With the Indian government bringing Section 5 of the Companies (Amendment) Act 2020 into force, a significant opportunity has opened up for Indian public companies. They can now opt for direct listing on foreign stock exchanges, bypassing the earlier restrictive mechanisms like Global Depository Receipts (GDRs) and American Depository Receipts (ADRs). This development is a part of a broader reform to offer Indian companies more global exposure and capital access.
To make this transition smooth, the government has also notified two critical sets of regulations – the LEAP Rules (Listing of Equity Shares in Permissible Jurisdictions Rules January 24, 2024) and the Foreign Exchange Management (Non-Debt Instruments) Amendment Rules 2024. These rules outline the procedures, eligibility criteria, and permissible exchanges where such listings can take place.
Let’s break down what direct listing means, how it works, the advantages it offers, and the challenges it poses for Indian companies looking to go global.
What Is Direct Listing?
To understand this concept better, it is essential to grasp the direct listing meaning. A direct listing is a method where a company lists its existing equity shares on a stock exchange without raising new capital or issuing additional shares. In contrast to a traditional IPO, where new shares are sold to raise funds, direct listing companies allow their existing shareholders—like promoters and employees—to sell their shares directly on the foreign exchange.
Unlike ADRs or GDRs, where shares are held by a custodian bank and certificates are traded instead, direct listing allows the actual shares of the company to be traded on an international platform. This simplifies the structure and enables better price discovery based on actual supply and demand.
Regulatory Framework Supporting Direct Listing
This reform traces its roots back to the SEBI Expert Committee’s recommendation, which advocated for Indian companies to list directly abroad and for foreign companies to list in India. While the latter is still restricted to the Indian Depository Receipts (IDR) mechanism, Indian companies have now been granted the freedom to explore global capital markets more directly.
Section 23(3) of the Companies Act, post-amendment, allows specific classes of public companies to issue equity shares for direct listing on foreign exchanges. According to Rule 3 of the LEAP Rules, both listed and unlisted public companies are eligible for this route. As a result, companies can choose to be listed only on foreign stock exchanges (non-dual listing) or on both domestic and foreign exchanges (dual listing).
At present, the permitted foreign exchanges for direct listing are the India International Exchange and the NSE International Exchange located at the International Financial Services Centre (IFSC) in Gujarat.
How Indian Companies Currently List Abroad?
Traditionally, Indian companies have accessed foreign capital markets through instruments like ADRs and GDRs. These involve appointing a domestic custodian and an international depositary bank. The domestic shares are held in custody, and equivalent certificates are traded on foreign stock markets.
Between 2008 and 2018, over ₹51,000 crore was raised by 109 companies via this route. However, this method has seen a sharp decline in recent years due to its complex structure and high cost.
The introduction of direct listing offers a simpler, cost-effective, and more transparent alternative, especially for new-age businesses and startups aiming for global investor participation.
Advantages of Direct Listing
The advantages of direct listing are numerous and can be particularly beneficial for growth-oriented companies and unicorns aiming to raise their global profiles. Here are some key benefits:
- Access to larger markets:By choosing direct listing, companies can tap into more liquid and broader capital markets. This could significantly increase the demand and valuation of their shares due to higher investor participation.
- Global investor base: Foreign stock exchanges often attract institutional and sophisticated investors. Listing on such platforms helps enhance credibility, reputation, and international brand recognition for Indian businesses.
- Cost efficiency: Unlike IPOsor DRs, direct listings eliminate the need for underwriters and reduce costs related to roadshows, legal due diligence, and regulatory filings.
- No ownership dilution: Since no new shares are issued during a direct listing, promoters and existing shareholders do not face dilution of their ownership, giving them better control over their business.
- Better corporate governance:Companies that list on foreign stock exchanges must meet international compliance and disclosure norms. This helps improve transparency and corporate governance standards.
- Attracting talents and partnerships:A foreign listing enhances the visibility of a company, helping attract skilled professionals, international partners, and global customers.
Challenges of Direct Listing
While the concept offers immense potential, direct foreign listing is not without its hurdles. Companies need to weigh these factors before deciding.
- Regulatory compliance:Foreign exchanges have their own compliance, disclosure, and governance requirements, which may be more stringent than Indian norms. Companies must adapt to different regulatory environments, which may involve additional costs and complexities.
- Valuation differences: Global investors may assess company valuations differently from domestic markets. This could potentially lead to lower valuations than what the company might receive locally.
- Market volatility and currency risks: Being exposed to foreign stock markets also means dealing with currency fluctuations and broader geopolitical risks, which can affect stock performance and investor sentiment.
- Legal and tax complications: Navigating the legal and taxation systems of a foreign jurisdiction may be challenging. Issues related to double taxation, shareholder disputes, or cross-border compliance can arise.
- Shareholder and governance concerns:There may be conflicts of interest or governance issues if shareholder expectations in foreign jurisdictions differ from Indian practices.
Dual vs Non-Dual Listing Explained
An important distinction to understand is between dual and non-dual listings. In a dual listing, companies are listed both in India and abroad. This allows them to maintain a presence in their domestic market while benefiting from foreign investor participation.
On the other hand, non-dual listing means companies are listed only on a foreign exchange. This could be beneficial for unlisted public companies looking to target international markets directly, although they would forego exposure to Indian investors.
This flexibility, granted under the new LEAP Rules, provides businesses the freedom to choose a route that aligns with their strategic goals.
The Way Forward for Direct Listing Companies
As more clarity emerges from regulators regarding eligibility, permitted jurisdictions, and procedural relaxations, more Indian businesses—especially startups and tech firms—are expected to explore direct listing. This is especially relevant in a globalised world where companies are no longer bound by national capital constraints.
With continued policy support, direct listing companies could set the tone for a new era of global fundraising. This approach can help position India as a key player in international financial markets while enabling its homegrown businesses to scale new heights.
Conclusion
The recent regulatory reforms enabling direct listing on foreign exchanges mark a pivotal moment in India’s financial evolution. By moving beyond traditional ADR/GDR mechanisms, Indian companies now have a streamlined and cost-effective method to reach global investors.
Understanding what is direct listing and its implications is essential for companies aiming to expand internationally. While there are both advantages of direct listing and challenges to consider, the reform offers a powerful new tool for ambitious Indian enterprises.
As the government continues to refine the framework, more clarity and investor-friendly norms will likely emerge. In the long run, direct listing companies could lead India’s charge into global capital markets, making it easier for the world to invest in Indian innovation.
