Background:

On January 24, 2024, the Ministry of Finance (“MoF”) in exercise of the powers conferred under Section 46(2)(aa) and Section 46(2)(ab) of the Foreign Exchange Management Act, 1999 read with sub-section section 23(3) of the Companies Act, 2013 (“CA 2013”), notified the Foreign Exchange Management (Non-Debt Instruments) Amendment Rules, 2024 (“the amended rules”) (click here) to amend the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (“the rules”). Further, the Ministry of Corporate Affairs (“MCA”) in exercise of its powers under Section 23(3) read with Section 469 of the CA 2013 has notified the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024 (“listing rules”) (click here). The listing rules apply to unlisted public companies and listed public companies subject to their compliance with rules and regulations issued by the Securities and Exchange Board of India (“SEBI”). The listing rules provide for conditions and requirements of filing the prospectus while the amended rules provide a framework for issuance and listing on an International stock exchange. Lastly, additional FAQs have also been issued on the direct listing scheme (click here).

I. Key highlights of the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024

A. Definitions Clause

1. ‘Permissible Jurisdiction’ under the listing rules means the International Financial Services Centre in India.
2. ‘Permitted Stock Exchange’ under the listing rules means the India International Exchange and the NSE International Exchange.
3. ‘Scheme’ under the listing rules means the Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme made by the Central Government in the MoF.

B. Listing Requirements

1. An unlisted public company not having partly paid-up shares or the existing shareholders of such company can issue equity shares for listing on a permitted stock exchange in a permissible jurisdiction. They shall also be required to comply with the conditions provided in the scheme.
2. The unlisted public company is required to file the prospectus in e-Form LEAP-1 and pay the associated costs to the licensed stock exchange within seven days of filing. Following listing, such company will adhere to any applicable requirements of the Companies (Indian Accounting Standards) Rules, 2015.
3. The standards set out in Section 2(f) of the Securities Contracts (Regulation) Act, 1956 must also be complied by the unlisted public company that intends to get listed on a recognized stock exchange.

C. Ineligible Companies

The companies ineligible for listing of equity shares include a) a company registered under Section 8 of the CA 2013 or a Nidhi company under Section 406 of the CA 2013; b) a company limited by guarantee and having share capital; c) a company which has accepted deposits from public in accordance with Chapter V of the CA 2013; d) a company having negative net worth; e) a company which has defaulted in payment to any bank or public financial institution or non-convertible debenture holder or any other secured creditor; f) A company against which winding up or resolution proceedings are going on under the CA 2013or the Insolvency and Bankruptcy Act, 2016; and g) a company which has defaulted in filing of an annual return or financial statement under Section 92 or Section 137 of the CA 2013.

II. Key highlights of the Foreign Exchange Management (Non-Debt Instruments) Amendment Rules 2024

A. Definitions Clause

1. Definition of ‘International Exchange’ has been inserted in the amended rules to mean the International Financial Services Centre in India including the India International Exchange and the NSE International Exchange as provided in the annexure to the amended rules.
2. The definition of ‘Listed Indian Company’ has been amended to include a listed Indian company listed on an International Exchange.
3. Definition of ‘Permissible Jurisdiction’ has been inserted in the amended rules to mean a jurisdiction under Rule 9(3)(f) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005.

B. Investment in public companies listed on International Exchange

As per the newly added Rule 34 under Chapter X of the amended rules, a permissible holder can purchase or sell equity shares of a public Indian company listed or to be listed on an International Exchange through the process of direct listing as specified in Schedule XI of the amended rules.

C. Direct Listing of equity shares of public Indian Company on International Exchange

The newly added Schedule XI of the amended rules talks about conditions applicable on direct listing of equity shares.

Permissible holder: A permissible holder is the holder of equity shares of a company listed on an International Exchange, including its beneficial owner. A permissible holder shall give due regard to the following:

1. If the permissible holder is (a) a citizen of a country sharing land boundary with India, or (b) is an entity incorporated in such a country, or (c) is an entity whose beneficial owner is from such a country, such a person shall not hold equity shares of an Indian public company without the prior approval of the Central Government.
2. A permissible holder shall not be a person resident in India.
3. Compliance of these requirements shall be disclosed by the public Indian company in their offer document.
4. The purchasing or selling of equity shares by the permissible holder shall be subject to limits specified for foreign portfolio investment under the rules.

Eligibility: The eligibility criterions for issuance of equity shares on International Exchange by public Indian company and offer of shares by existing shareholders is given below:

Issuance of equity shares by public Indian company on International Exchange/ Offer of shares by existing shareholders

1. The public Indian company, its promoters, promoter group, directors or selling shareholders shall not be debarred from the capital market.
2. The promoters or directors of the public Indian company should not be a promoter or director of any other Indian company debarred from accessing the capital market.

3. The public Indian company, its promoters or directors should not be willful defaulters.

4. The public Indian company should not be under any inspection or investigation under the CA 2013.

5. No promoter or director of the public Indian company should be a fugitive economic offender.

Issuance by a listed Indian company or by the existing shareholders shall be subject to compliance under the conditions and requirements provided by the SEBI and the MCA.

Conditions for issuance or offer: The conditions a public Indian company has to fulfill in order to issue equity shares or offer equity shares to existing shareholders include:

The issuance or offer should be (a) permitted and the shares must be listed on an International Exchange; (b) be subject to the prohibited activities, sectoral caps mentioned in Schedule I of the rules; (c) in dematerialized form and be pari passu with the equity shares listed on a recognized stock exchange in India; and (d) approved by Government wherever required.

Compliances under law: The public Indian company shall ensure compliance with laws relating to issue of equity shares including 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 CA 2013. Further, the public Indian company shall also ensure compliance with the foreign holding requirements as given under Schedule I of the rules.

Voting rights: Voting rights on the equity shares shall be exercised by the permissible holder either directly or through a custodian.

Pricing guidelines: The equity shares shall not be issued at a price less than applicable to a corresponding mode of issuance of such equity shares to domestic investors under the applicable laws. In respect of an initial listing by a public unlisted Indian company, the price shall be determined through book-building process as permitted by the International Exchange but it should not be less than the fair market value under applicable rules and regulations of the Foreign Exchange Management Act, 1999.

Conclusion:

The amended rules and the listing rules are a critical step in the right direction towards the direct listing revolution. A new channel for raising capital from international investors is made available to Indian companies by the framework established by the amended rules and the listing rules for the listing of shares of public Indian companies on international exchanges. This channel is particularly useful for start-ups and new age companies seeking to expand. Additionally, this would guarantee that Indian companies are valued more accurately and in line with international standards, which will assist to broaden the investor base and attract more foreign investment. Lastly, the amended rules and the listing rules will also open a new avenue for Indian public companies already listed on recognized stock exchanges in India. Similar to startups, these changes will be beneficial for Indian public companies looking to foray into global waters.

Please find a copy of Foreign Exchange Management (Nondebt Instruments) Amendment Rules, 2024, here and a copy of Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024, here.

This update has been contributed by Jitendra Soni (Partner) and Harsh Garg (Associate).

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