The International Financial Services Centres Authority (IFSCA) has proposed significant changes to the listing framework for startups on the GIFT IFSC (Gujarat International Finance Tec-City International Financial Services Centre) exchanges. The aim is to encourage domestic startups to list in GIFT City, India's sole international financial services center, by offering exemptions and relaxed conditions. This move is expected to enable startups to raise capital from global markets, enhancing their growth prospects.
Committee Recommends Exemptions and Measures to Boost Startup Listings
The IFSCA's expert committee has suggested key exemptions to the existing listing requirements, focusing on creating favourable conditions for setting up holding companies (holdcos) and special purpose acquisition companies (SPACs). This initiative aims to facilitate the listing of Indian startups at GIFT City's exchanges, bringing them into the international financial arena.
What Is SPACs?
Special Purpose Acquisition Companies (SPACs) are entities formed to raise capital through initial public offerings (IPOs) with the purpose of acquiring one or more businesses after the IPO. Commonly known as "Blank Cheque Companies," SPACs are solely focused on acquiring target companies and lack other commercial operations. These SPACs consist of institutional investors who identify and invest in a target company within a defined timeframe, subject to shareholder approval. If a target isn't identified, the IPO proceeds are returned to investors along with interest.
Shift in Popularity and Current Conditions of SPACs
Although SPACs have existed for decades, their popularity surged in recent years, with USD 80 billion invested in them in 2020. Under the current regulations, companies seeking to list on IFSC exchanges must have achieved at least USD 20 million in operating revenue in the preceding year and maintained average pre-tax profits of at least USD 1 million over the past three years. The expert committee has identified these conditions as barriers for new-age startups and suggests revisiting them.
What Are The Recommendations of The Committee's and Its Implications?
The committee, chaired by G Padmanabhan, former executive director of the Reserve Bank of India (RBI), has recommended relaxing or exempting startups from these stringent conditions for listing on IFSC exchanges. This adjustment would enable startups to access capital from the market and optimize costs, ultimately enhancing their value and quality.
Direct Listings and Proposed Avenues
Union Finance Minister Nirmala Sitharaman's recent announcement paved the way for Indian companies to directly list on IFSC stock exchanges. Currently, both the National Stock Exchange and BSE have their presence in the IFSC, with a potential merger on the horizon. Experts predict that merging these entities could streamline the listing process for startups at the IFSC.
Holdcos and SPACs: Global Concepts for Indian Startups
The expert panel's report advocates for two avenues to facilitate direct listing of Indian startups on offshore exchanges: holdcos and SPACs. Unlisted Indian startups could establish holdcos within GIFT City, listing their equity on specified offshore stock exchanges. Although listing on IFSC exchanges would be optional, this framework ensures founders in GIFT City enjoy the same public capital access as those in foreign jurisdictions.
Benefits and Future Outlook
Such an approach safeguards intellectual property and value within India through GIFT City, providing a new way for startups to access international funding. Currently, Indian companies must first list on domestic exchanges before issuing American Depository Receipts or Global Depository Receipts for offshore listings. This proposal aligns with the recommendations made by a committee on company law and aims to rationalize norms on listing via initial public offerings under the Securities and Exchange Board of India (SEBI).
Indian Depository Receipts (IDRs): Connecting Indian Investors with Global Equities
IDRs are financial instruments representing foreign companies' underlying shares, allowing Indian investors to indirectly invest in foreign equity. The expert committee's report suggests liberalizing the IDR framework, making it easier for Indian investors to access foreign markets without engaging in foreign currency transactions. Simultaneously, foreign companies could tap into the Indian market and attract capital from Indian investors.
The IFSCA's expert committee recommendations seek to propel Indian startups onto the global stage by relaxing listing conditions, promoting holdcos and SPACs, and liberalizing Indian Depository Receipts. These initiatives align with the government's push to enable direct listings on IFSC exchanges and pave the way for startups to access international capital more seamlessly.
Currently, unlisted Indian companies are not permitted to directly list their equity on offshore exchanges. An unlisted Indian company wanting to raise public capital from outside India is first required to list on an Indian stock exchange and then issue ADRs or GDRs for listing on offshore exchanges.
What Are The Benefits Of Listings Overseas For Startups?
The option to list overseas will provide a new avenue for raising capital which will be specifically significant for fin-tech/ tech start-ups. These start-ups will benefit from an international listing due to global investors’ better understanding of growth-oriented business models. For example, one of the reasons tech founders choose to incorporate in overseas jurisdictions like the US is because investors in the US capital markets have significant experience with tech companies and therefore have a deeper understanding of their business models which often result in acceptance of higher valuations.
How Can Startup's IP And Other Value Retained in India Despite Listing Overseas?
The committee recommends allowing Indian unlisted start-up companies to set up HoldCo in GIFT City and allow such HoldCo to directly list its equity on certain specified offshore stock exchanges. Such start-ups may have the option of also listing on IFSC exchanges, but it should not be made mandatory.
This will ensure that founders setting up in GIFT City have the same access to public capital as they would have had they set up in a foreign jurisdiction like Delawar.
The main advantage of this would be that IP and other value will remain in India (GIFT City), recommends the Committee.