Govt may keep China, Hong Kong out of foreign listing as tensions simmer

The move is in contrast to what an expert committee of Sebi had recommended in 2018 for China and Hong Kong to be permitted

China and Hong Kong are likely to be kept out of permitted countries for direct overseas listing of Indian companies, as tensions between the two continue to simmer, following border clashes.
 
Sources say the ministries concerned, including finance and corporate affairs, along with regulators, are at an advanced stage of finalising the framework, which is expected to be issued later this month.
 
“The new framework will allow an Indian entity to list only on those international exchanges which are permitted under India’s Prevention of Money Laundering Act laws,” says a senior government official privy to the development.
 
The move is in contrast to what an expert committee of the Securities and Exchange Board of India (Sebi) had recommended in 2018 for China and Hong Kong to be permitted. It had listed 10 permissible jurisdictions, along with the specified stock exchanges with strong anti-money laundering laws, such as the US, the UK, China, Japan, Hong Kong, South Korea, Switzerland, France, Germany, and Canada.
 
According to the panel, those jurisdictions may be considered that have deep capital markets, high liquidity, and strong listing conditions.
 
However, the government is of view that permissible jurisdiction for equity and depository receipts (DRs) should remain where eight jurisdictions are there, barring two.
 
Permissible jurisdictions are the ones that have treaty obligations to share information and cooperate with Indian authorities in the event of an investigation.

 
Also, investors, brokers, and investment bankers associated with the listing of Indian companies would have to be registered and compliant with all the requirements of the jurisdiction concerned.
 
Besides, the central government may keep the new route of overseas listing optional by not replacing the existing DR route.
 
At present, Indian entities are allowed to access foreign capital through American Depository Receipts or the Global Depository Receipt route.
 
“The direct listing route will be in addition to the existing modes of  DR/debt listing of equity shares. Under the new framework, for direct listing of equity shares, the issue of DR will not be a prerequisite. Both modes will co-exist and the issuer may choose either,” says a regulatory source.
 
The reason for keeping it optional is due to the compliance cost involved and the stringent laws of international exchanges.
 
“The idea of direct listing suits unicorns and new-age companies ready to bear the high compliance cost and follow the stringent regulation of international exchange standards, such as the US Securities Exchange Commssion. However, for small firms, the DRs are still a better option as they  are cost-effective and the rules are comparatively easier and simpler,” says an industry expert. 
 
The existing legal framework doesn’t allow a company incorporated in India to directly list on foreign bourses. Similarly, companies incorporated outside India cannot directly list their equity shares on the Indian stock exchanges.
 
The Cabinet had approved the direct foreign listing proposal in March. The idea was in line with Sebi panel's recommendations in December 2018.
 
Currently, India has more than a dozen unicorns and nearly 100 companies with valuation of more than $100 million that could benefit if the framework is implemented.
 
However, there are certain regulations which need to be tweaked to enable companies to list overseas.
 
For instance, changes need to be made to the Foreign Exchange Management Regulations to allow listing of overseas companies on Indian exchanges. The changes sought include permitting resident Indians to invest and transfer securities of companies incorporated outside India, and allowing companies incorporated outside India to open bank accounts in India denominated in the rupee.