Mint Explainer: Why startups aren’t chuffed about listing on Gift City exchanges

What is the difference between a direct overseas listing at Gift City and a classical overseas listing?

Several Indian companies have raised capital in overseas markets by incorporating entities abroad. These include MakeMyTrip Ltd, which has a US entity that listed on Nasdaq in 2010. Freshworks Inc., founded in Chennai but now headquartered in San Mateo, California, made a bumper listing on Nasdaq in 2021.

Another way to raise overseas capital is by listing American depository receipts or global depository receipts on US stock exchanges, as Infosys Ltd, Wipro Ltd and HDFC Bank Ltd have done. Such ADRs and GDRs are traded on US exchanges but represent the equity of these companies in India.

An initial public offering of a company’s shares on Gift City’s international exchanges works differently. Such share listings allow companies to raise capital from overseas funds directly while remaining incorporated in India. These companies would have to be an Indian public limited company but would be allowed to tap foreign capital with fewer hassles.

“Unlike the traditional route of listing shares, which could have only been done through ADRs and GDRs, (the Gift City route) allows direct listing of equity shares, takes away the hassle of involving multiple intermediaries, and saves cost," said Manendra Singh, partner at Economic Law Practice.  

Will we see startups go public overseas through the Gift City exchanges?

The initial reaction from the startup community has been tepid. When startups and multiple venture capital firms wrote to the prime minister in November 2021 imploring the Indian government to make direct listing on foreign exchanges possible, they had something else in mind. They were petitioning to be allowed to list directly on global exchanges such as Nasdaq or the New York Stock Exchange.

Three years later, there has been a change in sentiment. Startups no longer feel that listing overseas will fetch them better valuations. Multiple startups have shown the path to successful listings on Indian exchanges, and have seen greater demand locally than what they could have in global markets. There is also greater analyst coverage of smaller and mid-sized companies in India.

Some startups, though, may benefit from listing on the Gift City exchanges if they choose to opt for dual listings—meaning, they could offer their shares simultaneously across Indian exchanges as well as on the Gift City exchanges, according to Siddarth Pai, co-founder at venture capital firm 3one4 Capital.

“However, they would need to take into account the tracking error, which may be higher because of the currency difference. Foreign investors may find that this may be a good arbitrage opportunity," he said. 

Shares of companies listed on both NSE and BSE usually trade at slightly different levels—the tracking error Pai refers to. Depending on how large the difference is on BSE, NSE and the Gift City exchanges, investors could have an arbitrage opportunity. 

For startups, there may be other issues discouraging them from listing on the Gift City exchanges.

“Companies with negative net worth are not allowed to list; this could potentially impact plans of many startups that have huge book losses and net worth is eroded," law firm Dhruva Advisors said in a note. This may affect startups that have raised capital through compulsory convertible debentures, which are not included in computing a company’s net worth, Dhruva Advisors said.  

It is also not clear if companies need to convert convertible instruments prior to listing on the Gift City exchanges, similar to the requirement for a regular public market listing in India, Dhruva Advisors said.   

Who benefits from the Gift City listing decision?

Chiefly foreign investors. They will be able to invest in India from the comfort of their own countries, without additional paperwork.  

“They will have the advantage of investing in US dollars, which saves them the hassle of currency conversion, keeping their accounting simpler," said 3one4 Capital’s Pai. “They also won’t require a PAN (permanent account number) to invest in Indian securities."

International investors investing in shares listed on the Gift City exchanges will also be exempt from capital gains tax. “This tax exemption serves as a compelling incentive, enhancing the attractiveness of this avenue for international investors," said Rajesh Sivaswamy, senior partner at corporate law firm King Stubb & Kasiva.

Will Indian investors also benefit?  

Indian companies are not allowed to invest in securities through the Gift City exchanges—it is purely for foreign capital. However, an Indian resident who perhaps owns stock in a company that eventually lists on the Gift City exchanges can sell their shares.  

“While resident shareholders can offer their shares for sale on listing, they can’t continue to own listed shares. This would mean that residents don’t get ongoing liquidity for their shares and can only sell in subsequent rounds of offer for sale," Dhruva Advisors said in its note.   

What about Indian venture capital or private equity firms?

Over the past 3 years, public markets have emerged as a valuable mode of exit for PE and VC firms. This avenue will remain open for Indian investors on the Gift City exchanges. Although Indian PE/VC firms cannot purchase shares on the Gift City exchanges, they can sell their shares on these exchanges.  

Does this open the gate for direct listing in other geographies?  

The government has been keen to promote Gift City as a destination for global capital. Allowing direct overseas listing on the Gift City exchanges does not mean Indian companies can list directly in other destinations. It is also unlikely that such a notification will come through immediately, lawyers said.