A few days ago, the government gave the green signal to companies to list directly on foreign stock exchanges. In today’s Finshots we will give you an overview of it.
The history
Companies that go public do so because they gain better access to capital. It helps them grow their business, launch new products, or reduce debt. Most companies in India use the Indian stock markets. However, if they were allowed to exit and list on foreign exchanges, they could raise even more money.
But unfortunately, Indian laws do not allow companies registered here to do so. Admittedly, there are Indian companies that have listed abroad in the past. There are Infosys, Tata Motors, HDFC Bank, MakeMyTrip and many others. However, they did this using so-called depositary receipts (DRs).
Simply put, an Indian company that wants to list abroad sells its shares to a local bank. It could be Stock Holding Corporation of India, HDFC Bank or ICICI Bank. These banks keep the shares safe in their custody. Meanwhile, there is another intermediary called Depositary Bank Overseas who works with the Indian bank and makes an agreement. For every 10 shares held by the Indian bank, it creates and issues one new share (called a Depository Receipt or DR). The value of the receipt is derived from the underlying stocks in India. This example assumes that 10 shares represent 1 DR. But this relationship could change. In any case, once the foreign bank issues these DRs, foreign investors can buy and sell them on a foreign exchange in their local currency. So effective that they can get their hands on the shares of the Indian company.
When Infosys listed its shares on the New York Stock Exchange, it used American Depositary Receipts (ADRs). If a company wants to list its shares on other global markets, it can also use Global Depositary Receipts (GDRs).
But this will soon no longer be necessary, at least for selected Indian companies. Because a few days ago, the government brought into force an amendment to the Companies Act 2020. It said that certain companies could take the direct route and list on foreign stock exchanges. Okay, but what’s wrong with going the DDR route, you ask?
Firstly, companies would not be able to take this route if they were not listed on Indian stock exchanges in the first place. So they would have to get the necessary approval to float their shares to the Indian public. They would then have to spend more time and money getting their shares abroad through an intermediary. It was a time-consuming and costly affair.
Foreign investors also preferred to invest directly as DRs are traded in their local currency. This exposed them to currency fluctuation risk. This means that an Indian company’s GDR could be valued differently in the US and European markets even though it is affiliated with the same company.
Of course, the government and market regulator SEBI (Securities and Exchange Board of India) understood this and introduced simpler rules for DRs in 2014. Unlisted companies could use them to tap foreign financial markets. Even if companies did not choose to raise capital abroad, a foreign depository could still issue DRs for their shares if there was strong demand from investors. It is called unsponsored DR. The depository would have to be a broker-dealer holding the shares of the Indian company.
But these rules didn’t really come into play until a few years later. And the lack of clarity led to a decline in ADR and DDR questions. Between 2008 and 2018, Indian companies issued over 100 ADRs and GDRs in foreign markets. But since then there have been no problems at all.
Why weren’t the new DR rules implemented more quickly back then?
Well, regulators were concerned about companies using DRs to launder money. One could attribute it to a huge DDR manipulation scam since 2010 worth over $150 million. Arun Panchariya, the man at the epicenter of this fraudulent scheme, used interconnected companies to transport shares traded through GDR countries back to India, pocketing millions of rupees in the process. Essentially, he and his associates pushed companies to create artificial demand for their GDR products.
And they abused a feature of the GDR that we didn’t tell you about before. Foreign investors can sell their GDRs in exchange for shares. Once they have these shares in their treasury, they can sell them to Indian investors. This is exactly what foreign investors did in the Panchariya scam. They sold their shares to a common group of investors who initially exchanged the shares among themselves. This would artificially inflate share prices before they are sold to innocent retail investors.
This explains why the government is skeptical about the new DR rules. However, with a series of changes in 2020 and some additional rules to monitor money laundering, the government hoped to solve this problem once and for all. And these rules finally came into effect a few days ago.
Will this make it easier for Indian companies to raise money abroad?
Well, the government still needs to clarify a lot of details that the market is not yet clear about. But it’s definitely a start.
See you then…
Don’t forget to share this story on WhatsApp, LinkedIn and X (formerly Twitter).
📢Finshots is now on WhatsApp channels. Click here to follow us and get your daily financial solution in just 3 minutes.
Stop paying your medical bills out of pocket!
2/3 of all medical bills in India are paid out of pocket. And it destroys your savings:
You cannot expect your investment to grow if you cannot protect your savings. Even if you start with ₹1 lakh and increase it by 10% every year, a hospital stay can wipe out your profits and capital in a matter of days.
Medical inflation is rising above 10% in India: While medical treatments have become more widely available, a stay in hospital can cost a lot simply because the rooms are now expensive.
No tax advantages: If you pay for medical procedures out of your own pocket, you do not benefit from tax advantages. However, if you have insurance, you can protect your savings and take advantage of tax benefits while curbing medical inflation.
So, get comprehensive health insurance now before you start your investment journey.
But who can you trust when buying health insurance?
Well, the gentleman who left the review above spoke to our team at Ditto. With Ditto you get access to:
1) Spam-free advice guarantee
2) 100% free advice from the best insurance experts in the industry
3) 24/7 assistance in filing a claim from our support team
You too can now speak to Ditto consultants by clicking on the link here
Comments are closed.