Direct Listing: The Beginning of Demise of GDR and IDR Routes

  1. Introduction

The past few years have witnessed the increased internationalisation of companies through cross-listings on international exchanges. Corporates seeking cross-country capital raising tap cross-listings for primarily for substantial finance. This has been hugely facilitated by the rapid market liberalisation and greater integration of global securities markets.

In cross-border listings, there are two variants of listing, namely, direct listing and indirect listing. Under the direct listing, a company offers its ordinary shares to the public without going through the traditional route of Initial Public Offering (IPO). In a direct listing, there are no banks involved as underwriters and that might have implications on the company and the market. For the issuer, it is a lot economical than an IPO as it does not have to pay huge commissions to the banks.

Indirect listing on exchanges is through Depository Receipts (DRs). Depository Receipts are negotiable instruments issued by a bank in its domestic country that represents ownership of such shares in companies of other countries. Listings through DRs such as American Depository Receipts (ADRs) or Global Depository Receipts (GDRs) are a popular way of internationalisation among firms from emerging economies[1]. Domestic companies tend to cross-list due to several reasons, such as an expanding investor base to gain more capital for investment within the company, a growing customer base, to improve stock liquidity, to the increasing visibility of the company on a global level and the wish to take advantage of higher valuations which might be neglected in a domestic market.

Currently, Indian companies can only use the Depository Receipts routes — ADR or GDR. They can also list their debt securities on international exchanges which are famously known as masala bonds[2]. For foreign companies wanting to list on Indian exchanges, Indian Depository Receipts (IDRs) is the only route available currently.[3]

In the late 1990s and early 2000s, many Indian companies, especially those belonging to new sectors such as information technology, opted for ADR/GDR routes with an objective to get a better valuation for the shares of companies and access to global investors. Thereafter, there has been a steep decline[4].

The downside of mechanism of GDRs is that it facilitates the conversion of unaccounted money and returns back the same to India as legal one which has been perceived as a major issue by Indian regulators. Many companies without any noticeable trading operations move funds to India through this route exploiting the system in place. International authorities have noticed investment of illicit funds through GDRs which are not at all under any political unrest or geopolitical conflicts, losses by the investors betting on those particular companies.[5]

So far, the regulators and the Government have been reluctant to allow Indian companies to directly list abroad, on concerns that capital would leave the country impacting the domestic primary market, and the companies moving out of their regulatory ambit. Similar reluctance was manifested in allowing foreign companies to get directly listed on Indian stock exchanges for the fear of exhaustion of domestic investment on foreign companies instead of Indian companies.

However, in its press release, the Securities and Exchange Board of India (SEBI) expressed its intention to allow unlisted Indian companies to directly list their equity share capital on foreign stock exchanges and, concurrently, of foreign companies on Indian stock exchanges. To facilitate the same, an Expert Committee was constituted to further assess this proposition in detail.[6] The Committee was tasked to analyse the economic considerations for allowing direct listing of Indian companies on foreign exchanges and vice versa, while also examining the legal, operational and regulatory implications in facilitating the same.

  1. History of IDR and GDR/ADR

The IDRs were devised in 2004 as Government sought more foreign investment in Indian securities market post-liberalisation. The Central Government, in exercise of powers available with it under then Companies Act, 1956 had prescribed the Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules[7]). However, nothing happened for the next 5-6 years. Only in 2010 the first ever IDR issue by Standard Chartered Bank opened on May 25 and closed on May 28[8].

Under the IDR Rules, only companies having a pre-issue paid-up capital and free reserves of at least US$ 50 million and market capitalisation of US$ 100 million during the 3 financial years preceding the issue in its parent country can raise money[9]. Through these high benchmarks, the Central Government has more or less closed the doors on a major chunk of companies that may be willing to issue IDRs on Indian stock exchanges.

