Direct Listing Scheme: Enabling Indian Companies to List Equity Shares on International Exchanges

Here're 28 FAQs on Direct Listing Scheme.

Q1: What is the Direct Listing Scheme?

A1: The “Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme” allows public Indian companies to issue and list their equity shares on international exchanges. This scheme is specified in Schedule XI of Foreign Exchange Management (Non-debt Instruments) Rules, 2019, and provides a framework for issuing and listing equity shares of public Indian companies on international exchanges, which was previously not allowed.

Q2: Which provision of the Companies Act, 2013 enables the Scheme?

A2: The Companies (Amendment) Act, 2020, inserted Section 23(3) in the Companies Act, 2013, enabling certain class of public companies to issue securities for the purpose of listing on permitted stock exchanges in permissible foreign jurisdictions or other jurisdictions as prescribed.

Q3: Which types of companies are eligible to list their shares on an international exchange under the Direct Listing Scheme?

A3: Under the Scheme, only public Indian companies, whether listed or unlisted, are allowed to issue and list their shares on an international exchange. However, as of now, the framework only allows unlisted public Indian companies to list their shares on an international exchange. SEBI is in the process of issuing operational guidelines for listed public Indian companies.

Q4: What are private companies and public companies?

A4: Private companies are defined under Section 2(68) of the Companies Act, 2013, and have certain restrictions on the transfer of shares and the number of members. On the other hand, public companies, as defined under Section 2(71) of the Companies Act, 2013, do not have these restrictions.

Q5: Whether private companies are eligible under the Scheme?

A5: Private companies are not eligible under the scheme as they cannot invite subscription from the public, as explained in the answer to Q4.

Q6: Which public Indian companies are eligible under the new framework?

A6: Public Indian companies are eligible to issue equity shares in permissible jurisdictions if they meet certain conditions, including not being debarred from accessing the capital market, not being a wilful defaulter, and not being under inspection or investigation under the provisions of the Companies Act, 2013.

Q7: Which public Indian companies are ineligible under the new framework?

A7: The Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024, provide specific conditions under which a company shall not be eligible for issuing its equity shares for listing in accordance with these rules. These conditions include being registered under section 8 or declared as Nidhi under section 406 of the Companies Act, 2013, having a negative net worth, or having defaulted in payment of dues to any bank or public financial institution.

Q8: What is an international exchange in the context of this Scheme?

A8: International exchanges, as per the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, are permitted stock exchanges mentioned at Annexure to Schedule XI of the Rules. Currently, only two exchanges, namely India International Exchange and NSE International Exchange in GIFT-IFSC, are permitted international exchanges.

Q9: What is the framework applicable for unlisted public Indian companies?

A9: Apart from the framework provided under the Scheme, an unlisted Indian company may issue equity shares on international exchanges subject to compliance with the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024, and the regulatory framework of permitted international exchanges in GIFT-IFSC.

Q10: What is the framework applicable for public Indian companies already listed in India?

A10: In addition to the framework provided under the Scheme and Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024, a listed public Indian company is also required to ensure compliance with the conditions and other requirements as per the norms notified by the Securities and Exchange Board of India (SEBI).

Q11: What are the requirements under Companies Act, 2013 for filing of prospectus in respect of direct listing of equity shares on permitted stock exchanges?

A11: As per rule 4(4) of Companies (Listing of equity shares in permissible jurisdictions) Rules, 2023, the concerned unlisted public company shall file the prospectus in e-Form LEAP–1 within seven days after the same has been finalized and filed in the permitted international stock exchange.

Q12: Can public companies falling under sectors prohibited for FDI issue or offer equity shares under the scheme?

A12: No, public companies falling under sectors prohibited for FDI cannot issue or offer equity shares under the scheme.

Q13: Does condition of sectoral caps apply to public Indian companies participating in the Direct Listing Scheme?

A13: Yes, the equity shares listed on international exchanges will be counted towards the foreign holding of the company.

Q14: Who can invest or trade under the Direct Listing Scheme?

A14: Only the ‘permissible holder’ can invest, trade, or hold equity shares of Indian companies listed on International Exchanges. The permissible holder is not a person resident in India.

Q15: Can Indian residents purchase or sell shares of an Indian company listed on an international exchange through the Scheme?

A15: No, Indian residents cannot purchase or sell shares of an Indian company listed on an international exchange through the Scheme.

Q16: Are non-resident Indians (NRIs) permitted to buy or sell shares of an Indian company listed on international exchange under this Scheme?

A16: Yes, non-resident Indians (NRIs) are permitted to buy or sell shares of an Indian company listed on international exchange under this Scheme.

Q17: Can individuals/entities from land bordering countries invest in shares of Indian companies listed internationally?

A17: Yes, but with prior Government approval.

