How to benefit from cross-border listing

The expert committee for cross listing submitted its report to Securities and Exchange Board of India (Sebi) in December. Cross-listing is when equity shares of companies incorporated in a country (India) are listed directly on foreign stock exchanges or of companies incorporated outside India, on Indian stock exchanges. For the record, a direct listing is legally and technically different from depository receipts that are currently listed.


This is less straightforward than it appears. First, which are the jurisdictions that Indian shares can be listed? Given the reciprocity involved, that is, you need to allow companies in countries where regulators want Indian shares listed, to list in the Indian exchanges, and I will come back to this, it implies Côte d'Ivoire is out. For that matter most countries won’t make the grade. Put this the other way, there are very few countries that make the cut. 


How to then go about building this list? The committee has used a ‘principles-based approach’ for identifying these jurisdictions and exchanges. In this they have weighed in favour of jurisdictions where there is a "treaty obligation to share information and cooperate with Indian authorities in the event of an investigation". It has then filtered for members and signatories to the Board of International Organization of Securities Commissions (IOSCO) and membership of the Financial Action Task Force (FATF), with focus on anti-money laundering and combating the financing of terror. 


Based on this the committee has identified USA, China, Japan, South Korea, United Kingdom, Hong Kong, France Germany, Canada and Switzerland. If a company is good enough to be listed in these markets, Indian bourse will accept them. Surprisingly neither Australia nor Singapore find their way in this list.


To achieve this, there are changes needed to local regulations and tax laws. The committee has identified changes needed to both the Foreign Exchange Management Act, the Companies Act and Sebi regulations, and this is the meat of the report. The report makes clear that even as the listing framework of the foreign jurisdiction will apply, the Companies Act too will apply. Some other recommendations relate to the permissible jurisdictions KYC requirements and records of beneficial ownership — that have tangled Indian companies — will prevail. Two, that tax issues have always been intractable, and the committee suggests a dialogue with the department of revenue. Three that companies will report accounts based on both jurisdictions. For offshore companies listed in India, the requirements of a minimum issue size (Rs 1,000 crore) and investors (200) and removal of the requirement of an identified promoter or a promoter group.


The acceptance of these recommendations, as well as the ability to pragmatically deal with regulatory and tax issues as they surface will only partly determine whether the objective is met. For it to be a success, the user case too needs to be compelling. This is where the bigger challenges are.


For Indian companies wanting to list overseas, the argument for tapping ‘pools of liquidity’ exists but is weak: any institutional investor that wants to invest in Indian equities, is registered as an FII and can buy their shares. Moreover, the large global brokerages are present in India, and have coverage on stocks that investors track. A tangential benefit that these companies have more robust governance standards hence might enjoy premium valuations, is also not true. As governance focussed regulations have tightened in India, there is very little evidence to support this argument today. Today, company practices are also more closely aligned with regard to disclosures and more frequent interaction with investors. Companies then need to ask themselves if the marginal benefit they hope to get is worth the (compliance) and other costs associated with cross-listing.


India’s domestic market is open to foreign investors, the reverse is not true. Today the more compelling need is of foreign companies listing in India. All this while the global investors have ridden the Indian equity upside. True the Indian investors have done so as well, but there is a need to start to diversify their holdings. Such listings will help internationalise our currency, give us economic heft, compel best in class regulations and further develop the professional-services ecosystem. All this has a positive impact on the local market — in which case it is worth extending the list of jurisdictions to include emerging markets as well. And they are, initially, more likely to turn to India, than companies in the US or the UK. Having said so, as India starts to account for a greater share of an MNC’s business and as Indian savings and pension funds accumulate, there is more compelling case for foreign companies even in these countries to seek Indian listings — even if it is through depository receipts. True India cannot replace New York, London, Tokyo or Hong Kong as a financial centre, but only if we start to export capital to a broader swathe of countries, will India stand and be counted as a significant financial power.


The author is with Institutional Investor Advisory Services India Ltd.

Twitter : @amittandon_in

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