A GDR in general understanding of the market is often considered as a deposit agreement between the holder of GDR and bank issuing the receipt. There is also a separate custodian bank which holds the shares of the company that underlie the GDR. The depository bank then buys the shares and deposits the shares in the custodian bank. GDRs are negotiable instruments which derive its value from the equity shares of the issuer company. Further, the holder of GDR has an option to convert GDRs to a proportionate number of equity shares after certain period of time. Many big Indian companies have issued GDRs as a means for raising foreign direct investment.

Recently, however, the GDR route has been under close scrutiny by SEBI due to various allegations of round-tripping. It involves an entity transferring an asset or funds, in the name of a business deal, with an agreement to buy it back at a later stage while defrauding the entire financial regulations. Such practices may involve inflating the size of business deals without making any profits reflecting on its balance sheet and are undertaken mostly to transfer illicit funds. SEBI has expressed its concern that ADRs and GDRs are difficult to monitor and may be used for money laundering and market manipulation.

Development of the domestic qualified institutional placement (QIP), which is a more convenient and cheaper method for both the issuer and investor; has been seeing lot of foreign participation and can be attributed as a reason for stale run for GDRs. These factors have led to companies refraining from taking the ADR/GDR route which has seen a steep decline in recent times.

  1. Recent Trends in GDRs and IDRs

On 2-1-2019, SEBI banned Sanraa Media companies for manipulating share prices using GDRs[10]. In 2017, SEBI barred 19 domestic and foreign firms from securities markets in India for manipulation in issuances of GDR and warned several others including foreign institutional investors (FIIs). SEBI imposed a ten year ban on K Sera Sera Ltd. and Asahi Infrastructure and Projects Ltd., which figured among the six companies whose GDR issuances were manipulated to gain undue advantage, while at least 26 entities including European American Investment Bank AG (Euram) have been warned that all their future dealings in Indian markets should be strictly as per regulations.[11]

SEBI has also widened its probe into suspected misuse of GDRs for routing black money back to India and is investigating the role of over 50 individuals and companies.[12] SEBI in its initial investigation has found large scale misuse of GDRs for suspected illicit funds stashed abroad to bring back to India. Rounding tripping of funds has been a major route for laundering black money.

As per Credit Rating Information Services of India Limited (Crisil) data, of the 40 global GDRs issued by Indian companies in 2010, investors have lost money in 85% of the issues, with four out of five issues giving a negative return of 35% or more.[13] The number of GDRs slowed in 2011 and only 12 Indian companies raised Rs 940 crores ($0.2 billion) through GDRs as compared to 34 companies that raised Rs 4510 crores ($1.0 billion) during the corresponding period in 2010. In 2012-2013, not a single Indian company opted for equity offerings; on the other hand, 29 firms raised Rs 60,534 crores by selling bonds overseas.[14]

Although IDRs were first introduced in 2000, the Indian securities market saw its first IDR issue from Standard Chartered in May 2010. This IDR was listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

The reason for the lack of interest in the IDR market includes (a) lack of fungibility; (b) stringent eligibility criteria; (c) lack of clarity on the issue of taxation; (d) lack of advertising; and (e) concern over the stipulation of allocating 50% of an IDR issue to retail investors.[15]

SEBI’s ongoing investigations with allegations of GDR misuse have deterred companies from adopting GDR route which might seemed to have plagued with various abnormalities in the market. IDR is not the most favoured route for foreign companies as till date only one company has issued it thus creating an urge for need of a better alternative in the market.

  1. What is Direct Listing (The Spotify Rule)

Direct listings or direct public offerings are a way for a company to list on a stock exchange without going through a traditional IPO. In a direct listing, businesses offer shares of themselves directly to the market without working through a listing bank or an investment bank.

Direct public offerings attempt to cut out the middlemen of the business transaction to decrease the transaction costs for the listing business and to make the process more transparent and viable for the company. Well-reputed companies may already know how much they are worth in terms of valuation and the market may already know what they do in terms of their business.

Spotify’s decision to go public without a traditional IPO was made possible by recent changes to the New York Stock Exchange’s (NYSE’s) listing requirements by Securities and Exchange Commission (SEC) which some commentators have dubbed it as “Spotify Rule” that went into effect on 2-2-2018[16].

