The government has decided to walk the talk made in May 2020 when the Covid pandemic was running amok, necessitating among others Indian companies to choose non-traditional avenues for raising finance. On July 28, Finance Minister Nirmala Sitharaman said the government has decided to go ahead with the decision and soon the nitty-gritty would be fleshed out.

Announcing the decision Sitharaman said it will enable Indian companies to access foreign capital and get better valuations.

Also Read: Indian companies will soon be permitted to directly list securities overseas, says Finance Minister

It is not as if India would be bypassed completely because any company choosing to seek greener pastures abroad will have to first offer its shares through the Gujarat International Finance Tech-city (GIFT) platform.

GIFT is India’s attempt to have its own international high-quality financial centre with robust IT and financial infrastructure to wean away companies that seek listing in Singapore, Dubai and other International financial centres. But there is a catch--transactions in GIFT can be consummated only in hard international currencies and not in INR. So, that begs the question--why desert India and INR?

Having first listed in GIFT, unlisted Indian companies including startups can raise capital from the seven or eight international financial centres to be notified that would intuitively include those in the US, the UK, Canada and Switzerland where anti-money laundering laws are strict.

Sitharaman’s announcement has surprised those in the know. Why now? The world including India has shaken off Covid and its debilitating financial impact and is soldiering on. The 4-trillion-dollar capitalisation of Indian bourses is capacious enough to accommodate new players. Why then put the cart before the horse given the fact that under the extant GDR/ADR regime, a wannabe foreign listing seeker has first to make the grade for foreign listing on the back of certain criteria like a three-year track record of profits and approval from Foreign Investment Promotion Board (FIPB) of the Ministry of Finance.

GDR/ADR is necessary because INR is not an international floating currency and therefore Indian shares designated in INR obviously cannot be traded abroad directly. In other words, one GDR represents a given number of underlying Indian shares of the issuing company and is designated in Euro or Pound and ADR in US dollars.

GDR/ADR are fungible in the sense that any non-resident can present the instrument to the Indian company and ask for the underlying shares either fully or partially. The shares thus emerging out of such conversion now can be traded in the Indian bourses. At any time, he or she can change her mind and ask for Indian shares to be converted back into GDR/ADR. This is not just to encourage or fuel whimsical decisions. On the contrary, the idea is to allow the holders of ADR/GDR the enormous advantage of arbitrage i.e., choosing the market to maximise his/her profits.

In the absence of such arbitrage opportunities will a non-resident even touch shares of Indian companies even with a barge pole? While the nuts and bolts would be announced soon, there are many issues that rear in the minds of the cognoscenti. Being Indian companies, their AGMs will have to be held in India. Will non-residents make an annual pilgrimage to India or be content appointing their proxies?

What makes the government believe that in a milieu where GDR/ADR issues have almost come to a grinding halt, a few upstarts would get thumbs up abroad? It is naïve to believe that foreigners open their purse strings more easily or readily. Many Indian companies have refused to go for GDR/ADR for the fear of foreign regulators especially the SEC of the US ripping apart the Indian balance sheets applying the tougher American accounting standards.

In any case, post listing the shares would be carefully watched by the discerning investors. To wit, Ramalingam Raju’s goose was cooked when he believed that he could get away with window-dressing of his company Satyam Computers’ accounts. He had not reckoned with the famed voting-with-the-feet ability and tendency of the foreign investors. Truth be told, the infamous Satyam scam of 2008 unfolded thanks to the vigilance of the ADR investors who smelt a rat in the cooked-up accounts and voted with their feet. The echoes of their actions were soon heard in India.

Let us then not be in a tearing hurry to let loose our startups to raise funds from abroad bypassing India. India must keep tabs on Indian companies lest later it is accused of unleashing its babies on foreign bourses. Let us not put the cart before the horse. And BTW what makes the Indian authorities believe Switzerland is the epitome of financial and banking rectitude?

—The author, S Murlidharan, is a CA by qualification, and writes on economic issues, fiscal and commercial laws. The views expressed are personal.

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(Edited by : C H Unnikrishnan)

First Published:Aug 8, 2023 7:23 AM IST