Indian Companies Permitted Direct Listing on International Exchanges Gift
The Ministry of Finance (“MOF”), in exercise of its powers under Sections 46 (2) (aa) and 46 (2) (ab) of the Foreign Exchange Management Act, 1999 (“FEMA Act”) has amended the provisions of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“FEMA Rules”), and simultaneously the Ministry of Corporate Affair via its introduction of the Companies (Listing of equity shares in permissible jurisdiction) Rules, 2024 (“Company Rules”) (collectively “Rules”), through respective notifications dated January 24, 2024, have formulated the framework to allow the direct listing of public Indian companies on international exchanges.
The Rules currently allow unlisted public companies and listed public companies (as long as they are in accordance with the regulations framed or directions issued by the Securities Exchange Board of India) to list in International Exchanges (defined under Schedule XI of FEMA Rules) and permissible jurisdictions (defined under Schedule 1 of the Company Rules), which currently prescribes international stock exchanges under the International Financial Services Centres (IFSC), established in the Gujarat International Finance Tec-City (“GIFT City”).
Furthermore, under the FEMA Rules, Chapter X Rule 34 allows permissible holder to purchase or sell equity shares of a public Indian company listed or to be listed on an International Exchange with mechanism and conditions towards the same being set under the newly introduced Schedule XI.
The pricing mechanism of these equity shares varies depending on whether equity shares are issued by a listed company, offered by existing shareholders on a recognised stock exchange in India, or in the case of an initial listing by an unlisted Indian company on an International Exchange.
Lastly, the Company Rules under Rule 5 detail certain companies which are not eligible for listing in such permissible jurisdictions, with Nidhi companies and section 8 companies included in same amongst others.
The Rules providing an overarching regulatory framework for Indian companies, is a set in the right direction towards reshaping the Indian capital market, allowing Indian companies including new age start-ups an opportunity to access global capital and growth.
Details Of The Notification
The RBI through this notification prevents REs from making investments in any scheme of AIFs which has downstream investments either directly or indirectly in a debtor company of the RE. In this instance the phrase “debtor company of the Regulated Entity” covers any company to which the RE currently has or previously had a loan or investment exposure anytime during the preceding 12 months.
The notification also directs a Regulated Entity to liquidate its investment in an AIF scheme if the scheme makes a downstream investment in any debtor company. The liquidation of its investment by the RE is to be made within 30 days from either the date of such downstream investment by the AIF or the date of issuance of the Circular, whichever is earlier. The Circular further provides that, where i the REs are not able to liquidate their investments within 30 days, REs will be required to make 100 per cent provision on such investments.
The notification further provides that investments by REs in the subordinated units of any AIF scheme with a ‘Priority distribution model’ shall be subject to full deduction from RE’s capital funds. Priority distribution model refers to certain schemes of AIFs which adopt a distribution waterfall in such a way that one class of investors (other than sponsor/manager) share loss more than pro rate to their holding in the AIF vis- à-vis other classes of investors/unit holders, since the latter has priority in distribution over the former.
Analysis
The circular seems to stem from the consultation paper issued by the Securities Exchange Board of India (“SEBI”) on May 19, 2023 and the investigations undertaken by SEBI which uncovered cases in tune of $1.8 billion to $2.4 billion where AIFs were found evergreening. RBI’s concern on evergreening though justified, however, seems excessive. A blanket ban on all investment, whether equity or debt, along with the requirement to exit within 30 days or in case where exit is not undertaken within 30 days, make 100% provision for the investment is likely to cause the REs to rethink their investment strategy in AIFs. It seems RBI may not be in sync with SEBI regulatory requirements which requires investment manager’s consent (AIF Category I and II) for liquidating the units, and even it is assumed that such consent is received in time, finding a buyer for such units in a short time is likely to be a challenging task. The Circular further fails to clarify its applicability where an RE is a sponsor of an AIF. The ramifications of the Circular are yet to be seen, however, this Circular will be a catalyst in RE investments drying up significantly in AIFs due to possible conflict of interest.
