Globalisation creates opportunities for businesses to attract new investors, build a global reputation, or raise capital from markets outside their own country. ADRs and GDRs are the primary means for Indian companies to raise funds abroad. These documents are issued to investors in other countries to enable them to purchase shares in Indian companies listed on Indian stock exchanges.
Now, India has successfully evolved a regulatory regime on 'directly issuing listed shares by eligible Indian public companies in approved foreign exchanges'.
The legal foundation for direct listing was notified in January 2024 under the Direct Listing Scheme and associated guidelines. The initial framework will let qualifying Indian public businesses access foreign exchanges in permitted jurisdictions, with the first phase targeting international exchanges at GIFT IFSC.
Key Takeaways
- ADRs and GDRs enable Indian enterprises to tap global investors.
- In January 2024, the Ministry of Corporate Affairs (MCA) and Ministry of Finance introduced the Direct Listing Scheme, permitting Indian public companies to list directly on international exchanges starting with GIFT IFSC.
- Companies must comply with dual regulations: Indian frameworks (MCA, SEBI, FEMA) and foreign exchange rules.
Why are Indian Companies Going Abroad?
Listing abroad might help a company tap investors beyond India. This could be helpful for companies that have international operations, global clientele, or intentions to expand overseas.
Potential benefits include:
- Access to a broader investor base
- Other sources of funding
- Increased worldwide visibility
- Enhanced worldwide brand recognition
- Better price discovery maybe
- Opportunities to broaden the shareholder base
Traditional Routes: ADRs and GDRs
Prior to the direct-listing regime, Indian companies had limited access to global equity markets through depositary receipt programmes.
What is an ADR?
An American Depositary Receipt (ADR) permits investors in the U.S. to invest in shares of a foreign corporation.
In this structure, the underlying shares are often held via a custodian arrangement, and depositary receipts for these shares are issued and traded in the US market.
An ADR can stand for:
- One share
- Multiple shares
- Fraction of a share
The structure allows U.S. investors to buy and sell securities of overseas businesses through their domestic market infrastructure.
What Is a GDR?
A Global Depositary Receipt (GDR) is a negotiable instrument that represents shares in a corporation and is used to provide access to investors in foreign markets.
The underlying shares are held in custody, and the GDRs are issued by a depositary bank and are traded in an overseas market.
Simply put, both ADRs and GDRs provide Indian companies access to overseas investors without the need for shares to be traded directly as under a direct-listing structure.
How ADR and GDR Ratio Conversions Work
Because depositary receipts represent underlying shares held by a custodian, their pricing incorporates a defined ratio and the prevailing foreign exchange rate. For example, consider an Indian company where:
- Local Share Price: ₹100 per share
- ADR-to-Share Ratio: 1 ADR = 5 underlying equity shares (meaning each ADR represents a claim on 5 local shares)
- Exchange Rate: ₹83 per $1
The mathematical conversion for the baseline ADR price is calculated as:
Total Underlying Value per ADR = Local Share Price x Ratio = ₹100 x 5 = ₹500
ADR Price in USD = (Total Underlying Value) / (Exchange Rate) = ₹500 / ₹83 = $6.02
In practice, actual market pricing may trade at a slight premium or discount to this parity value based on international supply, demand, and cross-border arbitrage.
What is a Direct Listing?
The direct listing offers qualifying companies the opportunity to list their equity shares on a permitted international exchange in accordance with the applicable regulatory framework.
Unlike a standard depositary receipt structure, the framework involves the direct issuance and listing of equity shares on an international exchange.
The Direct Listing Scheme was notified by India’s Foreign Exchange Management Framework on January 24, 2024.
This approach is covered under the larger legal framework of the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024, and related regulations.
Which Indian Companies can go for Direct Listing Route?
The framework applies to public firms incorporated in India according to the qualifying standards and regulatory constraints.
This encompasses the more general categories of:
- Publicly traded companies
- Not listed public companies
Specific eligibility and operating conditions are outlined in the applicable regulations and guidelines. The Direct Listing Scheme is a structure created for qualifying Indian public companies to issue and list equity shares on authorised international exchanges.
In this way, private corporations cannot list their shares directly without first complying with applicable legal and corporate requirements.
Who Cannot Use the Direct Listing Route?
While the framework applies to eligible public companies, the Direct Listing Scheme explicitly excludes specific categories from issuing equity shares on international exchanges. The negative list includes companies that:
- Are registered as a Nidhi company or a company carrying out business of chit fund.
- Are prohibited from issuing or raising capital through public offers or private placements by any regulatory authority (such as SEBI or the RBI).
- Have defaulted in the payment of dues to any financial institution, bank, or debenture holder, and such default is continuing.
- Have outstanding statutory dues or compounding applications pending with regulatory authorities under certain acts.
- Are prohibited from trading in securities by SEBI or subject to ongoing enforcement or debarment proceedings.
- Are classified as shell companies or lack active commercial operations as defined under applicable corporate laws.
Where can Indian Companies Directly List?
India’s direct-listing framework is being rolled out initially for international exchanges located at GIFT IFSC in Gujarat.
