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Overseas Indian Start-ups Knock on SEBI’s Doors for India Listing
Overseas Indian Start-ups Seeking Listing in India
Recently, a number of start-ups incorporated overseas have approached the Finance Ministry and the Securities and Exchange Board of India (SEBI) with a request to allow them to list in India. There have been several discussions on this matter over the past few weeks involving start-up founders, bankers, lawyers and officials from various government bodies.
However, the current regulations do not permit such companies to list in India. Any framework enabling this would require amendments to norms under SEBI, FEMA (Foreign Exchange Management Act) as well as the Companies Act, 2013.
Overview
| Sections | Details |
|---|---|
| Introduction |
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| Reasons for India Listing |
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| Challenges of Reverse Flipping |
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| Government Response |
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| Industry Demands |
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| Conclusion | Indian government remains indecisive on international start-up listings. |
Reasons for Seeking India Listing
Benefits of Listing in India
A clutch of Indian start-ups had incorporated overseas nearly a decade ago in order to access capital more easily. Start-up accelerators like Y Combinator made it mandatory for Indian start-ups to incorporate outside India, usually in the US or Singapore.
Earlier, some of these start-ups preferred listing overseas given the lack of depth in the Indian equity market as per experts. However, this is no longer the case. Listing in India offers several benefits:
- Better brand recognition and valuation: Companies would get adequate analyst coverage in India and trading volumes would be higher, leading to better valuations.
- Increased retail participation: With demat accounts tripling in the last 3 years and domestic mutual funds having significant investible capital, listing in India offers access to a wider retail investor base.
- Higher taxes for government: Listing in India would mean higher taxes for the government in the form of Securities Transaction Tax (STT) and capital gains tax.
Challenges of Alternatives Like Reverse Flipping
Some overseas start-ups like Dream11, Razorpay and Pine Labs are exploring the option of reverse flipping their holding companies back to India. However, this involves a merger which could trigger a tax payout as high as 20-30% of the fair valuation in the country where the firm is incorporated. This tax outgo could be prohibitive, especially for larger firms.
Further, countries like Singapore don’t permit cross-border mergers. Reverse flipping also requires compliance with a range of regulatory and sectoral approvals including Press Note 3 norms. This complex process is the reason why most top start-ups want to list in India while retaining their existing overseas structures instead of doing a reverse flip.
Government Response
SEBI Waiting for Government Directive
As per reports, SEBI is waiting for instructions from the government on this matter. The government, in turn, wants SEBI to formally write to it first. Hence, the matter is currently stuck due to this bureaucratic impasse.
A few years ago, SEBI had formed a committee to explore the possibility of allowing Indian companies to list abroad and foreign companies to list in India. However, the proposals were rejected owing to concerns about capital flight triggered by foreign listings.
Low Priority Due to Elections, GIFT City Focus
According to industry officials, this matter is low on the government’s priority list in the election year with the focus on promoting GIFT City. Hence, progress on the overseas start-up listing issue is slow currently.
Industry Demands
Industry bodies have suggested that companies with substantial Indian connections should be allowed to list in India. They recommend that this be subject to the condition that whatever primary capital is raised through the listing is deployed in India and cannot be repatriated overseas.
Final Thoughts
In summary, a number of overseas incorporated Indian start-ups are lobbying for relaxation in regulations to allow them to list on Indian stock exchanges. This would benefit the start-ups through better access to capital and domestic investors. However, changes in multiple laws and regulations would be required to enable this.
The government is yet to act decisively on this due to other priorities in an election year. Industry demands are centered around conditional listing with capital deployment restrictions. It remains to be seen when the regulatory logjam around overseas start-up listings in India will be resolved.
FAQ
How is a startup defined in India for government schemes?
A startup is defined as a company that is less than 10 years old from its date of registration. It should be a private limited company, limited liability partnership or partnership firm. This definition is only for the purpose of government schemes.
What is RBI’s definition of a startup?
RBI defines a startup as a private limited company, limited liability partnership or partnership firm working on innovation, developing or improving products or services. The entity should be less than 10 years old from its date of registration.
What is the general definition of a startup?
A startup refers to a new company in the early stages of operations. Startups are founded by entrepreneurs who want to develop a product or service for which they believe there is market demand.
How is a startup defined in the Income Tax Act?
As per the Income Tax Act, a startup must be a private limited company, limited liability partnership or partnership firm with turnover less than Rs 100 crores in any previous financial year. The entity will be considered a startup for up to 10 years from its date of incorporation.
How is a startup defined under the Companies Act 2013?
The Companies Act 2013 defines a startup as a private limited company recognized as a startup according to the Department of Industrial Policy and Promotion’s notification.
