[Analysis] Direct Listing on GIFT-IFSC International Exchanges – MCA Guidelines | FEMA Amendments

Table of Contents

1. Part-A: MCA Guidelines: Companies Issuing Securities in Permissible Jurisdictions
2. Part-B: FEMA Amendment Unleashes Direct Listing Potential: Key Insights for Investors
3. Conclusion

The Ministry of Corporate Affairs (MCA) has introduced groundbreaking guidelines under the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024, allowing unlisted and listed public companies to issue securities for listing on International stock exchanges in permissible foreign jurisdictions.

This move, alongside the recent Foreign Exchange Management Act (FEMA) amendment, opens up new avenues for foreign investors to engage in trading equity shares of Indian companies listed or intending to list on international exchanges.

These regulatory reforms aim to strengthen market confidence, encourage global participation in India’s capital market, and stimulate economic growth while ensuring stringent compliance standards and regulatory oversight. This article aims to analyse the provision of the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024 in Part A and provisions of the Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2024 in the Part B.

1. Part-A: MCA Guidelines: Companies Issuing Securities in Permissible Jurisdictions

Earlier, the Government set October 30, 2023, as the enforcement date for section 5 of the Companies (Amendment) Act, 2020. This section pertains to public offers and private placement. It introduced new sub-sections allowing specified public companies to issue securities for listing on permitted stock exchanges in permissible foreign jurisdictions or as prescribed.

Later, the MCA vide. Notification No. G.S.R. 61(E) dated 24-01-2024, has notified the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024. These rules apply to unlisted public companies and listed public companies issuing securities for listing on permitted stock exchanges in permissible jurisdictions, such as the IFSC (International Financial Services Centre).

The Permitted exchanges include the India International Exchange and NSE International Exchange. Additionally, the Ministry of Corporate Affairs (MCA) outlines certain ineligible entities under these rules, such as Nidhi Companies and companies limited by guarantee.

1.1 Applicability of the norms for listing equity shares in the permissible jurisdictions

The provisions of the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024, shall apply to the following companies which issue their securities for listing on permitted stock exchanges in permissible jurisdictions:

• unlisted public companies;
• listed public companies, [so far as they are following regulations framed or directions issued in this regard by the SEBI or Authority)]

1.2 Criteria for Eligibility: Companies Permitted to Issue Securities in Permissible Jurisdictions

As per the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024, the following types of companies are not eligible to issue securities under this rule:

An unlisted public company, which does not fall under above list and which has no partly paid-up shares, may issue equity shares for the purposes of listing on a stock exchange in a permissible jurisdiction. It is to be noted that the conditions specified under FEM (Non-Debt Instrument), Amendment Rules, 2024 is to be complied with.¹

1.3 Reporting Requirement: Filing of Prospectus for Unlisted Public Cos in Permissible Jurisdictions

Rule 4(4) of the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2023 stipulates the reporting requirement requiring an unlisted public company to submit its prospectus using e-Form LEAP-1 within 7 days after finalizing and filing it with the authorized international stock exchange. This form must be electronically filed in the MCA21 Registry for record-keeping purposes.

2. Part-B: FEMA Amendment Unleashes Direct Listing Potential: Key Insights for Investors

In a significant development, the Ministry of Finance, through Notification No. S.O. 332(E)., dated 24.01.2024, has introduced a groundbreaking amendment to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

A new Rule 34 in the Chapter X has been inserted which permits the Investment by permissible holders in Equity Shares of Public Companies Incorporated in India and Listed on International Exchanges.

As per the amended norms, a public Indian company may issue equity shares or offer equity shares of existing shareholders on a Specified International Exchange subject to certain conditions. Further, amended norms allow the permissible holder to purchase or sell equity shares of an Indian company listed on an international exchange subject to the limit specified for foreign portfolio investment.

The eligibility criteria for the direct Listing of Equity Shares of Companies Incorporated in India on the International Exchanges Scheme and for the purchase and sale of equity shares by the permissible holders has also been specified. The Key takeaways from the amendment are as follows:

2.1 Introduction of new Definition: ‘International Exchange’ and ‘Listed Indian Company’

2.1.1 “International Exchange”

A new clause 2(aaa) has been introduced defining ‘International Exchange’. The ‘International Exchange’ shall mean permitted stock exchange in permissible jurisdictions which are listed at Schedule XI of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

The Schedule XI specifies the ‘International Financial Services Centre in India-India International Exchange’ and ‘NSE International Exchange’ as ‘International Exchanges’

2.1.2 “Permissible Jurisdiction”

Also, new clause 2(ag) defining ‘listed Indian company’ has been introduced. The ‘listed Indian company’ means an Indian company which has any of its equity instruments or debt instruments listed on a recognised stock exchange in India and on an International Exchange and the expression ‘unlisted Indian company’ shall be construed accordingly.

2.2 Permissible Holders’ gets access to Indian equities under International Exchanges Scheme

Ministry of Finance has introduced Rule 34 i.e., Investment by permissible holder. As per the newly introduced norms, a permissible holder may purchase or sell equity shares of a public Indian company which is listed or to be listed on an International Exchange under Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme as specified.

Comments: The amendment aims to attract and facilitate foreign investment by allowing permissible holders to directly engage in the purchase and sale of equity shares of Indian companies on International Exchanges. This helps in promoting global participation in the Indian capital market.

2.3 Who is the ‘Permissible Holder’?

The permissible holder means a holder of equity shares of the Company which are listed on International Exchange, including its beneficial owner. Further, the permissible holder is not a person resident in India.

