Indian stock exchange and foreign companies

The Indian Stock Exchange: A Hub of Financial Trading
When it comes to the world of finance, the stock exchange plays a crucial role. Think of it as a bustling marketplace where traders and buyers meet to exchange financial instruments like stocks, bonds, and commodities.
In India, the stock exchange follows a set of rules laid down by the Securities and Exchange Board of India, or SEBI. This regulatory body keeps an eye out for investors’ interests and strives to boost India’s stock market.

So, what exactly is a stock exchange?
In India, a stock exchange is where all the action happens. It’s the place where companies’ stocks, bonds, and other financial goodies are bought and sold. There’s a specific timeframe for these transactions during business days, all in accordance with SEBI’s clear guidelines. But only companies listed on the stock exchange get to join this party.
If a company’s stocks aren’t part of a well-known stock exchange, they might still be traded in something called the ‘Over Counter Market.’ But those shares won’t enjoy the same level of prestige.

How does it actually work?
In India, stock exchanges mostly operate independently, without any big-shot “market makers” or “specialists” hanging around.
Here’s the deal: the trading process is all about orders. It’s like a digital dance, where computers match investors’ orders with the most fitting limit orders. This system brings a lot of transparency to the table since all the market orders are on full display.
Brokers are like the conductors of this trading orchestra. Every order goes through them. Both big players and regular folks can jump in using something called direct market access. They use terminals provided by stock exchange brokers to place their orders directly into the system.

Why list with a stock exchange?
Getting your company listed on a stock exchange comes with some nifty perks. For instance, only listed companies get their shares quoted on the exchange.
Being part of a reputable stock exchange is a win-win for everyone. Companies, investors, and the public all reap the rewards. Here’s how:

1. Boosting Credibility: Listed stocks carry a certain cachet. Companies can flaunt their stock exchange status to attract more shareholders. Selling shares to interested folks is a smart move that builds up the company’s reputation.
2. Raising Capital: Need cash? Listing on a stock exchange is like hitting the financial jackpot. Companies can rake in more money by issuing shares to eager shareholders. The exchange’s good name helps them gather funds to keep the business running smoothly.
3. Collateral coolness: When you’re listed, lenders give you a nod of approval. Listed securities are like golden tickets – they’re accepted as collateral. A listed company has an easier time securing credit because it’s seen as reliable.
4. Liquidity lovin’: Listed shares are like the cool kids in the block. They’re more liquid, meaning they’re easily tradable. Shareholders can quickly figure out how much their investment is worth, and that’s a big plus.
5. Sharing the risk: Listing helps spread the risk around. It evens out the ups and downs a bit. Shareholders can catch a piece of the pie if the company’s overall value goes up even a smidge.

How do you invest in a stock exchange?
Investing in an Indian stock exchange is a two-way street. You’ve got options:

1. Bombay stock exchange (BSE): Established way back in 1875, the BSE is India’s oldest stock exchange. It’s a heavyweight, with over 6,000 publicly listed companies. The BSE’s performance is tracked by something called the Sensex, which hit a record high in June 2019.
2. National stock exchange (NSE): Born in 1992, the NSE is the trailblazer of electronic stock exchanges in India. It was created to shake up the market scene. The NSE’s market cap was around $4.1 trillion in 2016, and its NIFTY 50 index is like a crystal ball for the Indian capital market.

These stock exchanges aren’t just financial hubs – they’re economic powerhouses. They’re interconnected too. If one falters, it can send ripples through other global exchanges. For when the Bombay stock exchange sneezes, the New York stock exchange and others might catch a cold too.

Foreign companies in Indian stock exchange
In the wake of the era of liberalization and globalization, numerous businesses embarked on global expansion. Over the last few decades, there has been a noticeable surge in the internationalization of businesses, with companies raising funds from foreign capital markets by listing on stock exchanges across the globe. This trend has interconnected global securities markets, easing cross-border access to capital markets. India, being one of the world’s fastest-growing economies, has become a magnet for foreign investors and businesses aiming to tap into its markets. Responding to this, India has taken measured steps to open up its financial markets to some extent, allowing foreign enterprises to raise funds within the country. In this article, we will delve into the process through which foreign companies can secure funds from India and get their securities listed on Indian stock exchanges.

