September 9, 2020
The Companies Act and Foreign Exchange Management Act (FEMA) and Income Tax Act are to be amended to make space for the new norms.
The list of ‘permissible investors’ and a few security classes will be made eligible for listing as part of the new norms.
A Foreign Action Task Force (FATF) will be instituted to prevent international money laundering.
The norms will particularly benefit the startup ecosystem and enhance profitability.
The Ministry of Corporate Affairs (MCA), through amendments to the Companies Act and Foreign Exchange Management Act (FEMA) among others, will now allow for Indian companies to list their shares in overseas markets without having to be listed first at home. The draft norms drawn from the recommendations put forth by the Securities and Exchange Board of India (SEBI) wherein provisions to enforce business friendly regulations in the foreign exchange management and taxation processes, in addition to the prevention of money laundering were included. These norms will now allow for the expansion of the list of ‘permissible investors’ and will make a few security classes eligible for listing within the purview of appropriate foreign jurisdiction. A Foreign Action Task Force (FATF) will be concretized for the institution of checks and balances to prevent money laundering. However, the provisions of the act do not currently permit Indian companies listed in foreign stock markets to sell shares to foreign citizens.
Experts point out that the move would prove to be useful in improving the valuation of Indian companies and open up several avenues for the procurement of quality capital. This could be particularly beneficial to the Indian startup ecosystem as well performing startups could reach profitability with support from leading foreign investors. However, if the norms are to be effectively implemented, there are several matters that will require immediate attention.
At a basic level, processes should be implemented wherein information on potential investors will be made easily available. Amendments will be required in order to encourage the participation of foreign citizens in Indian shares. Furthermore, clarity will be required on the taxation of capital gains, listing of ADR/GDR instruments, overall taxation impact as well as the peculiarities of the existing currency exchange system. With future-forward policies opening up a world of opportunities for Indian companies, there is immense potential for growth, development and the benchmarking of best practices across the globe.