Government Amends FEMA Rules to Facilitate Direct Listing of Indian Company Shares on International Exchanges

The Ministry of Finance, Department of Economic Affairs, issued a significant notification on January 24, 2024, introducing the Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2024. This legislative instrument, published in the Official Gazette, came into force on the date of its publication, marking a pivotal change in India's foreign exchange management framework. The amendment was enacted in exercise of powers conferred by clauses (aa) and (ab) of sub-section (2) of section 46 of the Foreign Exchange Management Act, 1999, read with sub-section (3) of section 23 of the Companies Act, 2013. The primary objective of these rules is to further amend the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, to enable direct listing of equity shares of Indian companies on international exchanges. 

The new rules introduce several key provisions and definitions. They define "International Exchange" as a permitted stock exchange in permissible jurisdictions listed in the newly annexed Schedule XI. The definition of a "listed Indian company" has been expanded to mean an Indian company with equity or debt instruments listed on a recognised stock exchange in India and on an International Exchange, with the term "unlisted Indian company" to be construed accordingly. A "permissible jurisdiction" is now defined as a jurisdiction notified by the Central Government under the Prevention of Money-laundering (Maintenance of Records) Rules, 2005. Crucially, the amendment inserts a new Chapter X into the principal rules, titled "Investment by Permissible Holder in Equity Shares of Public Companies Incorporated in India and Listed on International Exchanges." This new chapter, along with Schedule XI, outlines the "Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme." The scheme permits a public Indian company to issue equity shares or existing shareholders to offer equity shares for listing on specified International Exchanges, subject to certain conditions. These conditions include adherence to prohibited activities and sectoral caps, and the requirement for shares to be in dematerialised form, ranking pari passu with shares listed in India. The rules also specify that prior Government approval, wherever applicable, must be obtained. 

The legislative intent behind these amendments is to broaden the avenues for Indian companies to access global capital markets directly, thereby facilitating capital formation and enhancing their international visibility. The earlier legal position did not explicitly provide for direct listing of Indian company shares on international exchanges, creating a statutory gap that limited the ability of Indian entities to raise capital from a wider pool of international investors without first listing in India. These rules address this limitation by establishing a comprehensive framework for such listings. The scheme details eligibility criteria for both public Indian companies and existing shareholders, ensuring that entities with regulatory debarments, wilful defaulter status, or those under inspection/investigation are excluded. Furthermore, it mandates compliance with various Indian laws, 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, and the Companies Act, 2013. The rules also stipulate that the aggregate foreign holding in such companies must not exceed the limits specified in Schedule I of the principal rules. The legislation provided: “A permissible holder may purchase or sell equity shares of a public Indian company which is listed or to be listed on an International Exchange under Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme as specified in Schedule XI.” This provision is central to the new framework, enabling foreign investment in Indian companies through direct international listings. The mode of payment and other attendant conditions for remittance of issue proceeds are to be specified by the Reserve Bank. Pricing norms are also laid out, requiring shares to be issued at a price not less than that applicable to domestic investors for listed companies, and determined by a book-building process for unlisted companies, not less than the fair market value. The rules also include a crucial safeguard, requiring Central Government approval for permissible holders from countries sharing a land border with India. 

Keywords: FEMA, Foreign Exchange Management, Non-debt Instruments, Direct Listing, International Exchange, Equity Shares, Indian Companies, Capital Market, Investment 

Geo Tags: India, Delhi 

District: Not Applicable