Mechanisms for foreign companies to raise funds from India
There are two principal avenues through which foreign companies can raise funds from India. The first involves the incorporation and registration of their company in alignment with the stipulations of the Companies Act of 2013. The second route is through the issuance of Depository Receipts (DRs), which are subsequently listed on stock exchanges. While the direct listing of securities on Indian stock exchanges is not feasible for foreign companies, they can opt to issue Indian Depository Receipts (IDRs) and subsequently seek to list for them.

Understanding depository receipts (DRs)
Depository Receipts (DRs) are certificates issued by domestic banks in a given country, serving as proof of ownership of shares in foreign companies. The DRs program has paved the way for companies worldwide to be listed in multiple countries. Opting for cross-listing via DRs is often preferred over direct listing due to its simplified and more flexible mechanisms, coupled with less stringent regulations for foreign companies compared to direct listings. When DRs are denominated in Indian Rupee and issued by domestic depositories in India, they are referred to as Indian Depository Receipts (IDRs). IDRs empower local investors to invest in foreign companies using Indian Rupees. The foreign company initiating the issuance must collaborate with a Domestic Depository registered with the SEBI, which subsequently issues the IDRs on behalf of the foreign entity.

Exploring special purpose acquisition companies (SPACs)
An Alternative Approach Another route for foreign companies seeking listing in India involves Special Purpose Acquisition Companies (SPACs). SPACs are essentially shell companies backed by sponsor companies that raise capital through an Initial Public Offering (IPO). Following the IPO, the SPAC identifies and acquires a target company, leading to a public listing without undergoing the conventional IPO process.

Navigating the legal and regulatory framework for IDRs
The issuance of IDRs entails compliance with regulations laid out by both the Securities and Exchange Board of India (SEBI) and the Companies Act of 2013, along with associated rules and regulations. This involves adhering to Section 390 of the Companies Act 2013, rules under the Companies (Registration of Foreign Companies) Rules, 2014, and the Companies (Issue of Indian Depository Receipt) Rules, 2004. Furthermore, applicable rules from the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, and Guidelines from the Reserve Bank of India are pertinent to IDR issuance.
In India, nearly the entire equity market capitalization, exceeding US$3 trillion, is attributed to domestically incorporated companies. Thus far, our progress has been mainly driven by the listing of Indian domestic companies. To cultivate our markets and provide local investors with a broader array of choices, it’s beneficial to encourage foreign companies to list in India as a secondary option. Additionally, we should extend an invitation to companies promoted by Indians, albeit incorporated and listed outside India, to use Indian exchanges as a secondary listing platform.
India has an Indian depository receipts (IDRs) mechanism in place, designed to facilitate the listing of a foreign company’s shares on Indian stock exchanges. It functions like a reverse GDR/ADR mechanism, enabling the listing and trading of foreign currency-denominated shares in the form of Indian rupee receipts. These issuances are governed by specific regulations outlined in the Companies Act, established by SEBI and the RBI. However, up until now, only one listing has taken place using the IDR route in India—by Standard Chartered Bank. Following this listing, no other company has pursued this route. One of the primary reasons for the limited interest in IDR mechanisms stems from the somewhat restrictive nature of these guidelines.
Naturally, when these regulations were introduced, they were rolled out conservatively to test the waters. However, to heighten activity in the Indian market and offer more choices to investors, it’s time to encourage more such listings in India. A reevaluation and liberalization of these guidelines are in order, with appropriate safeguards, of course.
In my opinion, the chief challenge lies in the eligibility criteria for IDR listing. Ideally, the eligibility conditions for IDR listing should mirror the criteria for listing an Indian company within India. A couple of specific modifications to the guidelines could attract some of the emerging new-age companies to consider listing in India.
As per the Companies Rules today, a company seeking an IDR issuance must have been listed and traded in its home country for at least three immediately preceding years. This provision was intended to ensure that only well-established companies enter the Indian market. However, this rule might exclude many of the high-quality, new-age unicorns recently listed on international stock exchanges from even contemplating an Indian listing. Additionally, the rules stipulate that the average market capitalization of the internationally listed security must be at least USD 100 million.
To entice recently listed companies, I propose that instead of scrutinizing the listing track record or market capitalization, we should focus on the operational performance and business track record of the company. To maintain prudence, we could apply a higher allocation to Qualified Institutional Buyers (QIBs), similar to the approach outlined in 6(2) of ICDR provisions applicable for the listing of an Indian company. Numerous companies promoted by Indians, spanning both traditional and new-age sectors, are listed on global markets without a presence in India. This adjustment could prompt them to explore Indian markets as a secondary listing option.
Furthermore, an IDR listing necessitates a track record of distributable profits for at least three out of the immediately preceding five years. I believe this requirement should be viewed from a sector-specific perspective. For certain sectors, such as infrastructure, dividend distribution may not be viable as these companies might find it more beneficial to reinvest their earnings for growth and debt reduction. In fact, a similar provision regarding a track record of profits existed for the listing of Indian companies as well. However, this was subsequently modified with the creation of Regulation 6(2) of the ICDR Regulations to facilitate issuer companies that did not meet asset/net worth/profit criteria, enabling them to make an initial public offering (IPO) with a minimum allotment of 75% to QIBs. This approach empowers various new-age and infrastructure businesses to list without possessing a track record of profitability. A parallel listing criterion could be introduced for IDRs as well.
In my assessment, these changes can be swiftly implemented, as they do not necessitate changes to any prevailing legislation. These recommendations would only require adjustments to the Companies Rules and SEBI guidelines. With determination and focus, it’s conceivable that we could genuinely encourage foreign companies to seriously contemplate India as a significant secondary listing market

