Madam Nirmala Sitharaman: Let tech start-ups directly list abroad

Information technology is unlikely to remain as much of a challenge given Infosys’ pitch in the early 2000s to change the rules for its American depository receipts or ADRs. The story of India then was about the information technology sector. A sensitive government was in power. It immediately directed the bureaucrats to reduce the barriers. (Shares of non-U.S. companies trade through ADRs like regular shares on U.S. stock exchanges.)

Once again, a slew of Indian startups are on the doorstep of the government – with a strong case for getting their shares listed directly on exchanges abroad. What will Nirmala Sitharaman do?

The list of unicorns with a valuation of over $1 billion – more than 70 at last count – is growing impressively; Prime Minister Narendra Modi has acknowledged his ideas and innovation skills. The founders of several have written to their office to say that India should allow foreign direct listing of shares by Indian companies.

The time has come for this. Bets are off for now on China, whose education technology and technology companies attracted billions of dollars until the Xi Jinping regime launched a crackdown last year. Influential investors, including George Soros, have cut their investments in these companies. Chinese ADRs are now “uninvestable”, one of the world’s largest hedge funds has said. This loss of appetite from global investors for these stocks has freed up investable resources that Indian startups want to tap. Global investors are sitting on piles of cash and looking for good returns outside China. Direct listing of startups abroad could be a significant improvement with which Sitharaman can revive the sluggish growth story.

Startup founders have a compelling case. It is hard to argue against Indian startups gaining access to low-cost global capital and, in the process, the ability to build a global brand and be competitive. An expert committee in late 2018 favored direct listing of shares by Indian companies and listing of foreign companies on Indian stock exchanges. The committee was of the view that these reforms would give a boost to Brand India and that local companies would benefit from creating a wider investor base and better valuations.

Of course, acting on the recommendations would require some heavy lifting: the Foreign Exchange Management Act would have to be amended; The Companies Act, which already has an enabling provision, would require minor changes. As will be certain rules of SEBI. Lastly, how capital gains will be taxed has to be clarified.

What can give Sitharaman’s cold feet? First, record inflows from private equity, venture capital, and a red-hot Indian primary market only weaken matters a bit. The fact that listed overseas means, particularly in the US, complying with the gold standard of best practices in corporate governance and disclosure.

The nationalist argument that Indian stock markets should not be exported is a sham, as a handful of Indian companies are listed on the Nasdaq or have ADRs or Global Depository Receipts (GDRs). One reason for this is that the round-tripping of illicit funds by some GDR issuers in the past has alerted the regulators. When certain companies violate the rules, the state’s default response in India is to shut the door. There is no justification for collectively denying the foreign direct listing option for those firms infringing or defaulting startups.