This was done after the representatives of NYSE wrote a letter to SEC requesting for change in listing requirements to allow companies to get listed directly on NYSE. NYSE stated that they face significant disadvantage over Nasdaq in relation with direct listing.

  1. Spotify’s Direct Listing on NYSE

Direct listing differs from the traditional IPO on multiple fronts from underwriter to raising of capital funds for the firm. Many companies are reluctant to go for direct listing due to the risks and volatility associated with it but there has been a certain change in market behaviour after recent listing of Spotify on NYSE.[17]

In the direct listing, Spotify did raise new cash or issuing any new stock. It just listed its existing shares on the NYSE and allowing its traders to trade them if they wish to. This prevents any dilution of value of existing shares. In a direct listing, existing shareholders of companies sell shares on stock exchanges without going through the detailed procedural requirement of a traditional IPO. This is much economical and less complex process saving on many intermediaries’ fees.

Spotify chose the direct listing route not only to save costs and but to avoid any lock-in periods for its key shareholders. It appointed three bankers Goldman Sachs Group Inc., Morgan Stanley and Allen & Co. for a $30 million fee[18] to help with the direct listing process which is still cheaper than what it would have paid them for an IPO.

On 3-4-2018, the opening day of trading on NYSE, 30,526,500 shares of Spotify were traded. The opening public price was $165.90 and the closing public price was $149.01. At the end of its opening day of trading on the NYSE, Spotify had a market cap of $26.54 billion.[19]

Spotify’s successful listing could also encourage Indian companies to opt for direct listing after SEBI appointed committee gave green light for allowing Indian firms to get directly listed on foreign stock exchanges with further recommendations of Indian Government.

One could argue that the greatest advantages of direct listing is that it can nearly match private markets in being faster, less costly and simple than a traditional IPO, while also minimising litigation risk with investment banks. In some scenarios, it could provide nearly the same amount of liquidity as a traditional IPO. Direct listings have been available on the NYSE and Nasdaq for almost a decade but have not been utilised regularly by large private companies in lieu of a traditional IPO.

While Spotify proved that a direct listing is a viable alternative to an underwritten IPO, the process might not be for every issuer. The success of Spotify’s direct listing was partly due to Spotify being a well-capitalised company with no immediate need to raise additional capital in its account, while also having a large and diverse shareholders group that could provide sufficient liquidity on the very first day of trading. It can also be identified as well-recognised brand name and an easily understood business model. The intention of Spotify was to enable market-driven price discovery by providing increased transparency.

Following the success of Spotify, many companies are planning to take the unconventional route of listing directly on stock exchanges. It is reported that Airbnb Inc., Slack Inc., Pinterest Inc. are planning to go public through direct listing[20].

  1. Indian Scenario: SEBI’s Expert Committee for Listing of Indian Equities on Foreign Exchanges and Vice Versa

In 2014, the Government allowed unlisted Indian companies to raise capital abroad without listing in India initially for a period of two years through an amendment to Foreign Direct Investment (FDI) policy.[21]

SEBI for the betterment of Indian capital market decided to liberalise it by allowing companies incorporated outside India the opportunity to access the Indian equity capital markets. At the same time, it also enabled opportunity for companies incorporated in India to directly access the global equity capital markets. For this purpose, a 9-member Expert Committee was constituted to further assess this proposition in detail, and inter alia, evaluate the implications and requirements of the same in different aspects. The Committee included people from different sectors including law firms, multinational corporations (MNCs), corporations with suitable experience.

The Committee was to broadly analyse the economic considerations for allowing direct listing of Indian companies on foreign exchanges and vice versa; while also examining the legal, regulatory, operational limitations in allowing the same. The Committee was also to make recommendations for a suitable framework for enabling such listing.

