Explained: Why Indian firms want direct overseas listing and why the govt is reluctant

In what could potentially be a big blow to Indian companies wanting to tap foreign capital markets, the government has reportedly frozen plans to allow local companies to list abroad. 

News agency Reuters said in a report that the government has made an about-turn as it is looking to further bolster the local capital markets which have, over the last few years, seen a boom of sorts in initial public offerings, especially with several tech companies coming out with big-ticket listings. 

Why do Indian companies even want to list abroad?

An offshore listing would make it easier for new-age companies, especially in the technology domain, to benchmark valuations. Analysts say the Indian stock exchanges and local investors have traditional views on profitability and growth, which often contradict the performance indicators that many new-age companies follow.

Moreover, overseas bourses have far more depth in terms of number and quality of institutional investors.

So, there is no way Indian companies can access foreign capital markets?

Actually, there is a way. Indian companies can access foreign capital markets through American depository receipts (ADRs) or global depository receipts (GDRs). But there is a catch. Only those companies that are already listed in India can do so. Existing laws don’t allow direct listing of Indian companies on a foreign stock exchange.

When did India start thinking of allowing Indian companies to list overseas directly?

In December 2018, a committee of the the capital markets regulator Securities and Exchange Board of India (SEBI) proposed to allow Indian companies to list on overseas bourses directly. Later, the government amended the Companies Act to enable overseas listing and reduce the compliance burden for companies.

However, the government, SEBI and the Reserve Bank of India haven’t framed detailed regulations for the purpose.

Why has India changed its mind now?

The government apparently thinks that the local capital markets have enough breadth and depth to allow companies to raise money at good valuations, the report said, citing officials it didn’t identify.

The government has, however, not said anything about this officially. 

What had India been saying about foreign listings before it reportedly reversed its decision?

Indian government officials had said in August last year that new rules for foreign listings would be framed by February this year. But that deadline has now passed.

So, who will be most impacted by this decision? 

Several private equity and venture capital investors had been lobbying with the government to allow Indian companies to list abroad for better valuations and improved access to capital.

The about-turn will not only companies but also some of the most active investors in Indian startups, such as US-based investment firms Tiger Global and Sequoia Capital. It could also hurt stock exchanges in cities such as Singapore, London and New York, which were hoping to tap into India’s growing startup economy. 

How have the Indian equity markets done over the last couple of years, especially in the wake of the coronavirus pandemic?

Indian equity markets have boomed as enthusiastic retail investors and a pandemic-induced flood of easy money pushed stock prices to record highs. This has encouraged a slew of Indian companies, including new-age tech companies such as Paytm, Zomato and Nykaa, to float IPOs. 

How many companies have debuted in India since last year and how much money have they raised?

More than 60 companies made their market debut in India in 2021 and raised a total of more than $13.7 billion. This amount is more than the cumulative money raised in the previous three years. There is also a long list of companies that have SEBI approval to launch IPOs and companies that are awaiting regulatory approval.

Have Indian tech stocks been listing at fair valuations?

Not really. The blockbuster listing of digital payments company Paytm bombed last year, as the stock listed much below its IPO price. The stock has since slumped further and is now trading 75% below its issue price. 

Several other stocks like Zomato and Nykaa, which had listed at very high valuations, have also shed most of their flab. 

What are local interest groups saying?

The report says that interest groups like the Swadeshi Jagaran Manch, which is closely associated with the ruling Bharatiya Janata Party, opposed the plan, saying such listings would mean less Indian oversight of domestic companies while Indian investors would find it more difficult to trade in shares of companies listing abroad.

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