Listing of securities on international exchanges in GIFT City IFSC

Introduction

International Financial Services Centre (“IFSC”) is a designated jurisdiction within a country where the stakeholders in the financial sector can raise, issue, subscribe and conduct various financial services, having access to funds from global investors, banks and financial institutions. It is considered to be a foreign territory or a special economic zone in terms of applicable laws and regulations. It creates an opportunity and acts as a catalyst to enable domestic companies of the country where an IFSC is located along with the other stakeholders to undertake financial services in a currency other than the currency of the nation within whose territory it is located. in India, the first IFSC established under Section 18 of the Special Economic Zone Act, 2005 is known as Gujarat International Financial Tech City (“GIFT City”) and is an effort to put India in the forefront of global financial services industry. Being a part of the Special Economic Zone, the GIFT City is not considered a part of India and therefore, the entities located in its territory shall be treated as ‘persons resident outside India’. This further makes it significant to discuss that because of this reason, the transactions between a foreign investor and the entities in the GIFT City shall be outside the jurisdiction of Foreign Exchange Management Act enforced in India. However, all the equity, debt and loan transactions between the entities in GIFT City and stakeholders of the financial services in India shall attract the provisions related to Foreign Direct Investment, External Commercial Borrowings and other Foreign Exchange Management Regulations as the case may be.

After the establishment of the GIFT City, all the regulatory norms, legal framework and other procedural clarifications are required in order to operate the entities and transactions in the territory. It is primarily important to identify the pillars of the operation of the GIFT City which are – the capital market and the banking infrastructure. To strengthen these pillars, the government of India has been in the process of formulating new rules, amending existing legislations and establishing bodies in order to create a foundation and structure for providing the financial services in the GIFT City. In this article we shall discuss the recent legal development in the realm of capital market infrastructure in the GIFT City focusing on the development regarding listing of securities in the international stock exchanges established in the GIFT City.

Direct Listing Scheme and the enabling legislations

Recently, the government issued a Direct Listing Scheme (“Scheme”), Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024 (“Listing Rules”) and amended the existing Foreign Exchange Management (Non-debt Instruments) Rules, 2019 known as Foreign Exchange Management (Non- debt Instruments) Amendment Rules, 2024 (“Amended NDI Rules”), enabling and providing a detailed framework for listing of securities by public Indian companies on the international exchanges of the GIFT City. As promulgated in the Annexure to the Amended NDI Rules, there are two international stock exchanges established to operate in the GIFT City – (i) India International Exchange (India INX), and (ii) NSE International Exchange (NSEIX). This widens the scope and opportunities for Indian public companies and start-ups to get access to global capital i.e., beyond domestic capital market. This global exposure and benefit of access to foreign and domestic investment in both foreign and domestic currency shall help in increasing their scale of operations, boost their performance and also aid in expanding their global footprint. 

For the sake of better understanding we shall discuss the above-mentioned legal framework under the following heads:

(i)      Applicability

The Scheme permitted only public unlisted companies to list on these international exchanges. This is because listed public companies are regulated by Securities and Exchange Board of India (SEBI) and thus, only SEBI is responsible for formulating guidelines for listing securities of already listed Indian companies on these international exchanges. Therefore, the listed public companies in India shall be permitted to list their securities on the international exchanges of GIFT City only after SEBI issues the guidelines in this regard, which SEBI is in the process of drafting. The Listing Rules enforced by the Central Government provide a detailed framework for listing equity shares of the unlisted public Indian companies on the international exchanges in the GIFT City. Rule 3 of the Listing Rules establishes that they are applicable to both unlisted and listed public companies, however, the application on the listed public companies is made dependent upon the regulations and directions issued by SEBI in this regard. To strengthen the applicability of Listing Rules on unlisted public companies only, Rule 4 specifically uses the term ‘unlisted companies’ for providing the general guidelines for listing.

(ii)     Investors

Chapter X is added in the Amended NDI Rules to include investment by ‘permissible holders’ in equity shares of public Indian companies listed on the international exchanges. The term ‘permissible holders’ is defined under the Amended NDI Rules and includes (i) persons not resident in India and (ii) individuals / entities from land bordering countries of India subject to government approval in this regard.

(iii)   Ineligible companies

Rule 5 of the Listing Rules enumerates certain companies which are not eligible for listing equity shares on the international exchanges in the GIFT City. These companies are:

(a) section 8 companies and Nidhi Companies as per Companies Act, 2013;

(b) companies limited by guarantee and also having share capital;

(c) companies having outstanding deposits accepted from public;

(d) companies having negative net worth;

(e) companies who have defaulted in the payment of any dues from banks, financial institutions, related to any non-convertible debentures issued or related to any secured creditors;

(f) companies having pending winding-up applications or against which any proceedings for winding-up are instituted under the Insolvency and Bankruptcy Code, 2016; or

 (g) companies which have defaulted in filing annual returns or other financial statements as per the Companies Act, 2013.

(iv)   Pricing of equity shares

As per the Schedule XI of the Amended NDI Rules, the listed entities shall be entitled to issue the equity shares at a price which shall not be less than the price applicable if the same were issued in the domestic market under the applicable laws. In case of unlisted public Indian companies, the issue price for the initial listing of equity shares shall not be less than the fair market value of the same under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and shall be determined by a book-building process as prescribed by the established international exchanges. Subsequent issuance or transfer for listing additional shares after initial listing shall be based on the pricing norms as applicable in the GIFT City and the international exchanges, as the case may be.

(v)    Regulator

It is important to mention that a designated regulator has also been established in the GIFT City in the name of International Financial Services Centers Authority (“the Authority”) under the International Financial Services Centers Authority Act, 2019. The Authority is designated to regulate the financial products and services in the GIFT City and is vested with the unified powers of domestic regulators in India, namely Reserve Bank of India (RBI), SEBI, Pension Fund Regulatory and Development Authority (PFRDA) and Insurance Regulatory and Development Authority of India (IRDAI). Before the establishment of the Authority, all the above-mentioned domestic regulators regulated the business in the GIFT City including capital market activities, foreign exchange management and other financial services.

Future Actionable

The regulatory regime for the capital market in the GIFT City is being developed by regularly introducing new laws and amending existing laws to make them conducive and accommodative for the GIFT City jurisdiction. For making a level playing field for both the unlisted and listed public Indian companies, SEBI should soon formulate their guidelines for listing of equity shares on international exchanges in the GIFT City of the already listed entities on domestic exchanges.

Apart from all the incentives and regulatory relaxations provided to make the operations lucrative for attracting the entities to establish themselves in the GIFT City, there are still certain aspects which need attention like trading related norms, establishing dispute resolution authority and also streamlining laws with respect to various capital market intermediaries. The Authority shall also fill the gaps remaining and arising in regulating the entities and financial services undertaken in the GIFT City by constantly conducting market research in this regard.

Conclusion

The introduction of the Scheme and promulgation of the Listing Rules helps in building blocks of the capital market in the GIFT City enabling Indian companies to list their shares on the international exchanges. This shall not only help Indian companies to tap the international markets for investment but will help them align their competence with that of the global corporates marking their expansion beyond domestic markets. As India is one of the fastest growing economies, increase in valuation and proficiency of the Indian corporates will in turn boost the Indian economy to flourish at a rapid pace, bringing us closer in competition with the other thriving economies of the world. Therefore, the GIFT City is the potential gateway to global financial market for the stakeholders in the Indian economy.