the aforesaid list. However, presently dealing in equity shares of a company incorporated in India is not permitted on such exchanges.
Should IFSC in GIFT City be recognised as a permissible jurisdiction?
In chapter 2 of the report, the committee has laid down the principles for identifying 'permissible jurisdictions' and foreign stock exchanges within such jurisdictions, for listing of equity shares of Indian companies. In part II of chapter 2 of the report, the committee recommends the criteria to define a 'permissible jurisdiction' . Further, the committee has provided a list of 'permissible jurisdictions' and specified stock exchanges that satisfy the conditions laid down in Part II. These include the United Kingdom – London Stock Exchange and United States of America – NASDAQ, NYSE. The criteria to be satisfied by a 'permissible jurisdiction' include:
a country should be a member of the Board of International Organization of Securities Commissions (“IOSCO”) and the Financial Action Task Force (“FATF”);
the securities market regulator of the country should be a signatory to the IOSCO’s multilateral memorandum of understanding; and
clause 2.2 (iv) of Part II of chapter 2 of the report recommends that the central government, pursuant to discussions with relevant regulators, should have the authority to notify any other jurisdiction as a permitted jurisdiction .
It is to be noted that IFSC in SEZ GIFT City is situated within the territory of India and India is a member of IOSCO and FATF and the other conditions laid down in part II of the report are sufficiently satisfied. Therefore, to allow Indian companies to diversify their capital raising options, to find better valuation and to provide them with cost-effective alternatives to raise capital, it may be appropriate to permit companies incorporated in India to list directly on India INX or NSE IFSC in compliance with all applicable regulatory requirements.
Recommendation
In light of the above, for the fructification of the aforesaid proposal, SEBI could exercise its powers under Section 11 (1) of the SEBI Act, 1992 and include “equity shares of a company incorporated in India ” within the list of 'permissible securities' under clause 7 of IFSC guidelines. Thereafter, the central government, pursuant to discussions with relevant regulators could to explore the option to identify IFSC in GIFT City, as a 'permissible jurisdiction' and international exchanges established within the IFSC could be included in the list of designated foreign stock exchanges for listing of equity shares of companies incorporated in India.
Sandeep Parekh is a partner and Rahul Das is an associate at Finsec Law Advisors
