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Compliance, tax major challenges for direct listing abroad

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Getting foreign exchanges to IFSC the key hurdle.

Finance Minister Nirmala Sitharaman’s announcement that the government will allow listed/unlisted companies in India to list abroad via the IFSC exchanges seems to have come as a boost for startups.

However, the execution could be easier said than done, considering the multiple challenges and bottlenecks that to be cleared. For instance, it could require significant amount of harmonisation in terms of guidelines and taxation rules.

“There will challenges like announcement timings of price-sensitive information that directly impacts global investors. Further, there will guidelines required for money movement between countries and, of course, taxation issues. But these are not unsurmountable problems,” said an investment banker.

Firms based in the UK and Germany have been listed in the US markets since ages, the banker pointed out. Even many Indian startups are registered in Singapore, as PE and VC investors are comfortable with the stable tax regime. When those countries have been able to resolve issues, there is no reason to believe we cannot do so, said the banker.

“Rupee convertibility will be the major challenge as it is not a globally accepted currency. A solution in this regard will have to be thought of by the regulators. Another challenge would be the difference in time zones, leading to different trading hours across markets,” said Mahesh Singhi, managing director of global investment banking firm Singhi Advisors.

However, experts also say it is important for various bodies like the RBI, Sebi and the I-T department to come together for facilitating the process of direct listing. They called it a good step but one that needs sound guidelines.

“The government’s initiative is praiseworthy as it is expected to improve access to global capital and enhance valuations. However, there are challenges in convincing foreign stock exchanges to participate and maintaining a balance in listing norms between IFSC and non-IFSC entities. Another hurdle is addressing the issue of capital account convertibility in overseas listings,” said Sumit Agrawal, founder of Regstreet Law Advisors.

Sebi has previously taken action against multiple companies and their promoters for issues related to the GDR mechanism, indicating the lack of clarity surrounding compliance.

Agrawal pointed out that regulators have in the past shown discomfort with allowing Indian companies to list directly overseas, which is why clear compliance guidelines will be essential.

At present, Indian companies looking to tap foreign capital via a listing have to first list on the domestic stock exchanges. Overseas listings by entities listed in India are carried out through American depository receipts (ADRs) and global depository receipts (GDRs).

Aarin Capital’s chairman T V Mohandas Pai has given his thumbs up to the move, saying it will give startups a platform to access international capital and getting listed stocks may also be beneficial for foreign investors. He also said the tax regime at IFSCs was friendlier than India.