Direct foreign listing: Indian companies face capital gains hurdle

FinMin seeks 10% capital gains tax on transfer of Indian shares

Direct overseas listing of Indian companies may take time as no decision has been taken yet on whether capital gains tax will be imposed on such transactions.   

Also, while the Union Cabinet had approved foreign direct listing in March 2020 (without having to list in India), there’s been a delay in finalising the foreign jurisdictions where companies could list their shares, according to two officials in the government.

The ministries concerned, including finance and corporate affairs, along with regulators, have not arrived at a consensus so far, said one of the two officials. 

“Multiple deliberations within ministries and at regulatory levels have been held in March-April on the matter,’’ a senior official said. The deliberations followed the Revenue Department’s suggestion to tax gains arising out of transactions overseas, he pointed out.

It is learnt that the Ministry of Corporate Affairs (MCA) has been waiting for a go-ahead from the Revenue Department on the foreign listing matter before finalising the regulations. 

"We are firmly of the view that we should not disincentive Indian companies who want to list abroad. If you have a tax framework which is not on par with other countries, it will put the Indian companies at a disadvantage and send out a signal to the world that India is not ready to take up bold reforms," an official said opposing the Revenue Department’s view on levying capital gains tax on transfer of Indian shares for overseas listing.

Unlike the Revenue Department, other ministries and departments dealing with the issue are of the opinion that Indian shares must be treated on par with American Depository Receipt (ADR) and Global Depository Receipt (GDR) schemes. At present, foreign investors trading in ADR/GDRs of Indian companies do not have to pay capital gains tax on their profits. 

To reach a consensus, concerned ministries have explored the possibility of inserting provisions which could entail criteria for taxing the shares listing overseas, said another source in the government. Putting a threshold on taxing companies based on their profitability, net worth, paid-up capital and turnover has been discussed at the highest level. Those with a negative net worth will not be allowed to list, for instance.

Another idea being explored is to start the exercise with International Financial Services Centres Authority’s Gift City in Gujarat, as it is already being exempted from taxes, an official quoted above said while admitting that the second wave of Covid-19 had also delayed the work on foreign listing.

The government is learnt to have received many queries from foreign stock exchanges about the notification of rules for direct listing for Indian companies. "Getting good companies which have the prospect of turning into serious unicorns is a huge attraction for stock exchanges," an official involved with the deliberations pointed out. 

On the jurisdiction part, sources said  the government planned to initially allow listing in eight jurisdictions including the IFSCA Gift City in Gujarat and later add more countries to the list. The other geographies include the US, Korea, Japan, UK, France, Germany and Canada. For every jurisdiction, the treaties with India will have to be addressed before making the transactions taxable. 

“It is essential to reach common ground as the main objective is that Indian firms can have access to foreign capital and not to collect tax revenues. The government needs to take an overall view on whether the proposed framework would encourage companies to raise global capital over and above whatever they are raising domestically,” said an industry expert. 

An umbrella scheme for foreign listing was to be introduced by the Department of Economic Affairs and rules for the listed companies would have been brought out by the Securities and Exchange Board of India (Sebi). The Ministry of Corporate Affairs would roll out the rules for unlisted companies once the umbrella scheme is launched. 

Any company seeking to list abroad would be required to fill a single form called LEAP (Listing for Equity Shares in Permissible Jurisdictions) and submit it to MCA for its permission. If all conditions are met, approval would be given within two weeks.