The Committee submitted its report on 4-12-2018 which was later published by SEBI.  In its 29-page report, it advised the security markets regulator to allow foreign companies to get directly listed on Indian stock exchanges and allow Indian companies to get directly listed on foreign exchanges.[22]

  1. Summary of Committee Report

The Committee analysed the possible implications of direct listing on the Indian economy. The Committee listed possible laws which should be amended in order to facilitate direct listing. In its report, the Expert Committee laid emphasis on the positive benefits on Indian economy . Following are the benefits for the Indian economy for allowing Indian companies to access the Indian securities markets and vice versa:

(i) Increased Competitiveness for Companies Incorporated in India

Many Indian companies are facing competition from foreign multinationals who have added advantage of raising capital from multiple listings. Listing on a foreign stock exchange will increase the relative competitiveness of such companies incorporated in India and will benefit the Indian economy. Indian capital markets will also get an opportunity to innovate and maximise efficiencies with the standards as compared to global demands. This can promote the development of the Indian financial system.

(ii) Development of Finance Which can net in High Value Added Export

Finance can become export success story for India if it starts competing with the foreign players and thus can only be achieved after losing the restrains on it. The Indian economy will, therefore, benefit from the development of a world class financial system that is a provider of capital to companies incorporated outside India.

(iii) Boost the “India” Brand Globally

The liberalisation of India’s regulatory framework will boost the brand “India” and its profile all around the world. Similar listings by companies on major international exchanges, are seen to have strengthened the brand and profile of their country of incorporation as an increasing number of companies incorporated in India list of key global stock exchanges like Nasdaq, NYSE or London Stock Exchange (LSE).

(iv) Improve Economic Relations with Other Countries

By enabling listing of foreign companies in India and listing of Indian companies abroad will be an important economic and diplomatic tool in the hands of the authorities of Government of India which might help them for public welfare and any form of security to India.

Following are the benefits for the Indian companies:

(i) Alternate Source of Capital

Benefits can be attained from a reduction in the cost of capital in advanced economies with relatively developed financial markets. An international listing regime which enables all companies incorporated in India to raise capital in the market will optimise cost reduction and provides the greatest benefits in terms of value, quantum, quality and branding.

(ii) Broader Investor Base

Listing on foreign stock exchanges broaden and diversify the pool of investors which increases the demand pool for the company’s shares and helps to decrease the cost of capital. Indian startups or emerging growth companies will be able to access capital from investors overseas that may be more welcoming to their securities than Indian investors, who have been typically focussed on companies with proven track records of profitability and growth, and have generally exhibited less appetite for startup or emerging growth companies.

(iii)  Better Valuation

Companies listing on foreign stock exchanges are expected to obtain more accurate valuations on their securities than in their domestic capital markets. Listings on foreign stock exchanges can facilitate clearer comparisons against other peer companies that are listed overseas which results in better determination of value of a company.

Benefits to foreign companies which intend to get directly listed on Indian stock exchanges:

(i) Fruitful Association With Brand “India”

The companies which want to start its listing in India can exploit the opportunity for value creation as country still remains one of the fastest growing economies of the world. With right corporate governance and good returns to the investors in India, one can certainly expect a long run advantage for all the stakeholders in it.

(ii) Access to Indian Markets

India has a vibrant of small and large companies that access capital from both domestic and international investors to fund their growth in the process. Indian capital markets benefit from a credible corporate governance and well-defined regulatory framework, and opportunistic investors.

Benefits to Indian investors:

(i) Increased Diversification of Portfolios

The portfolios of shareholding of Indian personalities and institutional investors generally tend to exhibit lower levels of diversification of shareholding pattern. This home bias is likely to decline when global assets are directly listed on Indian stock exchanges. For example, wealthy Indians may want to invest in shares of global Blue Chip companies and the proposed liberalisation of the Indian regulatory framework is an effective means of satiating the desire of such Indian investors.

