How do Indian Companies List on Foreign Exchanges?

 

If you have been keeping a watch on Indian stock markets, you must have known that the Government has allowed Indian companies to get their business listed on foreign exchanges. It is was resulted of lockdown caused by the coronavirus pandemic that prompted the Indian Government to allow Indian firms to access foreign capital markets. The basic idea behind this move was to reveal another liquidity avenue for Indian corporate houses through foreign exchange listing.

On June 12, 2018, the Securities and Exchange Board of India (SEBI), the Indian stock markets controllers formed an expert committee on the listing of equity shares of firms set up in India on foreign stock exchanges and of companies set up in countries other than India on Indian stock exchanges. The committee is made up of members, not only from SEBI but also from some popular capital market institutions and bigger law firms.

Now, when it comes to the listing of Indian companies on the foreign stock exchange, there are lots of things that come into play to make it workable. For example, the decision involved the alteration of Section 23 of the Companies Act 2013. Apart from this, the companies are supposed to meet particular criteria to get listed straight on foreign stock markets like average profit accrued over the past 3 years, the worth of a company’s realizable and non-realizable assets, and the paid-up capital, etc.

Since the listing process is still under process, Indian firms can choose to hit the foreign exchanges through GDRs and ADRs that refer to Global Depository Receipts and American Depository Receipts, correspondingly.

What are Global Depository Receipts (GDRs)?

When it comes to listing an Indian company in global stock exchanges, the same can be done only through GDRs. It is essentially a certificate that is designed to help companies accrue capital by trading their shares other than India. The main two types of GDR are:

Rule 144A: Enables trading of shares of non-American firms in the American market based on 144A of SEC. The trading charge remains lesser than that of Type III ADRs.

Regulation S: Permits non-American companies to raise capital from European markets only.

For example, an Indian company can go in line with a financial institution of a different country. The guardian bank keeps the company’s shares against GDR allotment. The bank, in turn, registers the stocks of the firm in the respective Stock Exchange. The bank plays a full-fledged role in working the entire transaction. One GDR can signify one share or different shares or a portion of a share. This is usually fixed by the depository bank given what is preferred by the investors.

The worth of the company’s shares in the Indian market is carefully checked due to arbitrage. GDR transactions in a global scenario boast lower costs than other likewise systems.

You May Also Like to Read: Lowest Brokerages Charges by best stock broker

What are American Depository Receipts (ADRs)?

It is pretty simple and meant for Indian companies that want to list their business shares on American Stock Exchanges. As it is not possible for an Indian company to list its shares directly in a foreign stock exchange, ADR helps Indian companies lure American investors and their capital. ADRs allow trading non-American shares in American stock exchanges.

There are two types of ADRs are:

Sponsored ADRs: Become applicable via a contract between a non-American business and an American financial institute/ bank

Unsponsored ADRs: Presence without the participation of the non-American business

The company felicitates share to an American financial institution. The bank keeps the shares and considers them inventory by acknowledging them via a certificate known as ADR. This showcases the company’s part in the American stock market and is registered in NASDAQ or New York Stock Exchange with over-the-counter trading. Post that, shares are examined and transacted in dollars. Each ADR is made up of a fixed amount of shares as though appropriate by the depository bank. One ADR could refer to one share, various shares, or a portion of a share. If an American stock investor buys shares of an ADR-listed Indian business, he invests through the ADR given to that company against the questionable shares. Therefore, the ADR is transformed into a similar number of shares. The investor gets the dividend and capital appreciation in American currency.

According to the best stock broker in India, the company needs to furnish the bank with detailed all-inclusive information for the advantage of American investors. In addition, the worth of the company’s shares in the Indian market is carefully examined due to the buying/ selling of the same shares concurrently in diverse markets which is called arbitrage.

Our Recent Article : Upcoming IPO in India

What does direct listing mean?

In the case of a direct listing, a local business can register itself with the stock exchanges of other nations without the involvement of a mediator. Contrary to ADRs and GDRs, the Indian company can straight give their shares in foreign markets rather than trading them through a foreign depository bank.

The direct listing remains exclusive of mediators, reduces the overall transaction expense, and promotes transparency. However, a straight foreign listing of Indian businesses hasn’t yet been carried out.

As per the top stock brokers in India, some of the popular Indian companies listed via ADRs and GDRs are Infosys Ltd, Rediff.com India Ltd, HDFC Bank, Bajaj Auto Ltd., Aditya Birla Nuvo, Bajaj Finserv Ltd., and Accentia Technologies Ltd.

Conclusion

The idea behind the listing of Indian companies in foreign exchanges is to raise capital from other countries. This helps in the strengthening of the economy in case of a domestic slowdown as companies can still raise capital through foreign markets.