Exploring ADR and GDR: Your guide to global market participation
Before we dive into the intriguing process of how Indian companies can join the global stock markets, let’s demystify the terms ADR (American Depository Receipts) and GDR (Global Depository Receipt). These financial tools, introduced by the Government of India, empower Indian companies to make their mark on foreign stock exchanges.
In a similar vein, let’s not forget the Indian Depository Receipt (IDR), which comes into play when foreign companies wish to offer their shares in Indian stock markets.

Decoding ADR – American Depository Receipt
Imagine an ADR as a bridge connecting an Indian company to American investors. By utilizing ADRs, an Indian-incorporated company can offer its shares for sale on US Stock exchanges. This strategic move has been made by some renowned Indian giants like Tata Motors, ICICI Bank, Infosys, and Wipro.
An Indian ADR can represent a single share, multiple shares, or even a fraction of a share, based on decisions made by the depository bank. ADRs come in two distinct flavors:

1. Sponsored ADRs: When a non-American company entrusts its shares to a US depository bank, allowing those shares to be sold in the US stock markets.
2. Unsponsored ADRs: When a non-American company directly sells its shares over the counter in the US stock markets.

Unveiling GDR – Global Depository Receipt
Picture GDRs as versatile certificates issued by depository banks, empowering Indian companies to venture into the global stock markets.
The Bold Move: Direct Listing of Indian Companies Abroad
Fast forward to 2018, when the Indian government formed a committee to explore the concept of directly listing Indian companies on foreign stock markets. Until then, companies could only venture abroad through ADRs and GDRs.
Now, with the green light from the central government, Indian companies can apply for direct listing on global stock exchanges. Unlike ADRs and GDRs, they can sell their shares directly on prestigious platforms like US Exchanges and European Exchanges, without involving a foreign depository bank.
However, the committee is diligently crafting the blueprint and guidelines to facilitate this direct listing of Indian companies in foreign markets.

In Closing
Currently, Indian companies have a ticket to global markets via ADRs and GDRs. But here’s the exciting twist: the Indian Government and SEBI (Securities and Exchange Board of India) are working hand in hand to sculpt a framework that would enable domestic companies to directly list on esteemed US and European exchanges. If all goes according to plan, this strategic move could usher in a win-win scenario for companies, investors, and the government alike.

