After paving way for Indian unlisted companies to list abroad, Finance ministry is going to make this listing even easier. Uncertainty on taxation issues of such listing shall be cleared by finance ministry’s decision to keep foreign investors’ transactions of buying and selling of shares of such companies, out of taxation regime.
Taxation treatment of the shares issued and listed on overseas bourses by unlisted Indian companies would be similar to that of Global Depository Receipts and American Depository Receipts.
Unlisted companies were allowed to list abroad in 1990, but were banned in 2005 in order to curb the shift in regulatory jurisdiction of such companies to foreign regulators. 2005 onwards only companies listed in India could list on overseas stock exchanges. However, high current account deficit, rupee weakening and need of long term foreign capital compelled government to rethink its decision and last year government allowed unlisted companies to list themselves at overseas exchanges vide press release issued by Ministry of Finance [MoF] dated September 27, 2013. MoF [Department of Economic Affairs] and RBI issued necessary notifications dated October 11, 2013 and November 13, 2013 respectively. Necessary changes have also been made in the Consolidated FDI Policy in this regard.
This scheme has been allowed to run for two years on pilot basis. After this period of two years, the impact would be reviewed.
As per this scheme companies can use foreign capital raised to pay outstanding overseas debt or for operations abroad including acquisitions but need to remit the funds to India if they remain unutilized for 15 days and such money shall be parked with AD category banks recognized by RBI. The Company should be fully compliant with FDI policy and sectoral caps while raising money overseas
Listing has been allowed only on exchanges in International Organization of Securities Commission (IOSCO), an association of organisations that regulate the world’s securities and futures markets or Financial Action Task Force [FATF] Compliance Jurisdiction, an inter-government body that sets policies to combat money laundering and terrorist financing or those jurisdictions where SEBI has signed bilateral agreements.
This scheme is expected to benefit sectors like IT/e-commerce which are believed to have more acceptability in foreign markets. Some possible listing candidate via this route include InMobi, IMIMobile, One97 Communications, iYogi, online travel portal Yatra.com and e-commerce players like Flipkart. Delhi-based Jasper Infotech Pvt Ltd, which runs the online marketplace Snapdeal.com, is looking to list in the US bourses in 12-24 months following this route. US market is a more mature for technology-driven companies and so is better exposed to investors, prompting it to look to list there. Makemytrip is already listed at NYSE without being listed here. However, it was not under this scheme. Parent company of makemytrip.com is a Maritius based entity hence Indian listing restrictions are not applicable to it. But such overseas holding structures are very cumbersome and not viable for every other organization. Hence this scheme is considered as progressive and a welcome move. Further, Clarity on taxation issue is expected to boost investors’ sentiment and encourage companies to take this route to raise funds.
However, it is interpreted from the language of notifications that this listing is permitted for companies to raise funds only not to provide liquidity to existing private equity investors or venture funds. In other words listing has to be through Initial Public Offering [IPO] not through Offer for Sale [OFS]. However, once listed PE investors like other any other investors may trade on foreign exchanges where the company’s shares got listed. Government needs to bring more clarity on this issue and to boost PE investor’s sentiment and to provide them exit opportunity which is not available on Indian bourses at present, it should allow existing investors to exit through this scheme during initial listing only.