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Concerns relating to the overseas listing of Indian startups

This article was originally published by The Kootneeti on September 1st, 2021. Thank you to the Editors for their kind authorization to re-publish.

Leading investors including Tiger Global, Sequoia Capital and Lightspeed, as well as startups have called on India’s Prime Minister Narendra Modi urging the government to allow direct overseas listing of Indian companies. Until 2019, a direct listing of the equity share capital of companies incorporated in India was not permitted on foreign exchanges and vice versa. Then in September 2020, the Government of India passed an enabling law that allowed direct overseas listing in select foreign jurisdictions. 

The Act provided for amendment in Section 23 (3), Companies Act, 2013 which provides for ‘Public Offer and Private Placement.’ This amendment paved the course for fewer regulations regarding direct overseas listing for Indian companies, and to a large extent, it had been successful in doing so. But at the same time, the Securities and Exchange Board of India (SEBI) did not exempt companies from any kind of regulation as it would then facilitate money laundering through a direct listing. Section 23 (3) (inserted through amendment) under the Act states that public companies may issue such classes of securities to be listed on permitted stock exchanges in “permissible foreign jurisdiction”, meaning those that have treaty obligations to share information and cooperate with Indian authorities in the event of any investigation. But there are still some issues to be sorted out and the government is yet to release the final blueprint of the new regulations on exchange control laws, taxation, and other aspects. There are now reports that India would take around six months to announce rules related to taxation.

In order to speed up the process, a group of 22 investors and startups, in a letter to the PM dated July 29, 2021, stated “Even as some companies are gearing up to list in India, many others are keen to evaluate the option of an international listing”, emphasizing that companies in other markets like the United States have a much bigger market capitalization than in India. “If India wants to produce multinational tech giants, permitting our startups to access global capital by listing on international exchanges is an absolute must-have”, says the letter.

Access to foreign capital markets – a flawed rationale

India is currently the third-largest startup unicorn system. This sector has received several billion dollars of American, Japanese and Chinese investments. The start-up ecosystem, combined with the ability to list in India, has laid the groundwork for massive wealth-creation opportunities, besides livelihood creation. The London Stock Exchange, which is tracking India’s policy change closely, has been in talks with several Indian tech firms on overseas listings.

Venture capitalists make rosy promises to startups to encourage overseas listing. These include easy access to vast amounts of foreign capital, stable regulation, escape from allegedly cumbersome laws and regulations, avoidance of Indian capital gains tax, better intellectual property (IP) protection, control and evaluation, level playing field and brand building.

However, an overseas listing can negatively affect sovereign interests as it causes an outflow of domestic wealth overseas. There is a potential flight of unicorns, intellectual property rights, control, management and ownership of data.

Via an overseas listing, the company, investors, company value, IP and data are domiciled overseas with little accountability to Indian regulators. Indian customers, workforce, IP and data all contribute to creating wealth overseas.

A domestic listing does not mean only domestic investors; the field is wide open to a large number of foreign portfolio investors (FPIs) registered with SEBI, thereby allowing global capital to flow into Indian companies. Further, the rationale for allowing overseas listing, pertaining to access to global capital, appears to be flawed. In reality, Indian companies have had access to global capital since 1992 through the overseas listing of Global Depositary Receipts (GDRs) and American Depositary Receipts (ADRs). 259 such companies, such as Infosys, Wipro, ICICI and Reliance, have collectively raised Rs. 1.39 lakh crore. 

By dual listing, startups also face a higher compliance burden as it means changes in founder compensation, insider trading laws, financial repowering norms, board composition and tax laws. Overseas listing can be discouraged by offering a tax incentive or a 10-year tax holiday for start-ups that remain Indian.

Some investors prefer overseas listing because these companies are substantially outside of Indian jurisdiction or the influence of Indian regulators and are not subject to Indian laws, taxes and government rules. The current inability of unlisted companies to tap into the international market is supposedly the reason for the migration of startups outside of India. However, India is such a big emerging market that, even if the option of the overseas listing is not available, most of these investors would invest in Indian startups as they have done in many Indian domiciled startups. 

The assertion that tech companies get better valuations outside of India is weak. Increasing maturity in the Indian equity market has increased the appetite for large IPOs. The recent listing by Zomato is a very good example that Indian equity markets are becoming bigger and deeper. Over 33 per cent of anchor investors in the Zomato IPO round were domestic investors and the IPO was oversubscribed 44 times. Zomato is already among the top 50 market cap companies in India. A top stock in the market always gets more intention from investors. If Zomato were to be listed in the US, it would not even be in the top 500 stocks. And examples of disappointing listings on foreign bourses are plenty: Uber, Slack, Lyft and Smile Direct Club.

With a visibility perspective, especially if tech companies started listing in India, most mutual fund houses would create a separate scheme for this and the acceptance from venture capital firms and retail investors would be very high. Already, Sequoia Capital, an American foreign venture capital fund active in the Indian start-up market, offers some of the largest investments including OYO Rooms, BYJU’s, Ola, Zomato, MobiKwik, Mu Sigma, Unacademy, MoneyTap, Urban Ladder and Grofers. Another US-based seed money startup accelerator is Y Combinator with investment in over 50 key Indian start-ups, such as SockSoho, OkCredit, Khabri, ClearTax, Meesho and Razorpay. Zodius Capital is an Indian venture capital firm that focuses on investing in India-centric businesses. It has investments in Big Basket, AllyGrow Technologies, Zivame, Pepperfry, etc. Nexus Venture Partner is a US-India venture fund started by entrepreneurs in enterprise technology and consumer internet. Some of the major names in which it has investments are Unacademy, WhiteHat Jr., Olx, Zomato, Snapdeal, Map My India etc. US venture capital firm Lightspeed Venture Partners includes BYJU, Acceldata, ITZcash Card, Magicpin, OYO rooms, Udaan etc. in its Indian portfolio.

Businesses made in India have a responsibility towards the country. Internet businesses and e-commerce have millions of Indians as consumers which play a very important role in the expansion of market width. Domestic listing helps expand the retail investor base and bring in their savings into India’s highly capital-starved economy. The proactiveness of SEBI, the National Stock Exchange of India (NSE) and other government bodies are leading the way with state-of-the-art IPO execution, trading settlement processes and high-volume capability. IPO listing time in India is also minimal.

Aside from the outflow of domestic wealth overseas, the potential loss of control over intellectual property rights, management and ownership of data, and stock market valuation, an overseas listing includes the risk for the central government of losing capital gains tax revenue that would accrue if the PE/VC/founders exited the company and lower corporate taxes depleted by higher royalty payments in the future. 

A domestic listing would ensure a wider home brand recognition, allow for research coverage, trading liquidity, ease of investor relations, lower litigation risk and lower listing and ongoing compliance costs. 

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