It shall be noted that the citizens, entities, or beneficial owners from countries sharing a land border with India require Central Government approval to hold equity shares in a public Indian company. A permissible holder may purchase or sell equity shares of an Indian company listed on an international exchange subject to limit specified for foreign portfolio investment.

2.4 Direct Listing Scheme for Equity Shares of Indian Companies on International Exchanges

A public Indian company may issue equity shares or offer equity shares of existing shareholders, subject to the following conditions, namely:

• such issue or offer of equity shares of existing shareholders shall be permitted and such shares shall be listed on any of the specified International Exchange;
• such issue or offer of equity shares of existing shareholders shall be subject to prohibited activities, and sectoral caps prescribed;
• such equity shares to be issued by the public Indian company or offered by its existing shareholders on an International Exchange shall be in dematerialised form and rank pari passu with equity shares listed on a recognised stock exchange in India.

The Listed Indian Companies shall obtain prior Government approval, wherever applicable.

Comments: The rationale behind these conditions is to strike a balance between facilitating global capital access for Indian companies and ensuring robust regulatory oversight. The conditions are designed to encourage responsible and transparent practices while safeguarding against potential risks and maintaining alignment with domestic regulatory standards.

2.5 Eligibility Criteria for Issuing Equity Shares on International Exchanges, for Listed Co’s

A public Indian company may issue equity shares on International Exchange subject to compliance with the following conditions and requirements:

• The public Indian company, any of its promoters, promoter group or directors or selling shareholders are not debarred from accessing the capital market by the appropriate regulator;
• None of the promoters or directors of the public Indian company is a promoter or director of any other Indian company which is debarred from accessing the capital market by the appropriate regulator;
• The public Indian company or any of its promoters or directors is not a wilful defaulter;
• The public Indian company is not under inspection or investigation under the provisions of the Companies Act, 2013;
• None of its promoters or directors is a fugitive economic offender.

2.6 Eligibility Criteria for Issuing Equity Shares on International Exchanges, for Existing holders

The existing holders of the public Indian company shall be eligible to offer shares, subject to compliance with the following conditions and requirements:

• The public Indian company or the holder offering equity shares are not debarred from accessing the capital market by the appropriate regulator;
• None of the promoters or directors of the public Indian company is a promoter or director of any other Indian company, listed or otherwise, which is debarred from accessing the capital market by the appropriate regulator;
• The public Indian company or the holder offering equity shares is not a wilful defaulter;
• The public Indian company is not under inspection or investigation under the provisions of the Companies Act, 2013;
• None of the promoters or directors of the public Indian company or the holder offering equity shares is a fugitive economic offender.

2.7 Compliance Framework for Issuing Equity Shares on International Exchanges

To ensure adherence to extant laws governing equity share issuance, including the prescribed requirements in this Scheme, the public Indian company must comply with the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, the Depositories Act, 1996, the Foreign Exchange Management Act, 1999, the Prevention of Money-laundering Act, 2002, and the Companies Act, 2013, along with relevant rules and regulations.

The company may establish necessary arrangements with both Indian and Foreign Depositories. Additionally, the aggregate equity shares issued or offered in a permissible jurisdiction, combined with those held in India by non-resident individuals, must not surpass the foreign holding limit outlined.

Comments: The rationale behind these amendments is to ensure legal compliance, strengthen regulatory oversight, maintain consistency with domestic legislation, facilitate efficient depository arrangements, and manage foreign ownership within prescribed limits.

2.8 Global Participation: Direct Exercise of Voting Rights by Permissible Holders

The public Indian companies having their equity shares listed on International Exchange shall ensure that the voting rights on such equity shares shall be exercised directly by the permissible holder or through their custodian pursuant to voting instruction only from such permissible holder.

2.9 Equitable Pricing Principles: Ensuring Parity in the Issuance of Equity Shares by Listed Companies

Equity shares issued by a listed company or offered by existing shareholders on a Recognised Stock Exchange in India must be priced at a minimum equal to the price applicable for a similar mode of issuance of such equity shares to domestic investors under the applicable laws.

For the initial listing of equity shares by a public unlisted Indian company on an International Exchange, the pricing of the issue or transfer of equity shares shall be determined through a book-building process as allowed by the respective International Exchange. The price set should not fall below the fair market value as per the applicable rules or regulations under the Foreign Exchange Management Act, 1999.

Comments: The rationale behind this amendment is to uphold fair valuation practices, maintain consistency with domestic standards, preserve market integrity, leverage international best practices through the book-building process, prevent undervaluation, and foster investor confidence in both domestic and international markets.

2.10 India’s Bold Move Empowers Foreign Investors in Listed Companies on International Exchanges

The amendment widens investment avenues for foreign investors, permitting eligible holders to acquire equity shares in Indian public companies listed or intending to list on international exchanges. Moreover, Public Indian companies with shares listed on International Exchanges must ensure that permissible holders directly exercise voting rights, promoting global participation in corporate governance.

Detailed eligibility criteria, compliance obligations, and regulatory oversight mechanisms contribute to bolstering market confidence and transparency, offering assurance to both domestic and foreign investors.

This scheme particularly benefits Public Indian Companies, including startups and those in the sunrise and technology sectors, enabling them to tap into global capital beyond domestic exchanges. This expansion is expected to drive increased investment, unlock unprecedented growth opportunities, and diversify the investment landscape.

3. Conclusion

In conclusion, the amendment signifies a positive step towards attracting foreign investment, promoting transparency, and aligning Indian equity market practices with international standards. The stringent regulatory measures aim to safeguard market integrity while providing a more accessible avenue for global investors to participate in India’s economic growth.

1. Please refer point 5 “Eligibility Criteria for Issuing Equity Shares on International Exchanges, for Listed Co’s” in Part-B