Swadeshi Jagran Manch opposes direct listing overseas

Amid a clamour for allowing direct listing of Indian unicorns in overseas market without listing on domestic bourses, Swadeshi Jagran Manch (SJM) has said the remedy is worse than the disease as Indian authorities will not just lose the oversight but also the right to tax gains accruing from businesses built in the country.

Ashwani Mahajan, National Co-Convener of SJM - a wing of the Rashtriya Swayamsevak Sangh, said that the argument that Indian capital markets lack depth has been shattered by highly successful IPOs of firms from Zomato to PayTM and Nykaa.

''Swadeshi Jagran Manch is deeply concerned to note that a huge number of unicorns, which have grown in the last one decade, have either flipped abroad or have been incorporated overseas,'' he said.

Flipping of an Indian company means a transaction where an Indian company incorporates a company in a foreign jurisdiction, which is then made the holding company of the subsidiary in India. The most favourable foreign jurisdictions for Indian companies are Singapore, the United States and the United Kingdom. Most of these flipped entities have operations and primary markets in India. Nearly all have developed their intellectual property (IP) using Indian resources (human, capital assets, government support etc).

These unicorns generally flip on the insistence of the foreign investors, with an objective to avoid the Indian regulatory landscape; and this process has been accentuated by the favourable policies adopted by the host countries, where these startups flip, like the US, Singapore, the UK etc, Mahajan said. These unicorns have also been listing their shares overseas, with the assumption that valuation is higher due to deeper pools of investors in those countries, he added.

''Real question is, whether this argument of lack of maturity of the Indian capital market or paucity of funds is a right argument? Lack of liquidity is being cited as the inhibiting factor in startups' funding. This argument looks misplaced. Recently, an Indian unicorn Zomato came out with an Initial Public Offer (IPO), which was oversubscribed by several times. Over 33 per cent of anchor investors in Zomato were domestic investors. Even global capital can join the IPO through the FPI route without overseas listing,'' he said.

Motivated by Zomato, more than 10 tech companies have filed for IPO in India with a target market cap of USD 50 billion or Rs 3 lakh crore.

''At present law of the land doesn't permit direct foreign listing of shares of Indian companies, without prior listing domestically. However, if the startups are allowed to list their shares overseas, it may be detrimental to India's economic interests in general and will adversely affect the exchequer and will have an impact worse than even the flipping,'' he said.

In case of overseas listing, only overseas investors will participate in secondary purchases since the domicile of the trading is overseas. As per the present tax laws, all gains on the overseas bourse be free of taxation in India, Mahajan said adding the Indian authorities will lose regulatory oversight over such firms.

The Indian tax rules for indirect transfer of capital assets in India and chargeability of transaction to tax under Income Tax Act Section 9 (1) of Income Tax Act, 1961 don't apply on sale of shares in overseas markets, if these shares are not simultaneously listed in India.

Mahajan said if the loss to the exchequer is to be avoided, a mechanism needs to be created where foreign stock exchanges will have to administer STT and investors will need a PAN registration.

''Even if it is made possible, will foreign investors agree/participate in this complex transaction, is a million dollar question. In all probability it seems that this exercise is seemingly a tax arbitrage ruse in the guise of painting a pretty picture, and attracting India with the promise of foreign capital for building a great tech industry,'' he said adding this would exclude India's general public, mutual funds, insurance pools and pension pools.

''What signal is India sending when a USD 2.5 trillion market cap nation with USD 50 billion VC/PE flow, exports cap tables of companies and excludes its own citizens and financial institutions from investing in such companies,'' he said.

He said it is argued that promoters of these startups needed options to exit from these businesses, and flipping their registered offices to US or Singapore gave them flexible options for exit, including listing on the NASDAQ. ''Now the argument is being made that this needs to be reversed by allowing them to list their shares overseas, without even listing them domestically. This allows the access to NASDAQ, without the companies changing their domicile out of India.'' Argument is that with this more tech companies will get overseas funding.

A recent McKinsey report states that India can build USD 50 billion of SaaS revenues (Software Tech Companies), which will be valued at USD 1 trillion by 2030.

''Assumption is that only markets like the US will be able to price them fairly and provide the necessary liquidity for trading. This reminds us of the so-called 'Whiteman's Burden Theory', when the British said Indians weren't 'ready to govern' and lacked maturity and hence they were forced to govern India, and we became the white man's burden,'' Mahajan noted.

''Is the statement that the large Indian capital market system is 'immature', and hence we need to list our startups in a more mature overseas market, to get them higher valuation, a parallel to the British / East India Company views of 17th century?'' he added.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)