Overseas Direct Listing: Revamping the Indian Start-up Culture

Sidharth Pareek is a Fourth Year Law Student at National Law University, Jodhpur.


The COVID 19 pandemic has reaffirmed that we are living in a globalized world with an interlinked economy. India has taken the next step towards building a world-class financial system. The Government of India has passed the Companies Act (Amendment) Bill, 2020 to resolve the economic problems facing Indian businesses and start-ups, by getting listed directly in the Overseas Bonds. It offers businesses another chance to raise funds. Any of these businesses including start-ups will earn considerably improved assessments on the overseas market. It’s a smart move, in fact.

India is facing a rapid growth cycle with the advent of new generation start-ups that draw much greater involvement and interest than in the old days from international investors. In the preliminary phases of the development, these start-ups need significant low-cost equity funding for growth generated by foreign investments. A lot of Indian start-ups with multinational aspirations still want to enter foreign markets.

What is Overseas Listing?

Corporations use cross-border listings to create funds in order to achieve greater economic security and produce a large amount of capital. There are 2 methods for cross-border listing: direct and indirect listing. Direct listing occurs when businesses sell their shares to the common public straight via stock markets rather than through Initial Public Offerings, i.e., there are no sponsors, brokers, banks, or economic institutions involved in the direct listings. As a result, it proves to be extremely cost-effective for businesses, as they are able to save a significant amount of money in the form of trading costs. The path a firm prefers depends on the circumstances, a public bid, for example, entails significant underwriting costs and other risks but profits in terms of ads and liquidity. Presently, Indian businesses may only list cross-border by Depository Receipts.  These are monetary negotiable instruments used mostly by banks to symbolize publicly listed shares of a foreign business.

Global Depository Receipts (“GDRs”) and American Depository Receipts (“ADRs”) are two kinds of Depository Receipts used by Indian businesses to obtain money. GDR is a security certification provided by middlemen and underwriters, such as banks, to enable investment in a foreign business. As a result, a GDR denotes a particular number of shares not listed or transacted on local stock markets. ADR also permits underwriting banks located only in the United States to produce such certifications. Even though indirect listing assists Indian businesses in obtaining money from overseas, it also carries extra costs for brokers and economic institutions. Because of the opacity of indirect listing, it is closely monitored by SEBI in order to prevent the movement of illicit money.

Allowing Indian firms to be listed in certain forms in international stock markets offers them access to a number of countries from which capital may be collected, with various capital costs and terms of listing. It also provides greater exposure and gives investor bases more insight into niche companies and a demand for them.

Key takeaways: Benefits to the Indian Startup regime

In view of the growth and internalization of capital markets and to encourage the listing of equity capital directly and vice versa by companies incorporated in India, a high-level expert committee was formulated by the Securities and Exchange Board of India (“SEBI”) which produced a report in affirmation on the direct listing of equity shares in India in international bonds. Section 23(3) (inserted by amendment) of the Companies Act, 2013 states that public corporations which issue securities to be listed in the ‘permissible foreign jurisdiction’ on permissible stock exchanges. The word ‘permissible foreign jurisdiction’ can include, as given in the SEBI Report, a jurisdiction which, in the event of any inquiry, has a treaty agreement to exchange information and work with Indian authorities.

This change in the Indian financial system significantly strengthened the lesser regulations relating to the Indian companies’ direct listing abroad, which was successful to a large extent but at the same time the government and SEBI did not rule out all forms of regulations because they encouraged tax evasion through a direct listing. This amendment would encourage businesses to raise capital directly and would only entail regulatory actions where appropriate, thereby making it easier to do business in India.

Indian corporations and startups may previously put their borrowing instruments on international trade, but their equity may be only listed internationally through an ADR or a GDR. Similarly, firms and corporations outside India may only access Indian financial markets by means of the Depository Receipt System of India. The direct listing of share capital of foreign exchange firms recorded in India and vice versa was not permitted. While there are explanations for listing start-ups on Indian stocks for lower capital cost from global funds, liquidity bases and institutional investors, start-ups in India have no direct exposure to the Indian capital market, including, but not limited to, the comprehension of Indian capital stocks, poor funding and high-risk start-ups. Tech start-up promoters are frequently unwilling to give up ownership of the company throughout the early market cycle.

India has over 30 unicorns (start-ups with more than 1 billion dollars’ worth of valuations). This may be the primary receivers of overseas direct listing in International bonds as they will be eligible to sell their shares in the international market. Directly listing companies overseas in India is a major advantage for start-ups, high technology and biotech firms, metals and minerals, etc., best understood by investors on particular markets outside India.

Concluding Comments and Suggestions: A path for easy business in India

Markets in the United States, the United Kingdom, other European economies, have more experience and skills in valuing businesses such as, though not limited to, loss generating and conglomerate companies that usually sell at their underlying value at discounted prices. The new law would allow Indian firms to negotiate with multinational corporations and draw higher valuations, a larger base of buyers and raise the market on an international level. The diversified customer base would raise demand for its shares and further lower capital costs. The individuals interested in cross-listing shall meet the criteria for Indian and international listing.

In accordance to this, need may also have arrived for launching the idea of Business Development Companies (BDCs), as existing in the United States, straightforwardly speaking, BDCs are Real Estate Investment Trusts (ReIT) including private and listed firms with much smaller exchange volumes to invest. This may be configured as automobiles that can be fully “traveled” for tax purposes, rendering them tax effective. While not explicitly listed, BDCs offer leverage to entrepreneurs and early-stage venture firms by providing access to retail segment and facilitating retail-accredited investors with access to their private/start-up portfolio, thus diversifying their risks. Different major private equity companies operate in BDCs in the United States, which should also be welcomed and allowed to float BDCs in Indian capital markets. BDCs can often provide stability to optimize portfolio level at a start-up level to reduce / distribute the danger to all investors. The Indian regulators should benefit from the experience of REITs in India incorporating BDCs.

In sum, the ease of doing business in India means that companies and investors must be free to select who to sell their share, and the government can, unwittingly, step into the shoes of companies.

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