These are:
- India International Exchange (India INX)
- NSE International Exchange (NSE IX)
The framework was announced by the government as part of its efforts to enable Indian firms to access international capital markets through India’s International Financial Services Centre ecosystem.
Further evolution of the framework may occur when authorities issue new operational guidance or broaden the list of permitted jurisdictions and exchanges.
What is the Process for Listing?
Exactly how this is done depends on the company, the type of listing, and the exchange’s rules. Basically, an Indian corporation may need to undertake the following processes.
- Eligibility confirmation
First, the company needs to decide whether it meets the direct-listing criteria that apply. This might include looking at:- Its corporate structure
- Being publicly traded
- Compliance with regulations
- Conditions for Foreign Investment
- Sectoral limitations
- Select the Listing Path
The company must determine whether GDRs, ADRs, or a direct listing are the right solution for its goals. The decision may depend on whether the company wishes to raise new capital, provide liquidity to existing shareholders, or create an international investor base. - Choose the Permitted Exchange
The corporation needs to select an exchange that falls within the permitted regulatory framework for a direct listing. There will also be particular requirements relating to listing standards, disclosures, governance, and ongoing commitments. - All Regulatory and Corporate Approvals
In addition to compliance with the Companies Act, FEMA guidelines, and other applicable legislation, the company may need to obtain permission from its board and shareholders. The specific approvals will depend on the form of the transaction. - Meets Disclosure Requirements
Investors require information they can trust about the company. The corporation may consequently have to submit information about:- Financial results
- Operations of the business
- Management of shareholding risk factors
- Use of funds, if appropriate
Disclosure obligations are a big aspect of any public listing.
6. Meet the Listing and Post-Listing Requirements
The firm is required to continue to comply with any reporting, disclosure, and governance standards after the listing is completed. So listing is not a one-time thing. This is a vital and continuing obligation.
Direct Listing with ADR and GDR
| Feature | Direct Listing | ADR/GDR |
| Instrument traded | Equity shares under the applicable framework | Depositary receipts |
| Depositary bank | Not central to the direct-listing structure | Required |
| Investor access | Through permitted international exchange | Through the relevant depositary receipt market |
| Regulatory structure | Direct Listing Scheme and related rules | Depositary receipt and foreign investment framework |
| Main purpose | International listing and investor access | Access to overseas investors through receipts |
The right path will depend on the company's structure, its financial needs, and regulatory eligibility.
Benefits of an International Exchange Listing
Access to More Investors: Listing overseas helps an Indian company to get exposed to institutional and individual investors beyond the domestic market.
- Better Visibility Worldwide: Listing on an international exchange can also help raise the company's profile globally, particularly if it is active in multiple countries.
- Alternative Funding Path: Companies can raise funds internationally rather than domestically.
- Potential Upside in Valuation: Investors of different classes may value a company differently. International participation may increase price discovery but does not necessarily mean higher valuation.
- Support for World Growth: Having a foreign-market presence can help organisations with plans for overseas operations, staff, customers, or acquisitions.
The government's direct-listing model is aimed at improving access to global capital markets, broadening investor engagement, and increasing the worldwide competitiveness of Indian enterprises.
Challenges Companies Need to Consider
Foreign listing also means more responsibility.
- Higher Compliance Requirements: Companies could have to comply with different sets of legislation governing India, the listing jurisdiction, and the exchange.
- Extra Costs: Legal, accounting, reporting, and advising fees may rise.
- Exchange Rate Risk: Depending on the pricing and trading of the securities, companies and investors may be subject to currency-related risks.
- Governance Requirements: These international investors should anticipate strong levels of corporate governance and transparency.
- Various Market Conditions: Global interest rates, foreign investor sentiment, and economic developments outside India might affect a company's valuation.
The companies should, however, be careful to assess whether the benefits of international listing outweigh the increased costs and compliance burdens.
Direct Listing and Dual Listing
The corporation has the option of using multiple listing structures, depending on the rules.
Dual Listing
Under the dual listing model, a firm is listed in India and allowed in worldwide markets. That can help it keep access to domestic investors while also tapping global investors.
International-Only Listing
In addition, a qualifying public company may consider an international listing structure under the applicable framework that is permissible under the legislation. The right path relies on the company’s ownership structure, investor base, and business plan.
What Does This Mean for Indian Firms?
The launch of the Direct Listing Scheme marks a significant milestone in India's capital market infrastructure.
In the past, overseas access for Indian corporations was primarily limited to instruments such as ADRs and GDRs. “Eligible public Indian companies now have yet another way to access international exchanges, subject to prescribed conditions.”
The early focus on the GIFT IFSC also serves India’s goal of building an internationally competitive financial centre. That provides more freedom for companies. Instead of a one-size-fits-all approach to overseas investors, they can examine multiple structures based on their capital needs and longer-term plans.
Conclusion
Indian companies have multiple options in overseas capital markets. Foreign investors still rely on ADRs and GDRs. The Direct Listing Scheme, 2024, allows eligible public companies to directly issue and list equity shares on permitted international stock exchanges. The first phase will be international exchanges in GIFT IFSC, including India INX and NSE IX. Companies opting for this route must follow rules on eligibility, foreign exchange, corporate governance, and disclosure.
