In a bid to broaden their financial horizons, Indian companies typically seek public listings to gain access to increased capital. This expansion allows for business growth, product launches, and debt reduction. While many businesses in India traditionally tap into the domestic equity markets, a recent change in regulations has opened the door for them to explore foreign stock exchanges, potentially unlocking even greater funding opportunities.
However, existing Indian laws prohibit companies incorporated in the country from directly listing on foreign stock exchanges. Some Indian companies, such as Infosys, Tata Motors, HDFC Bank, and MakeMyTrip, have managed to list overseas in the past through a method involving Depositary Receipts (DRs).
In simple terms, this involves an Indian company selling its shares to a local bank (like Stock Holding Corporation of India, HDFC Bank, or ICICI Bank), which then safeguards the shares. Simultaneously, a depositary bank overseas collaborates with the Indian bank to create Depositary Receipts (DRs). For every set number of shares held by the Indian bank, a corresponding number of DRs are issued. These DRs, representing the value of the underlying Indian shares, are then traded on foreign stock exchanges, allowing foreign investors to access the Indian company’s stock.
However, a recent amendment to the Companies Act in 2020 signals a potential shift. The government has allowed certain Indian companies to take a direct route and list on foreign stock exchanges, bypassing the need for DRs. This move eliminates the hard process of obtaining clearance to list on Indian exchanges before going through the additional steps of listing overseas.
While the government’s move simplifies the process, there are lingering uncertainties that need clarification. The decision to list directly on foreign exchanges could mark a significant departure from the previous method of using Global Depositary Receipts (GDRs) or American Depositary Receipts (ADRs). Foreign investors, who preferred direct investment due to currency fluctuation risks associated with DRs, may find this new approach more appealing.
The delay in implementing simpler rules for DRs, which were introduced in 2014, was partly due to concerns about potential misuse for money laundering. A past GDR manipulation scam worth over $150 million raised red flags, as individuals manipulated interrelated companies to artificially inflate stock prices, causing regulators to approach the new rules cautiously.
With the 2020 amendments and added measures to combat money laundering, the government aims to address these concerns and facilitate smoother overseas listings for Indian companies. While specific details are yet to be clarified, these recent changes represent a positive step towards making it easier for Indian businesses to raise funds on international platforms.
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