Eligibility Criteria for IDR Issuance
Companies aiming to issue IDRs must satisfy criteria established by SEBI, RBI, and relevant rules and regulations. These criteria encompass:
Companies (Registration of Foreign Company) Rules, 2014:
– Minimum pre-issue paid-up capital and free reserves of at least USD 50 million.
– Minimum average market capitalization of USD 100 million in the parent country over the preceding three financial years.
– Continuous trading on a stock exchange in the home country for a minimum of three financial years before IDR issuance.
– A track record of distributable profits as per Section 123 of the Companies Act 2013 for three out of the five preceding years.
– Adherence to additional eligibility criteria stipulated by SEBI.
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009:
– Listing on a stock exchange in the home country.
– Absence of prohibition from issuing securities by regulatory authorities.
– Demonstrated compliance with all securities market regulations and laws in the home country.
Companies (Issue of Indian Depository Receipts) Rules, 2004:
– Minimum pre-issue paid-up capital and free reserves of USD 100 million.
– Average turnover of USD 500 million over the preceding three financial years.
– Five years of profitability before issuance, with a minimum annual dividend of 10%.
– Debt-equity ratio not exceeding 2:1 before issuance.
– Minimum IDR issue size of Rs. 50 crores.

Procedure for IDR Issuance

The process of issuing IDRs involves several sequential steps:
1. Obtaining necessary approvals and exemptions from relevant authorities in the home country.
2. Submitting a draft application with SEBI, accompanied by a due diligence report, through an authorized Merchant Banker at least ninety days before the IDR issue commences.
3. Furnishing any additional information requested by SEBI within thirty days of submitting the draft application.
4. Receiving in-principle approval from SEBI for the IDR issue.
5. Remitting the issue fee to SEBI, updating the prospectus, and filing it with both SEBI and the Registrar of Companies.
6. Appointing an overseas custodian bank and a Domestic Depository.
7. Transferring underlying shares to the Overseas Custodian Bank.
8. Obtaining listing permission from relevant stock exchanges in India.
9. Fulfilling other procedural formalities and complying with regulatory requirements.

Essential Documents for IDR Issuance

Critical documents required for the IDR issuance process encompass:
– Agreement with the authorized Merchant Banker.
– Due diligence certificate from the Merchant Banker.
– Authenticity certificate for the prospectus from the Merchant Banker.
– Draft prospectus of the Issuer Company.
– Document outlining the constitution of the Issuer Company.
– Certified copy of the certificate of incorporation.
– Agreements with the Overseas Custodian Bank and Domestic Depository.
– Translated documents, if the originals are not in English, certified by key managerial personnel and attested by an authorized officer of the Indian office of the embassy of the Issuer Company’s country.

The Emergence of SPACs: Paving a New Path to Listing
SPACs have emerged as an alternative route for listing in India. A SPAC is a shell company formed through an IPO with the intention of acquiring an existing operational company or identifying a target within a predefined timeframe. Subsequent to the acquisition, the target company assumes the status of a listed entity without undergoing the conventional IPO route.

Operating Within the Regulatory Framework
While SPACs offer a distinctive avenue to listing, they must conform to the stipulations of the Companies Act of 2013 and other relevant regulations. A De-SPAC transaction, which involves merging the SPAC and target entity, necessitates approval from the National Company Law Tribunal (NCLT) and adherence to the Foreign Exchange Management (Cross Border Merger) Regulations, 2018.

Anticipating the Future and Case Studies
Despite initial hurdles and limitations, IDRs and SPACs have the potential to reshape India’s financial landscape. Real-world case studies, such as Standard Chartered’s IDR and ReNew Power’s SPAC deal in the US, offer valuable insights.
Standard Chartered’s IDR Journey
Standard Chartered Plc
issued the first-ever IDR in 2010. Despite early enthusiasm, challenges emerged, including interest rate and currency risks, tax complexities, and constraints on expanding the investor base. Eventually, the value of IDR declined, leading Standard Chartered to delist them.

ReNew Power’s SPAC Success Story
ReNew Power, a major player in India’s renewable energy sector, embarked on a SPAC deal with RMG Acquisition Group, resulting in an $8 billion listing on NASDAQ. While the deal garnered positive attention, its long-term implications are yet to be fully realized.

In Conclusion

The transformation of India’s financial landscape since the era of liberalization and globalization has been noteworthy. Foreign companies seeking funds have explored diverse avenues, including IDRs and SPACs, each characterized by unique advantages and challenges. As India aspires to establish itself as a global center for business and innovation, continuous regulatory refinements and industry adaptations will play a pivotal role in shaping the trajectory of fundraising and listing alternatives.

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