Global listing, local gains

Allowing Indian firms direct listing abroad makes sense

Corporate India and stock-market investors should welcome the news that the Securities and Exchange Board of India (Sebi) has constituted an expert committee to consider ways and means for India-incorporated companies to list on foreign bourses. There are significant gains to be garnered for both sets of players in such overseas listings norms. For corporations with investment plans, raising finance locally has become a headache in recent years. Access to bank finance has become difficult as a result of Indian banks’ huge bad debt overhang even as rising global interest rates and domestic inflation are raising the cost of capital. The weakening rupee has made foreign borrowing a risky proposition and India’s corporate bond market still lacks breadth and depth. In that sense, an overseas listing offers access to a wider, global pool of relatively cheap risk capital to finance projects that may be stalled for want of funding. It is true that this avenue has been open to Indian companies via the American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) mode — and several reputed companies such as Wipro, HDFC Bank, Infosys and Tata Motors, among others, have availed themselves of this route — the modus operandi is complicated.

Since direct listing is not permitted at present, these companies choose from a menu of structural options to leverage the ADR/GDR route, such as setting up holding companies or special purpose vehicles and intermediaries (depository participants). The fact that this route is confined to larger companies, with the institutional wherewithal to handle such complexities, suggests that the time and cost of following this route are unworkable for mid-size and smaller companies. Further, since most reputed bourses have stringent norms of disclosure and transparency, direct listing would do wonders in raising standards for Indian companies, which still lag global best practices in this respect despite reforms in accountancy standards recently. The gains for Indian shareholders too can be significant. A good example of this comes from e-commerce major Flipkart’s sale to Walmart. Flipkart’s business is entirely in India, yet its need for flexibility in raising adequate and cheaper quantities of risk capital without constantly inviting the attention of India’s tax authorities encouraged it to register in Singapore. It is highly unlikely that Flipkart will opt for any Indian stock exchange when it goes in for listing.

To be sure, there are many variables to deal with before direct overseas listing can become a reality. The obvious one is the need for Sebi to synchronise its regulatory architecture with the leading global bourses. The treatment of such inflows of foreign funds is another issue, both from the point of view of monetary policy imperatives as well as economic policy, especially in sectors in which there are restrictions on foreign direct investment, though this does not appear to have proven a hindrance for companies raising money through the ADR/GDR route. Taxation issues will add a layer of complexity to the exercise. All of these suggest that direct listing will not be an innovation that Sebi is likely to introduce anytime soon. As a step towards enabling India Inc to have improved access to global money markets, however, it is good that a conversation has begun.