(ii) Participation in Wealth Created by Global Companies

The proposed liberalisation would enable Indian investors in partaking in the wealth generated by MNCs that have significant impact on Indian lives. Global internet companies such as Apple, Facebook, Google, Amazon, etc. are the prime examples of it. Direct listing by foreign companies on Indian stock exchanges would enable Indian investors to participate in such wealth creation. Allowing companies incorporated outside India to access Indian capital markets will create a vibrant domestic market.

  1. Further Recommendations

Listing of equity shares of unlisted companies incorporated in India on foreign stock exchanges will be governed by the listing framework of the jurisdiction concerned and not by regulations laid down by the SEBI. In order to implement the recommendations of the Committee, it is necessary to amend certain laws and regulations to facilitate direct listing on Indian stock exchanges by foreign companies and direct listing on foreign stock exchanges by Indian companies.

The Committee prescribed for amendment of certain laws and regulations including Companies Act (2013), Foreign Exchange Management Act (1999), SEBI [Issue of Capital and Disclosure Requirements (ICDR)] Regulations, SEBI [Listing Obligations and Disclosure Requirements (LODR)] Regulations , SEBI [Prohibition of Insider Trading (PIT)] Regulations, SEBI [Substantial Acquisition of Shares and Takeovers (SAST)] Regulations , SEBI (Buy-back of Securities) Regulations  and SEBI (Delisting of Equity Shares) Regulations .

The Committee also recommended for listing on only specified stock exchanges in permissible jurisdictions which have strong anti-money laundering laws.

It also set a minimum capital threshold for listing on overseas market, besides recommending 10 overseas jurisdictions which have strong anti-money laundering laws and policies, and are also members of the International Organisation of Securities Commissions (Iosco) and Financial Action Task Force (FATF), to ensure that the new rules are not misused in any way.

The 10 countries and their exchanges are:

US: Nasdaq, NYSE

China: Shanghai Stock Exchange, Shenzhen Stock Exchange

Japan: Tokyo Stock Exchange, Osaka Securities Exchange

South Korea: Korea Exchange Inc.

UK: London Stock Exchange

Hong Kong: Hong Kong Stock Exchange

France: Euronext Paris

Germany: Frankfurt Stock Exchange

Canada: Toronto Stock Exchange

Switzerland: SIX Swiss Exchange

  1. Conclusion

Direct listing may come as a boon for many Indian companies who want to raise their capital outside the traditional domestic market. The added advantage of it is that a company can make a global presence known as many Indian tech companies have the potential for it . Not only does a company get a better and accurate valuation but raises the standard of Indian companies on international market. Cross-listing can also benefit many Indian startups identified as well-recognised name in the market that also have an easily understood business model.

The traditional route of raising capital through GDR/ADR is passe and its image sullied with allegations of misuse and round-tripping and lack of clarity over taxation thus creating an environment of insecurity among investors and companies for subscribing and issuing alike. SEBI is already investigating many companies for its alleged misuse of GDR routes for illegal purposes.

To allow foreign companies to get directly listed on Indian stock exchanges will not only boost the confidence of Indian investors but will also promote Indian economy on global stage.

Foreign companies may be incentivised for getting listed on Indian exchanges.

High time the new Government takes concrete steps for liberalising the capital market by adopting the recommendations of Expert Committee, providing a much need boost to the Indian economy.


*Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at bhumesh.verma@corpcommlegal.in. Karan Shelke is a Student Researcher with Corp Comm Legal (4th year student, Maharashtra National Law University, Mumbai).

[1]   Nicholas C. Howson and V.S. Khanna, Reverse Cross-Listings — The Coming Race to List in Emerging Markets and an Enhanced Understanding of Classical Bonding, 47, No. 3 (2014) Cornell Int’l L. J. pp. 607-629.

[2]   S. 2(30) of the Companies Act, 2013 (India).

[3]   S. 390 of the Companies Act, 2013 (India).

[4] Rajesh Mascarenhas, ADRs/GDRs Lose Charm for Indian Firms, The Economic Times (2016), <http://www.primedatabasegroup.com/newsroom/M124.pdf>.