Q18: Whether Indian companies listed on international exchanges need to follow domestic rules and regulations also?

A18: Yes, the Indian company which issues and lists its equity shares on international exchange shall ensure compliance with extant laws relating to issuance of equity shares, including requirements prescribed in the Direct Listing Scheme, the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, and other applicable laws.

Q19: What is the meaning of “beneficial owner” of shareholders in the context of the Direct Listing Scheme?

A19: The beneficial owner is defined as per proviso to sub-rule (1) of rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005.

Q20: Whether unlisted companies intending to list on international exchanges are required to also list on domestic exchanges?

A20: It is not mandatory for an unlisted company intending to list on international exchanges to also list on domestic exchanges. However, there is no restriction on such companies to opt for listing on domestic as well as international exchanges.

Q21: Are Indian mutual funds permitted to invest in companies listed through the Direct Listing Scheme?

A21: No, person resident in India is not allowed to invest or trade in equity shares of Indian companies on international exchanges as per explanation 1 of para 2 of the Scheme.

Q22: Whether Offer for Sale by existing shareholders has been permitted in the direct listing of Indian companies on international exchanges?

A22: Yes, Offer for Sale by existing shareholders has been permitted in the direct listing of Indian companies on international exchanges.

Q23: What are the potential benefits for companies participating in the Direct Listing Scheme?

A23: The Scheme will allow public Indian companies, especially start-ups and companies in the sunrise and technology sectors, to access global capital beyond the domestic exchanges. This is expected to enable better valuation of Indian companies in line with global standards of scale and performance, boost foreign investment flows, unlock unprecedented growth opportunities, and broaden the investor base.

Q24: What is the IFSCA regulatory framework for direct listing of equity shares of Indian companies on the International Exchanges in GIFT IFSC?

A24: The direct listing of equity shares of Indian companies on the International Exchanges in GIFT IFSC will be in accordance with IFSCA Act, 2019 and Rules and Regulations notified thereunder, including the IFSCA (Issuance and Listing of Securities) Regulations, 2021. The ILS Regulations provide the regulatory framework for initial listing, disclosure requirements, continuous listing obligations, etc. for listing companies on the International Exchanges in GIFT IFSC.

Q25: Are there any specific incentives offered to permissible holders under the Direct Listing Scheme in GIFT-IFSC?

A25: For foreign investors, the scheme will allow them to participate in value creation in Indian companies and earn high returns on their investment facilitated by the world class and business friendly regulatory regime being offered by GIFT-IFSC. The transactions on the stock exchanges in IFSC are in foreign currency, eliminating the currency risk for the investors. Additionally, there are various tax incentives provided under the Income Tax Act, 1961, making GIFT IFSC an attractive destination for global investors. Capital gains arising out of transfer of equity shares of Indian companies in GIFT-IFSC is exempted from tax.

Q26: What is IFSC and what is the aim of setting up IFSC in India?

A26: IFSC stands for International Financial Services Centre set up under section 18 of the Special Economic Zones Act, 2005 and regulated under the International Financial Services Centres Authority Act, 2019. The aim of setting up IFSC is to ‘onshore the offshore’ i.e. bringing back those India related financial services and transactions that are currently carried outside of India. Further, the objective of IFSC is to develop a strong global connect and focus on the needs of the Indian economy as well as to serve as an international financial platform for the entire region and the global economy as a whole.

Q27: Who regulates the financial services in GIFT IFSC?

A27: International Financial Services Centres Authority (IFSCA) established under the IFSCA Act, 2019, is the unified regulator for the development and regulation of financial products, financial services and financial institutions in GIFT IFSC. IFSCA has been vested with the powers of all the four financial sector regulators in domestic India viz. RBI, SEBI, IRDAI and PFRDA for regulating the financial services market in GIFT IFSC and for matters connected therewith or incidental thereto.

Q28: What type of Market Infrastructure Institutions are present in GIFT IFSC?

A28: There are two Stock Exchanges in IFSC namely, India International Exchange (IFSC) Limited and NSE IFSC Limited, subsidiaries of BSE Limited and National Stock Exchange of India respectively, providing the platform for listing and trading of securities in GIFT IFSC. The clearing and settlement of the trades executed on these Stock Exchanges are carried out by the respective Clearing Corporations namely, India International Clearing Corporation (IFSC) Limited and NSE IFSC Clearing Corporation (IFSC) Limited.

There is a depository namely India International Depository IFSC Limited providing depository services in GIFT IFSC. Additionally, GIFT IFSC has a robust banking ecosystem with the presence of several Indian and global banks from various jurisdictions.

This information is based on the FAQs on Direct Listing Scheme provided by the INTERNATIONAL FINANCIAL SERVICES CENTRES AUTHORITY. For more detailed information, please refer to the original document.