Legal, regulatory changes needed for foreign listing

The Securities and Exchange Board of India’s (Sebi) willingness to consider direct listing of Indian companies abroad will require several regulatory changes.

On the tax front, the Income Tax Act and all Double Tax Avoidance Agreements would need amending. Non-tax laws such as the Sebi Act, Reserve Bank of India Act, and the Foreign Exchange Management Act (Fema) will also need changes.

Experts say tax laws would be the most sensitive matter in this context, to avoid double taxation. Also, a rigid system would give no incentive for an Indian company. “Our tax laws will require a relook to provide for efficient rates and collection in a seamless manner,” said Amit Singhania, partner at law firm Shardul Amarchand Mangaldas.

Also, the government will have to first enter into an agreement with the foreign country concerned and then bring changes to the tax treaty. It will be viable for Indian companies to list only in those countries with such an agreement in place.

There are also grey areas on income tax matters. Indian promoters selling shares in a foreign country will be subject to capital gains tax there, since they would be listed.

Such an action could also trigger capital gains tax in India, since the core business would be here. Such conflicting provisions would have to be changed for companies that directly list abroad. There is also no clarity on how dividends for promoters would be taxed.

Companies will also want to see changes to the Fema rules. “Currently, a company can list in a foreign jurisdiction only after listing in India. Allowing direct listing overseas will need some changes to foreign investment policy,” said Girish Vanvari, founder of tax advisory firm Transaction Square.

Experts say regulatory challenges in the foreign jurisdiction have to be considered. Several nations do not allow listing of foreign companies.

Even in India, foreign firms cannot directly do so— they may only issue depository receipts. “Also, accounting and compliance standards differ from country to country,” said Tejesh Chitlangi, partner, IC Universal Legal.

For instance, in India, any preferential issue of equity involving more than 200 investors is considered a public placement. In some countries, this threshold is as low as 50 investors.

All this apart, experts feel having a framework to allow such listing would be beneficial for several Indian companies that are not getting their desired valuation abroad, because the Indian valuation is low. Further, Indian markets typically value companies based on their profits and assets. New-age companies work in a different fashion.

“Allowing firms to list directly will help them attract valuations based on business models rather than on financials, in India,” said an expert.