Direct listing outside India – Government notifies IFSC (GIFT City) as permissible jurisdiction, and NSE IFSC and India INX as permissible international exchanges

Post the notification of Section 5 of the Companies (Amendment) Act, 2020, with effect from October 30, 2023, the Government has now notified the related foreign exchange laws for enabling direct listing outside India. And, to kickstart, the Government has started with notifying International Financial Services Centre in India (GIFT City) – India International Exchange (India INX), NSE International Exchange (NSEIX) as permissible international exchanges.

Following are the critical pointers to note:

• Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules) have been amended to incorporate the changes;
• A new chapter and new schedule (scheme) has been incorporated to deal with direct listing of equity shares of companies incorporated in India on International Exchanges;

• A public Indian company may issue equity shares or offer equity shares of existing shareholders, subject to various conditions.
• Such issue or offer of equity shares of existing shareholders shall be subject to prohibited activities, and sectoral caps prescribed in paragraph 2 and 3 of Schedule I to the NDI Rules (this covers the automatic/ government route and sectoral conditionalities, etc.).
• The public Indian company shall ensure that the aggregate of equity shares which may be issued or offered in a permissible jurisdiction, along with equity shares already held in India by persons resident outside India, shall not exceed the limit on foreign holding under the Schedule I to the NDI Rules.
• Such equity shares shall be in dematerialised form and rank pari passu with equity shares listed on a recognised stock exchange in India.
• Prior Government approval, wherever applicable, shall be obtained.
• Public Indian companies having their equity shares listed on International Exchange shall ensure that the voting rights on such equity shares shall be exercised directly by the permissible holder or through their custodian pursuant to voting instruction only from such permissible holder.
• The public Indian company may also enter into necessary arrangements with Indian Depository and Foreign Depository, to ensure compliance with various applicable laws, such as this Scheme, the Securities Contracts (Regulation) Act,1956, the Securities and Exchange Board of India Act, 1992, the Depositories Act, 1996, the Foreign Exchange Management Act,1999, the Prevention of Money-laundering Act, 2002 or the Companies Act, 2013.

• Permissible holder is a holder of equity shares of the Company which are listed on International Exchange, including its beneficial owner.
• Permissible holder is not a person resident in India.
• A permissible holder may purchase or sell equity shares of a public Indian company which is listed or to be listed on an International Exchange.
• A permissible holder may purchase or sell equity shares of an Indian company listed on an international exchange subject to limit specified for foreign portfolio investment under the NDI Rules.
• Persons from countries sharing land borders with India: A holder who is a citizen of a country which shares a land border with India, or an entity incorporated in such a country, or an entity whose beneficial owner is from such a country, can hold equity shares of such public Indian company only with the approval of the Central Government.

Following conditionalities have been prescribed:

* These debarments shall not apply to the persons or entities mentioned therein, who were debarred in the past by the Government or the appropriate regulator and the period of debarment is already over as on the date of listing of its equity shares on the International Exchange(s).

• Where such issuance is by listed companies: Not less than the price applicable to a corresponding mode of issuance of such equity shares to domestic investors under the applicable laws.
• Where such issuance is by public unlisted companies: In case of initial listing of equity shares by a public unlisted Indian company on the International Exchange, the price of issue or transfer of equity shares shall be determined by a book- building process as permitted by the said International Exchange and shall not be less than the fair market value under applicable rules or regulations under the Foreign Exchange Management Act, 1999. Subsequent issuance or transfer of shares for the purpose of listing additional shares post initial listing would be based on applicable pricing norms of the International Exchange and the permissible jurisdiction.

The aforementioned changes have been notified vide the Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2024, and is effective from January 24, 2024 (available here).

Post MCA’s notification, this notification by Ministry of Finance has paved the way for implementation of direct listing outside India. As expected, IFSC – GIFT City has been notified as permissible jurisdiction and the exchanges operating therein are notified as international exchanges. The traction that GIFT City garners for companies will help the Government as test case to move to other jurisdictions in future, if they deem fit. MCA/SEBI now, may notify certain ancillary procedural rules, and it will be interesting to see how the industry reacts to this move.

We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

Manendra Singh, Partner – ManendraSingh@elp-in.com ;
Ambareen Khatri, Associate – AmbareenKhatri@elp-in.com