[5]  Surajit Ghosal, Repatriation of Black Money — India’s Cherished Dream Amidst the Challenges of International Regulations., 3 IJIMS 47, 47-58 (2016).

[6]  Press Release, Securities and Exchange Board of India (2018), Expert Committee for Listing of Equity Share Capital of Companies Incorporated in India on Foreign Exchanges and Vice Versa (12-6-2018), <https://www.sebi.gov.in/media/press-releases/jun-2018/expert-committee-for-listing-of-equity-share-capital-of-companies-incorporated-in-india-on-foreign-exchanges-and-vice-versa_39254.html>.

[7]   Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules),  General Statutory Rules 131(E), 23-2-2004.

[8] Press Trust of India, StanChart IDR Issue to Open on May 25, gets RoC Nod, The Economic Times (2010), <https://economictimes.indiatimes.com/industry/banking/finance/banking/stanchart-idr-issue-to-open-on-may-25-gets-roc-nod/articleshow/5922816.cms>.

[9]   Companies (Issue of Indian Depository Receipts) Rules, 2004, General Statutory Rules 480(E), 11-7-2007.

[10] Press Trust of India, GDR Issue: SEBI Bars Sanraa Media, 7 Others for 5 Years, Mint (2019), <https://www.livemint.com/Money/NzmKe2OBsqGfNxg3EVcySI/GDR-issue-Sebi-bars-Sanraa-Media-7-others-for-5-years.html>.

[11]   KII Ltd. v. SEBI, 2018 SCC OnLine SAT 122.

[12] Press Trust of India, SEBI Widens Probe Into GDR Misuse for Routing Black Money, Mint (2017), <https://www.livemint.com/Money/3C7eacYIzV556utxa3DzeL/Sebi-widens-probe-into-GDR-misuse-for-routing-black-money.html>.

[13]  85% of Indian GDRs Fail to Deliver, Business Line (2011), <https://www.thehindubusinessline.com/markets/stock-markets/85-of-Indian-GDRs-fail-to deliver/article20341461.ece>.

[14]  Press Trust of India, Investors Lose Money in 85% GDRs Issued Last Year: Crisil, Business Standard (2013), <https://www.business-standard.com/article/markets/investors-lose-money-in-85-gdrs-issued-last-year-crisil-111092700191_1.html>.

[15]   Nikhil Khandelwal, Indian Depository Receipts: A Critique, VCCircle (2009), <https://www.vccircle.com/indian-depository-receipts-critique/>.

[16]   Securities Exchange Act Release No. 82627 (2-2-2018), <https://www.sec.gov/rules/sro/nyse/2018/34-82627.pdf>.

[17] Reema Khrais, Spotify Could Go Public in an Unusual Way, Business Insider (2017), <https://www.businessinsider.com/what-is-a-direct-listing-and-why-is-spotify-considering-it-2017-4?IR=T>.

[18] Matt Levine, Spotify Will Pay Banks to Cut Out the Banks, BloombergQuint (2018), <https://www.bloombergquint.com/markets/spotify-will-pay-banks-to-cut-out-the-banks>.

[19]  Sara Salinas, Spotify Closes up 13 Per cent After Falling from Highs on First Day of Trading, CNBC (2018), <https://www.cnbc.com/2018/04/03/spotify-spot-ipo-stock-starts-trading-on-the-nyse.html>.

[20]   Dan Primack, Spotify is Inspiring Unicorns to Ponder Going Public Through an Unusual Listing Strategy, Business Insider (2018),<https://www.businessinsider.in/spotify-is-inspiring-unicorns-to-ponder-going-public-through-an-unusual-listing-strategy/articleshow/67051960.cms>.

[21] Jayshree Upadhyay, SEBI Proposes Direct Overseas Listing of Companies, Mint (2018), <https://www.livemint.com/Money/5l70fVoFY7au71RmSuPpiO/Sebi-proposes-direct-overseas-listing-of-companies.html>.

[22]   Supra note 6.

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